Downward Revisions To September Data
The Australian October employment report was broadly disappointing.  The data showed that 9.k jobs were created over the month, however, there were downward revisions of 20k to September’s data. Despite the downshift, employment quality did improve over the month with full-time employment replacing part-time employment.
Full-time employment rebounded by 41.5k in October whilst part-time employment fell by 31.7k over the same period. October’s full-time employment gain was offset by around 20K of downward revisions to September’s data. Overall, however, there was a positive shift in favour of full-time employment.
Aggregate hours worked rose by 0.9% with year-end growth increasing to 0.9% from a downwardly revised 0.2%. In terms of composition, gains in hours worked were largely the same across all states except for Victoria.
The Unemployment rate held steady at 5.6%, whilst the labour force participation rate also held steady at 64.4%. While full-time equivalent employment has clearly improved, there continues to be a broader underemployment problem.
Output Gap Remains Wide
The output gap, as based on full-time employment as a share of the active population and capacity utilisation, remains at its widest level since 2013. The gap is consistent with considerable disinflation pressure. When there is a significant level of slack in the economy, wage bargaining power is diminished, and the workforce typically doesn’t get fully compensated for inflation and productivity gains. Consequently, there is a strong positive relationship between increases in real unit labour costs and the output gap.
Sluggish wage inflation is consistent with a wide output gap. In 3Q the wage price index increased by just 0.4% whilst year-end inflation slowed to 1.9% from 2.1% previous. Â Wage inflation is now at its lowest level on record.
Notably, causation seems to be running from employment to wages rather than the other way around meaning that employment growth is not rising as wage inflation slows; both are slowing together. Whilst the RBA has recently noted that employment growth has been supported by low wage inflation, the data suggests otherwise.
