Let’s celebrate low unemployment and rising real wages

Having turned the economy around after years of Coalition mismanagement, the Albanese Government is giving Australians reason to celebrate, writes Stephen Koukoulas.

ECONOMICS IS USUALLY about bad news — recessions, cost of living crises, deficits, debt and market crashes. Those sorts of things make the news.

In Australia at the moment, there are at least a couple of events that should be bucking that trend, that we should be celebrating with gusto. Unemployment in the last two years has been hovering in a range of around 3.75-4%, with the odd spike a bit higher or a bit lower.

This rate of unemployment has not been achieved in any sustained way for 50 years.

This good news – of what is increasingly looking to be a structural lowering in the unemployment rate – is something no economist or policymaker would have dreamt about even a few years ago. It is good news amid the frequent negative aspects of the economy and economic policy debate.

Wage growth outpacing inflation — good news to ease cost of living

Wage growth is increasing at a rate above that of inflation, which is good news for Australian citizens and also the Albanese Government.

Low unemployment is something Australian policy and the general population are not used to. To sustain it requires a policy strategy that keeps the economy growing at a pace that creates job opportunities and a workforce ready and able to step into those new roles when they emerge.

It may even be possible to get the unemployment rate even lower, say to 2.5-3%, which means that everyone who wants a job has a job. The social benefits of this are clear, but it also has a macroeconomic benefit of generating higher living standards for society as a whole.

Another benefit that is linked to the improvement in the unemployment rate is rising wages. Not just in nominal terms, but they are now rising at a faster pace than the rate of inflation.

Specifically, the Wage Price Index rose 4.2% in the year to the December quarter of 2023 after a decade when annual wage growth averaged a miserable 2.5%. The latest inflation rate was 3.4%, some 0.8 percentage points lower than wage growth.

More good news

Sustaining this by delivering a job to everyone who wants one, where pay rates are rising at a pace above the inflation rate, are two of the most important objectives of economics.

There are reasons to be optimistic about the outlook.

The Albanese Government has implemented a range of what might be termed “structural reforms” that will help keep unemployment lower and will underpin decent and sustainable wage increases.

In particular, investment in education, skills and training will ensure a workforce that is better prepared to adapt to change and employers' demands as the economy continues to expand over the medium term.

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Economies dogged by higher unemployment tend to have a workforce with inadequate or inappropriate skills and training for economic needs. The link between skills and education and full employment has been established in a wide range of academic studies, including from the Reserve Bank of Australia.

Childcare and early education reforms, which focus on making childcare affordable and accessible to parents, will boost jobs and workforce participation, particularly for women. This is a critical issue for productivity and financial well-being. It also boosts wages for childcare workers. Research from the Treasury confirms the benefits to women from access to affordable childcare.

In an effort to boost wages, the Albanese Government has supported increases in the real minimum wage and for a range of other awards at all three hearings of the Fair Work Commission (FWC) since it was elected in May 2022.

For the first two of these, the FWC awarded wage increases for those on minimum wages of 5.3% and 5.75%. For the pending minimum wage case, currently before the FWC and due to take effect from 1 July 2024, the Government has provided a submission that ‘recommends that the Fair Work Commission ensures the real wages of Australia’s low-paid workers do not go backwards’.

While there is no hard figure set out by the Government, the FWC will likely follow the Government’s guidance and opt for a rise of around 3.75-4% to take effect on 1 July 2024, which is above the current and prospective inflation rate and in line with an increase in real wages.

Wages and the participation rate — more good news

Wages are often viewed from the perspective of an employer. In the private sector, which accounts for more than three-quarters of all employment, it is broadly understood that employers will only pay a potential worker a salary that covers the value of that person’s output.

That makes sense. Why would a firm pay someone $100 if they only added $50 to revenue?

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But from an employee's perspective, the level of a wage will often determine whether they supply their labour. If the wage is too low, the potential employee will not have a financial incentive to supply their labour — work, in other words.

A decent level of wages will have the positive effect of attracting some of those currently not in the labour force due to low prospective wages into employment. This boosts employment and household incomes and is a win for those individuals, and for the economy.

Can Australia have an unemployment rate of 3.5% or less?

There is a debate, albeit a low-profile one at this stage, about whether Australia should or could sustain an unemployment rate of around 3.5% – or even less – rather than settling for a rate of around 4%.

Given the current economic structure and level of skills, training and education, a sustained 3.5% unemployment rate appears to be an unreachable goal.

But if policymakers and employers invest an appropriate amount in skills, education and training for all Australians, if productivity can return to a stronger trend on the back of investment in infrastructure, machinery, equipment, IT and the like, then the structure of the labour market could see a lowering in the long-run sustainable level of unemployment.

The recent round of reforms points to steps in the right direction but it will take time and another business cycle to update just how low Australia’s unemployment can get.

In the meantime, let’s celebrate the news that unemployment is still relatively low and wage growth relatively strong.

Stephen Koukoulas is an IA columnist and one of Australia’s leading economic visionaries, past Chief Economist of Citibank and Senior Economic Advisor to the Prime Minister.