The outlook for the domestic economy (continued)
Labour market, wages and prices
Labour market
Employment has continued to grow rapidly through 2004-05, with the unemployment rate falling to a 28‑year low of 5.1 per cent in December 2004. Construction employment has increased strongly over the past year, reflecting the high levels of economic activity in that sector.
Forward indicators of employment, such as measures of job vacancies, point to further solid employment growth in coming months. For example, the Australian Bureau of Statistics’ job vacancy series increased by around 40 per cent through the year to February 2005.
Employment growth is expected to moderate to 1¾ per cent in 2005‑06 as the effects of recent slower GDP growth feed through to the labour market. In particular, employment growth in the construction sector is expected to slow, reflecting the flattening of growth in residential and commercial construction.
The unemployment rate is forecast to remain near 5 per cent through 2005‑06 after averaging around 5¼ per cent in 2004-05. Workforce participation is forecast to remain high by historical standards at 63¾ per cent on average in 2005-06. This is a little below its level of recent months. This Budget contains measures to increase workforce participation over the medium term. In the short term these measures will place upwards pressure on measured unemployment as new entrants to the labour market take time to find jobs.
| The labour market has performed very strongly over the past 12 months, with the unemployment rate falling to a 28-year low. Given this historically low outcome, it is not surprising that some business surveys are indicating that suitable labour is becoming more difficult to find. However, there is currently no evidence of widespread labour shortages or generalised wage pressure (Chart A). Chart A: Wage price index
Source: ABS Cat. No. 6345.0. This combination of low unemployment and moderate wage growth reflects past labour market reforms which have created more flexible working arrangements. This has led to a more efficient allocation of labour, higher productivity and increased real wages without triggering inflationary pressure. |
These reforms have also encouraged more people to participate in the labour force, with greater flexibility in the degree to which they participate. For example, part-time employment now accounts for around 28 per cent of total employment. Given the right circumstances, around a quarter of these workers have indicated they would like to work more hours, increasing the available pool of labour. Employers have been drawing on this pool, with the flows of workers from part-time to full-time employment around record highs (Chart B). Chart B: Proportion of part-time workers gaining full-time employment
Source: ABS Cat. No. 6203.0, 6291.0.55.001 (trend data). The ability to utilise existing workers more effectively should lessen the impact of tighter labour market conditions on economic activity and inflation. |
While the unemployment rate is at a 28-year low, there is further scope to increase labour inputs to production through the better use of under-utilised labour and by encouraging greater workforce participation (see Box 5).
Wages
Moderate wage growth in recent years has provided a good foundation for sustained economic growth. The Wage Price Index has averaged growth of around 3½ per cent for the past two years. These moderate outcomes are welcome in the light of a steadily falling unemployment rate.
Reforms in recent years to boost the economy’s productive potential, particularly those in the area of workplace relations, have supported this healthy combination of strong employment and moderate nominal wage growth (see Box 5). Statement 4 in the 2004‑05 Budget discussed labour market flexibility issues in more detail.
Wage growth is expected to increase over 2005-06, with the Wage Price Index forecast to grow by 4 per cent. Some localised wage pressure has appeared in specific industries and occupations, particularly in those areas affected by conditions in the mining sector. With the unemployment rate at a 28-year low, it is likely that some localised wage pressures will remain. Such relative wage adjustment is an important signalling mechanism in a high employment economy, helping to direct workers to the areas of their highest productive value.
At this stage, there is no evidence of more generalised wage pressure, and the expected more modest employment growth in the period ahead should help to contain overall wage pressure. However, it will remain important that wage growth is backed by increases in productivity on average — particularly with the current very low levels of unemployment — to support further sustainable economic growth.
Prices
Inflation has been contained in recent years (see Chart 9), reflecting moderate growth in unit labour costs, the effects of a higher exchange rate and vigorous competition in the retail sector. The Consumer Price Index (CPI) increased by 2.4 per cent through the year to the March quarter 2005. Although petrol prices are expected to place some further upward pressure on consumer prices in the near term, inflation is expected to remain moderate, with the CPI forecast to grow by 2½ per cent through the year to the June quarter 2006.
Unit labour costs are forecast to increase in 2004-05, reflecting a cyclical slowing in productivity growth and a slight increase in wage growth. While this will put some upward pressure on inflation, businesses are expected to look through some of the cyclical slowing in productivity growth in order to ameliorate volatility in retail prices.
Oil prices have continued to exert some upward pressure on the CPI in recent quarters. The direct impact of oil prices has been through higher petrol prices, although the prices of some other goods and services — air fares for example — have also been affected. Oil prices are assumed to remain broadly unchanged over 2005‑06 and, therefore, petrol prices are expected to stabilise.
Chart 9: Inflation
Source: ABS Cat. No. 6401.0 (original data).
| The economic outlook includes projections for real GDP growth beyond the immediate two forecast years. From the 2005‑06 Budget, this assumption is amended from 3½ per cent to 3¼ per cent per annum for 2008‑09 and beyond. The Intergenerational Report (IGR) notes that falling labour market participation due to an ageing population is expected to lower potential GDP growth in the coming decades. Projections of GDP growth for 2008‑09 will begin to reflect the IGR projections of declining participation rates and hence employment growth. Specifically, projections for employment growth have been adjusted down to 1¼ per cent in 2008-09, bringing projected GDP growth down to 3¼ per cent (Table A). Table A: Economic projections(a)
Source: Treasury. The projections for 2006‑07 and 2007‑08 assume that the wage share of GDP continues to fall. From 2008-09, compensation of employees and corporate profits are assumed to grow at the same rate as nominal GDP, keeping the wage share constant. As a result, wages are projected to grow by 4 per cent in 2008-09. The long run implications for GDP growth of adopting the IGR projections for declining aggregate participation and hence employment growth are shown in Chart A. |
Chart A: Real GDP growth
Source: ABS Cat. No. 5206.0 and Treasury. These projections are based on new population and participation data available since the 2002‑03 IGR. With these new data, the peak in participation is now projected to occur in 2006‑07 (Chart B). Chart B: Participation rate
Source: ABS Cat. No. 6202.0 and Treasury (original data). |
Box 7: Nominal GDP projections |
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| Nominal GDP is forecast to grow by 7½ per cent in 2005-06, largely reflecting increases in Australia’s commodity export prices. Nominal GDP has grown very strongly for a number of years. In 2003-04, nominal GDP grew by 7.3 per cent, largely reflecting the impact of housing demand on both real GDP and domestic prices. Strong growth in the terms of trade and the effects of higher oil prices are expected to result in nominal GDP growth of 6 per cent in 2004-05. Nominal GDP projections, for the period 2006‑07 to 2008-09, are typically based on underlying trends for real GDP and the GDP deflator – they are not forecasts. However, if the GDP deflator is projected at its historically-based trend growth rate, it would imply that commodity prices would remain at historically high levels over the entire projection period. Beyond the forecast period, world supply for commodities that Australia exports is expected to increase in response to the recent surge in demand. This is likely to place downward pressure on Australia’s export prices. As a result, not all of the recent boost to Australia’s nominal income will be permanent. How much of recent nominal income gains will be unwound in the projection period is a matter for judgement. |
The approach, adopted in this Budget’s fiscal projections, is to assume that commodity prices return to their long-run average level over the first two years of the projection period (Chart A). As a result, nominal GDP growth in 2006‑07 and 2007‑08 is not projected to grow as strongly. Projected real GDP growth is unaffected by the technical assumption for commodity prices. Chart A: Commodity prices
Source: ABS Cat. No. 5302.0 and Treasury. The interplay between rising global demand and supply makes predicting the future course of resource prices particularly difficult. Therefore, there is considerable uncertainty around the technical assumption for commodity prices. |
