Enduring Employment

Principal Economist's View

This week marks the 10th anniversary of the global financial crisis. Its pervasive legacy continues to dominate the economic landscape; be it the rise of populism, increasing income inequality, heightened regulation, elevated global debt levels and low interest rates. But one of the worst hit areas of the crisis, labour markets, are now finally starting to show signs of a return to normality.

Incoming data over the past week highlight the extent of healing seen in major labour markets. In the US, non-farm payrolls continued to rise at a strong pace, up by 200,000 over the month of August. Since the low point in early 2010, 19.5 million new jobs have been created in the US economy. The unemployment rate has fallen to 3.9%, its lowest level since 2000, down from a peak of 10% during 2009. New jobless claims are around a 49-year low, while dynamism in the labour market has increased with the job-openings and quit rate at their highest level since at least 2001. More importantly, evidence is emerging that wage growth is starting to firm. Annual growth in average hourly earnings rose from 2.7% to 2.9% in August, the fastest pace of wage growth since 2009.

In Europe, signs of improvement in labour market conditions are also becoming increasingly evident, albeit a few years behind the US recovery. Employment continues to recover strongly, rising 1.5% over the year to the June quarter. Since the low in 2013, the euro area economy has created 9.2 million jobs and the unemployment rate has dropped from 12.1% to 8.2%, only just above the low of 7.3% seen prior to the GFC. Promisingly for the euro area outlook, there are also firming signs of wage pressures. This week, annual growth in average compensation per employee was reported to have risen from 1.9% to 2.3%, the strongest wage growth seen since 2008.  

Of course, there is significant divergence across the continent. Conditions are particularly tight in Germany, where the unemployment rate has fallen to a post-reunification low of 3.4% (compared to 7% pre-GFC). Unemployment rates remain elevated in Greece (19.5%), Italy (10.4%), France (9.2%) and Spain (15.1%), although significant improvement is evident in all economies, particularly Spain which is down 11 percentage points from its peak. The labour market recovery in Europe is exemplified by Ireland and Portugal, where the unemployment rate has dropped by over 10 percentage points to 5.9% and 6.8% respectively. 

In the UK, labour market conditions have also tightened considerably over recent years. While employment growth has eased over recent months, the UK economy has created 3.4 million jobs since early 2010. The UK unemployment rate has fallen from a peak of 8.5% in 2011 to 4%, its lowest level since 1975. This tightness in the labour market is starting to translate into stronger wage outturns, with average weekly earnings (ex bonuses) rising 2.9% over the past year, up from 1.8% fifteen months ago and close to the strongest nominal wage growth seen since the GFC.

In Japan, labour market conditions continue to firm. Employment has grown by 1.5% over the past year, with 3.7 million jobs created since late 2012. This employment performance is particularly strong given Japan’s demographic headwinds and largely reflects increased female labour force participation. Highlighting the tight labour market conditions, the job-to-applicant ratio in Japan has risen to 1.63, the highest level seen since 1973. Japan’s unemployment rate has fallen from a peak of 5.5% in 2009 to 2.5% currently, which is the lowest level seen since 1993. Wage growth is also showing signs of picking-up in Japan, with average monthly scheduled earnings up 1% over the past year. This is in stark contrast to the negative wage growth seen on average over 2009-2014, and the best wage outturn since 1997.       

In Australia, stronger labour market conditions have also become evident over the past 18 months. This week, employment was reported to have risen by a strong 44,000 jobs in August, with annual employment growth remaining unchanged at 2.5%. The turnaround in employment follows three years of anaemic employment growth averaging 1.0% over 2012-2014. The rebound in employment has helped lower the unemployment rate from a high of 6.4% in 2014 to 5.3% currently, the lowest level seen since the mining investment boom in 2012.  Wage growth in Australia has also troughed, edging up to 2.1% in the June quarter 2018, up from a low of 1.9% a year earlier.

Although the GFC has clearly led to deep structural changes in the global economy, the fundamental notion of demand-and-supply remains. With spare capacity in labour markets gradually being eroded across the global economy, we retain our view that wage growth will continue to grind higher over coming years. Higher wage growth will slowly place upward pressure on underlying inflation, prompting most central banks to tighten monetary policy over the next 18 months (Japan being a notable exception). While the market continues to expect the RBA will remain on-hold until well into 2020, we retain our view that firming labour market conditions will give the RBA confidence to begin slowly lifting interest rates from mid-2019.

 Table 1: Financial market movements, 6 – 13 September 2018

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,904.2

0.9%

US

2.97%

9.7 bps

US Dollar Index (DXY)

94.52

-0.5%

Nikkei 225

22,821.3

1.5%

Japan

0.11%

0.1 bps

USD-JPY

111.92

1.1%

FTSE 100

7,281.6

-0.5%

UK

1.50%

8.8 bps

GBP-USD

1.311

1.4%

DAX

12,055.6

0.8%

Germany

0.42%

6.8 bps

EUR-USD

1.169

0.6%

S&P/ASX 200

6,128.7

-0.5%

Australia

2.61%

4.1 bps

AUD-USD

0.720

-0.1%

Source: Bloomberg

For economic update by region, click here.

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