Finance Work The other side of booming job numbers: Wage rises and business failures

The other side of booming job numbers: Wage rises and business failures

Wages are increasing in Australia, but we should prepare for some businesses to fail. Photo: Getty
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Let’s be optimistic for a moment and go along with all the headlines trumpeting the surprisingly sharp fall in the unemployment rate, down around 4.5 per cent in New South Wales and Victoria in September.

Let’s think the annual employment growth of 3.4 and 2.6 per cent respectively in those states is ongoing, nicely above their 20-year averages.

That’s good news for workers, good news for the economy – but not good news for everybody. It will mean some businesses fail when they can’t afford to pay more for labour.

The latest labour market statistics came a day after the Reserve Bank deputy-governor, Guy Debelle, warned not to get hung up on one month’s figures, given that the standard error for the monthly change in employment is plus or minus 30,000 jobs.

The September trend estimate for employment growth was 26,400.

Dr Debelle was careful not to get carried away, sticking with the RBA’s belief that wages will still only grow slowly and intimating that “full employment” is an unknown but probably lower figure than we’ve been used to.

However, he remained optimistic that employment growth is on track to eventually take up the slack in the labour market and produce higher wages – what the economy desperately needs to sustain the forecast GDP growth of 3 per cent.

Reserve Bank of Australia deputy governor Guy Debelle looks on during an economics committee at the NSW State Parliament. Photo: AAP

It’s been so long since we’ve had full employment and strong wages growth that many people will have forgotten what it’s like. Employers are forced to compete for workers by offering them higher wages.

Strong, productive businesses can afford to do that. Weaker businesses can’t and whither. Some die.

At present there is a business mindset across most of Australia that simply denies that there should be wage increases of more than the inflation rate. In some industries, it’s below the inflation rate.

Dr Debelle provided a chart showing the divergence of wages growth, underlying the industries doing well and those struggling.

As the labour market continues to tighten, those that can afford to pay more will eventually be forced to – or so economic theory tells us. It’s the last resort of most. The business lobby can be relied upon to push for alternatives – mainly more temporary work visas – but there’s a limit.

The United States is further along the employment growth/lower unemployment path than Australia. There are stirrings of wages growth there now, but it is still such a novelty that it can attract attention.

A newsletter article by one Matthew Yglesias neatly illustrates that.

Mr Yglesias reports on the American trucking industry complaining for years about a shortage of drivers.

“So just recently, J.B. Hunt, the biggest trucking company around, announced that it did something radical — raised pay 10 percent — and the company says it’s working,” he wrote.

When demand for a company’s service is strong enough and labour is hard to get, that is what has to happen.

“That could mean accepting lower profit margins as the price you have to pay to increase sales and grow the business over the long run. It could mean charging higher prices. Either way, what it means is that the most aggressive, highest-productivity firms are going to grow and the others will lose workers and die.

“A strong economy is a beautiful thing. But it isn’t literally good for every single person. In particular, while J.B. Hunt seems to be doing well with booming demand for truckers, some lesser trucking companies may be undone by higher wage demands. Full employment doesn’t necessarily serve the interests of the entire business class.”

That’s capitalism. Weaker competitors don’t necessarily have to die.

“J.B. Hunt is handing out raises to attract and retain truck drivers. Some other company may find that it can undercut them on pay by hiring inexperienced workers and training them.

“There are plenty of problems that market competition can’t solve, but there are actually quite a lot of problems that it really can address. You just need a strong labour market to make the good stuff happen.”

Remaining optimistic, that pattern should play out here as unemployment and underemployment fall. Be ready for the loud complaints from businesses that will find it hard to afford higher wages.

And be prepared for headlines about those companies that fold – you never read much about those that are growing. A case in point: all the coverage of the Max Brenner coffee and chocolate chain in trouble. That compares with the explosion of coffee shops around the nation – competition became tougher.

The overall better news though will be more consumers with more money in their pockets to spend at other businesses.

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