Why the RBA Cut Rates ? Underemployment v unemployment

The RBA rate cut occurred due to economic weakness – rising unemployment, significant underemployment, lack of wages growth and a lack of consumer spending.  Hey, this economy isn’t growing.  Stimulation is required or we could be considering the R word before long with the main risk being the international trade disputes between the China and the US (against almost everyone!)

Wages growth is obstinately low and unemployment has started to rise – a key metric the RBA has indicated will lead to more cuts if unemployment continues to rise.  Australia’s unemployment rate is 5.2 per cent, around a low point. 

To be considered employed is to be paid for one hour of work a week.  Clearly the unemployment rate does not tell the full story.  The real story is underemployment at 8.2% ie workers who have jobs but are not being offered the hours they need.  While unemployment changes over time, underemployment has been rising steadily for the past 40 years.

It is true the Australian economy has spare capacity – shown by underemployment levels.  The ABS statistics don’t deal well with measuring those who would like more work but underemployment has been a long-term structural issue of substance shown on this graph. 

Since 2002 there have been more people underemployed than unemployed.  The rate of underemployment for women of working age is above 10 per cent.  For younger workers aged between 15 and 24 years, nearly 20 per cent are ready and able to work more.

There is still plenty of unused capacity in the labour force demonstrated by the fact jobs keep getting filled. Economists think its great part time jobs are being filled – but they have got the wrong end of the stick – people want jobs. If they need 2 or 3 to keep from the poverty line that’s what they will do.

What is being offered is part time work – as its less burdensome on employers and the extra cost is outweighed by the benefits – not that part time work is desired (by most).

The RBA appears determined to keep cutting if the employment numbers don’t improve.  The RBA wants rate cuts to affect the disposable income of individuals so they can keep retail spending and investment going.  But as I pointed out in our earlier blog RBA Rate Cut and Banking Profitability in Australia …. this aim is unlikely to be achieved.

We can already see the reaction of the banks fragmenting – National Australia Banks (NAB) and Commonwealth Bank (CBA) passing on the reduction … but the ANZ and Westpac (WBC) resisting.  It is more likely that as the RBA lowers official rates, bank rates will remain unchanged as the risk to their profitability and dividend payments will rank over keeping the government happy.  This neuters the RBAs monetary policy herein.

Therefore retail spending is less likely to be fuelled causing the likes of Harvey Norman (HVN), JB Hi-Fi (JBH) and Super Retail Group (SUL) to fight harder for the retail dollar.  But the big Banks (NAB, CBA, ANZ, WBC) are under more pressure than ever before. 

It doesn’t mean that money can’t be made in these sectors but it’s harder than before.  It requires a new way.  All stocks have price cycles to be taken advantage of – they offer chances to invest in them all the time.  Spotting them is what Pythagoras does – mathematically predict share price behaviour.  Buying in the uncertainty and selling when greed returns – Warren Buffett would be proud! 

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Michael Dee 0419726223

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