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Public sector can’t prop up employment growth forever - featured image
By Michael Yardney

Public sector can’t prop up employment growth forever

We know that the RBA is hell bent on lowering our unemployment rate, so they keep lowering interest rates to try and bolster employment growth.

But if you've been watching my regular Property Insider video chats with Dr. Andrew Wilson you'd know we don't think this strategy will work.

The tax cuts and interest rate cuts have not encouraged spending nor private employers to employ more staff.


Instead around 97% of net employment gains over the past year have been in the public sector.

Private sector growth has been essentially flat, corresponding with weak business conditions and declining private investment.

In a recent report to their private and institutional clients ANZ Bank explained that the strength in public sector employment has been seen across states and territories as well as in key industries.

ANZ felt that relying on the public sector to create employment opportunities is not sustainable.

With a significant and sustained change in momentum for the private sector unlikely in the near term, ANZ expect overall employment growth to slow to 2.0% y/y by the end of 2019 and further in 2020.

Here's the rest of the report...

Almost all employment growth over the past year has been in the public sector

Of the 312,000 net additional workers employed over the year to August 2019, 301,000 (97%) were employed in the public sector.

This fits with the public sector’s 1.3ppt contribution to total GDP growth of 1.4% y/y in Q2 2019, which was almost entirely driven by public consumption rather than investment.


Public sector now accounts for a greater share of total employment

Keeping in mind that the data are in original terms (see Footnote 1), there was a sharp rise in the public sector’s share of employment in the November 2018 quarter.

This coincided with the Victorian election (November 2018) and preceded the run up to the New South Wales election (March 2019) and federal election (May 2019).


Public strength and private weakness is apparent across most states and territories…

Annual increases in public sector employment were recorded in all states and territories aside from Queensland (-12k) and the Northern Territory (flat).

In contrast, only two states saw rises in private sector employment; Queensland (+46k) and Victoria (+23k).

New South Wales and Victoria – the two states to have had elections within the past 12 months – recorded not only the largest absolute gains in public sector employment, but also the largest percentage gains (+32.1% y/y and +25.5% y/y respectively).


…and in key industries…

The four industries where the public sector currently accounts for more than a fifth of the workforce – public administration, education, health and utilities – all recorded a significant rise in public employment during the year, along with a fall in private sector employment.

Additional private sector employment was concentrated in professional services, administrative services, and wholesale trade.

The private manufacturing and construction workforces contracted.

In public administration and safety, it is possible that the changes reflect some degree of transfer in allocation of jobs from private to public.

However, this doesn’t appear to be the case in education, health or utilities, where the rises in public sector employment dwarfed falls in the private sector.


…as well as in vacancies

ABS job vacancies have fallen for the past two quarters – following three straight years of rises – taking annual growth down to -1.9% in August 2019.

The overall number masked a divergence between the two sectors, though; public sector vacancies were up 14.1% y/y while private sector vacancies were down 3.5% y/y.


ANZ LMI more reflective of private sector employment growth

We have been predicting a slowdown in employment growth for some time, based on the deterioration in our Labour Market Indicator (LMI).

UnemploymentThe LMI incorporates a number of data series which tend to lead changes in the labour market.

It now appears that employment growth has been surprisingly strong only because of the public sector.

When we compare the LMI to private sector employment growth (rather than overall growth), there is a much stronger correlation.

The LMI is consistent with the current weakness in the private sector.

Although there has been a small uptick in the LMI recently, it does not suggest a material upswing in private sector employment growth in the near term.


Employment growth to slow through the rest of 2019 and into 2020

Unless we see a sharp rise in public sector workers in the next quarter, annual employment growth could slide quite sharply.

Efficiency dividends at both the federal and state levels could also start to undermine public sector jobs, particularly at a time when reduced stamp duty revenue has punched a hole in state budgets and when the federal government is fixated on achieving a budget surplus in 2019-20.

Four candidatesWe are forecasting overall employment growth to slow to 2.0% y/y by the end of 2019 and further in 2020.

This could see the unemployment rate rise to 5.4% if participation stabilises around its current highs, as we expect.

The RBA also expects employment growth “to slow from its recent fast rate”.

Following yesterday’s cash rate cut to a fresh low of 0.75%, it stated that “the Board took the decision to lower interest rates further today to support employment and income growth”.

Furthermore, “it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment” – which the RBA has previously suggested now means

an unemployment rate of 4.5%.

Unfortunately, we do not see this being achieved any time soon.

Rather than relying on the public sector, the private sector will need to become the key driver of employment growth again.

This will be a tough ask against the formidable headwinds of global uncertainty and a fragile domestic household sector.

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.
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