Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 101

Soft labour market's impact on retirement outcomes

The ‘economics of retirement outcomes’ is a concept that explores how economic developments can affect retirement outcomes. Not everything in retirement is subject to market returns or the decisions of individuals, financial planners or super funds. The current soft labour market is a case in point.

Soft labour markets: unemployment increasing and negative wage growth

Currently labour market conditions in Australia are soft. It is one of the more significant challenges faced by the Australian economy. Our unemployment rate recently touched 6.4% (the highest level in 12 years) before dropping back marginally to 6.3%. Just 18 months ago the unemployment rate was 4.9%.

The unemployment rate is well-covered by mainstream media. What is less well-known is that real wage growth in Australia is negative. The purchasing power of Australian wages is heading backwards, and part-time workers are being squeezed particularly hard.

Negative real wage growth is reasonably rare in Australia. The chart below, which plots annual wage growth and inflation, shows that the last time that inflation exceeded wage growth was in 2000.

Also of note is that productivity remains at fair levels relative to history. It’s reasonable to expect that workers would at least participate in some of the benefits of productivity via wage growth, although the relationship is pretty loose, as shown in the chart below. The last three years are a story of workers experiencing little participation in the productivity gains that have been derived, adding further detail to the story of labour market softness.

How do soft labour markets affect retirement outcomes?

To understand the impact of soft labour market conditions on retirement outcomes we need to consider both the micro and the macro effects.

Micro perspectives take account of the individual, including:

  • Risk of unemployment resulting in no employer contributions, no voluntary contributions and a drawdown in savings and even an increase in debt to fund life’s necessities
  • Lower real wages which mean a reduced propensity to save
  • Lower age pension payments than expected, as increases in the age pension are currently indexed to the maximum of inflation, wage growth and a measure of inflation of a pensioner’s likely goods and services (wage growth would generally be expected to be the highest of these three in a normal environment). At the time of writing, the government’s proposal to drop wage indexation looks like it will be rejected by the senate.

However we should also consider the macro perspectives as well. Here a longer term environment of soft labour market conditions could also have important impacts:

  • Lower savings levels and so greater reliance on the age pension by the population
  • A lower than forecast payment level (due to indexation being lower than expected)
  • A weakened federal budget position (all else equal) due to lower income tax revenues and greater unemployment benefits.

Note that the first point above has a negative impact on the budget while the second point has a positive impact.

We have seen that the economic environment does not always align with the market environment (something Ashley Owen’s articles make clear). However we can see that there is more to retirement outcomes than just market returns, with a range of economic variables affecting retirement outcomes. The soft labour market is one such factor, and in this case it has largely negative effects at both a micro and macro level. Let’s hope that new sources of economic growth will soon emerge in Australia.

 

David Bell is Chief Investment Officer at AUSCOAL Super. He is working towards a PhD at University of New South Wales.

 

RELATED ARTICLES

Are older Australians re-assessing the job market?

Changed visions: 2021 New Year resolutions

Six suspects in the murder of inflation

banner

Most viewed in recent weeks

10 little-known pension traps prove the value of advice

Most people entering retirement do not see a financial adviser, mainly due to cost. It's a major problem because there are small mistakes a retiree can make which are expensive and avoidable if a few tips were known.

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Hamish Douglass on why the movie hasn’t ended yet

The focus is on Magellan for its investment performance and departure of the CEO, but Douglass says the pandemic, inflation, rising rates and Middle East tensions have not played out. Vindication is always long term.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Latest Updates

Investment strategies

Three ways index investing masks extra risk

There are thousands of different indexes, and they are not all diversified and broadly-based. Watch for concentration risk in sectors and companies, and know the underlying assets in case liquidity is needed.

Investment strategies

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.

Shares

2022 outlook: buy a raincoat but don't put it on yet

In the 11th year of a bull market, near the end of the cycle, some type of correction is likely. Underneath is solid, healthy and underpinned by strong earnings growth, but there's less room for mistakes.

Gold

Time to give up on gold?

In 2021, the gold price failed to sustain its strong rise since 2018, although it recovered after early losses. But where does gold sit in a world of inflation, rising rates and a competitor like Bitcoin?

Investment strategies

Global leaders reveal surprises of 2021, challenges for 2022

In a sentence or two, global experts across many fields are asked to summarise the biggest surprise of 2021, and enduring challenges into 2022. It's a short and sweet view of the changes we are all facing.

Shares

2021 was a standout year for stockmarket listings

In 2021, sharemarket gains supported record levels of capital raisings and IPOs in Australia. The range of deals listed here shows the maturity of the local market in providing equity capital.

Economy

Let 'er rip: how high can debt-to-GDP ratios soar?

Governments and investors have been complacent about the build up of debt, but at some level, a ceiling exists. Are we near yet? Trouble is brewing, especially in the eurozone and emerging countries.

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.