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?

Australia's economic report card heading into the polls

Federal budget forecast errors need greater scrutiny

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.