Category: Social Trends

The shift to solitary living is massively inflating property prices

From The New Daily.

Australians increasingly choose to live alone, and this huge demographic shift is going to push up prices and sprawl our cities further into the fringe unless we accept higher density living.

According to the Victorian government, by 2025 up to 51 per cent of Melbourne households will be ‘no child households’.

‘No child households’ are those that are pre-child, post-child or have no intention of ever having children.

The numbers are similar for all of Australia’s major cities, although slightly lower in Sydney as it attracts a slightly higher percentage of families.

Worst still, the fastest growing segment of the Australian housing market is the single person household. Single person households may reach 44 per cent of all major city households by 2035.

What does this mean for communities and for housing prices?

According to the Grattan Institute, 84 per cent of Melbourne’s housing stock is made up of detached or semi-detached family homes. Only 16 per cent of the housing stock is aimed at non-family residences.

By 2025, 51 per cent of our population could be in non-family units with only 16 per cent of our housing stock aimed at this demographic.

There will be a shortage of non-family medium and higher density living with people forced to bid for family homes leaving bedrooms empty. Fewer people will live in each housing unit, putting massive upward pressure on housing prices.

As the average number of people per household shrinks we will need more residences for the same amount of population. If we do not radically increase density then these new houses will continue to be built on our urban-fringed farm land.

It is not just me calling for a re-think on planning demographics. Reserve Bank governor Philip Lowe, speaking in Brisbane earlier this year, identified “the choices we have made as a society regarding where and how we live … urban planning and transport” as significant impacting factors on property prices.

Property, like all markets, is impacted by changes to both supply and demand. While demand can be impacted by a range of economic factors, supply is restricted by planning rules and the availability of land, as well as economic factors.

Some people think all will be okay with housing supply as they think Australia’s housing density has increased. But this is not true. Whilst the last decade has seen an uptick in density, a longer-term view tells a very different story.

Inner city suburbs, prior to ‘gentrification’, used to house one, two and sometimes three families per house. Now days the inner city houses often have just one, two or three people.

Melbourne, for example, has seen a huge drop in its density from 20.3 people per hectare in 1960 to around 14.9 people per hectare today.

This change in demographics means that, even if our population stays the same, our cities don’t grow ‘up’ then they must grow ‘out’.

This decreasing density is eating up farmland on the urban fringe and putting huge strain on infrastructure spending as the cost per person per kilometre of infrastructure sky rockets.

It is dangerous and will continue even if the population remained exactly the same – let alone if we continue to grow our it.

As single person households age and get ill, will we see more horror stories of people falling ill or dying at home and remaining undiscovered for days or weeks as ‘friends’ wonder why they have not been online?

With decreasing family sizes, growing numbers of childless households and growing numbers of single person households, our housing supply is becoming more out of sync with our housing demand.

The result will be increased pressure on housing prices.

‘Canberra to blame’ for next month’s sky-rocketing energy bills

Household budgets, already under pressure from flat incomes, underemployment and rising mortgage rates, face further cost of living pressures with the latest hikes in power prices, as highlighted by the New Daily.

Power bills will soar by hundreds of dollars next month in east coast states, and experts blame policy uncertainty in Canberra.

Two major retailers, Energy Australia and AGL, have announced they will hike prices substantially from July 1. A third, Origin Energy, is expected to follow soon.

Energy Australia will increase power bills by almost 20 per cent, roughly $300 more a year, for households in South Australia and New South Wales. Gas prices will go up 9.3 per cent in NSW and 6.6 per cent in SA, adding between $50 and $80 to annual bills.

Queensland customers will be least affected, suffering only a 7.3 per cent ($130) increase to residential power bills. This is due mainly to the Palaszczuk government forcing the state government-owned distribution network to take a hit to profits.

A week earlier, AGL, the country’s third-biggest energy provider, said it would push up electricity by 16.1 per cent and gas by 9.3 per cent next month in NSW, QLD, SA and the ACT.

Victorians and Tasmanians have escaped bill shock for now, but only because their prices operate on a different schedule. Annual price changes in those states will be announced in December, kicking in on January 1.

Dylan McConnell, energy expert at Melbourne University, said years of policy uncertainty resulted in barely any new generators being built to replace the withdrawal of ageing coal and gas-fired power stations.

This has forced the National Energy Market (which supplies to NSW, QLD, SA, VIC, TAS and the ACT) to rely more heavily on expensive gas-fired generators to fill gaps in supply.

“We’ve had an effective ‘capital strike’, where policy uncertainty has resulted in a lack of investment and delays with respect to upgrades, maintenance and new installations – whether that’s new renewables, new storage, new anything – forcing us to rely on older, gas-fired technology,” Mr McConnell told The New Daily.

“At the same time we’ve had the gas market open up LNG exports, which has put substantial pressure on gas prices.

“These higher gas prices have flowed through to electricity prices, mainly because of the way the price-setting mechanism works in the wholesale market. Basically, gas is the marginal generator a lot of the time, and it’s actually become more of the marginal generator. That means the effect is more acute.”

energy prices australia

If the sun stops shining on solar panels, the wind stops blowing on turbines and demand exceeds what traditional generators can supply, gas-fired turbine generators are fired up to plug the gap – at great expense to consumers.

Energy Australia and business groups have implored Canberra to embrace the recommendations of Chief Scientist Dr Alan Finkel, who published an energy policy review last week.

Energy Australia chief customer officer Kim Clarke said the Finkel review was a “good, solid blueprint” for Canberra to follow.

“A sensible next step is for governments to engage industry and other stakeholders on the Finkel package of reforms to discuss the best way forward,” Ms Clarke said in a statement.

The Finkel review confirmed that policy uncertainty has constrained the building of much-needed ‘dispatchable’ energy sources – that is, the kind of generators that can be switched on and off quickly to meet the increasingly more volatile energy usage habits of Australians.

“Uncertainty related to emissions reduction policy and how the electricity sector will be expected to contribute to future emissions reduction efforts has created a challenging investment environment,” Dr Finkel wrote.

In the absence of reliable power sources (which, Dr Finkel notes, could have included battery-stored solar and wind energy), generators have had to rely more heavily on gas turbines to create electricity, with the result that consumers pay more.

“Ageing generators are retiring from the NEM, but are not being replaced by comparable dispatchable capacity. Policy stability is required to give the electricity sector confidence to invest in the NEM.”

While Dr Finkel was at pains to say he was “technology neutral”, he predicted the future belonged to solar, wind and battery storage, not so-called lower-emission fossil fuels.

His main policy recommendation was his Clean Energy Target – effectively a watered-down carbon price – that would facilitate “an orderly transition to a low emissions future” and encourage investors to build new generators.

“It puts downward pressure on prices by bringing that new electricity generation into the market at lowest cost without prematurely displacing existing low-cost generators. It further ensures reliability by financially rewarding consumers for participating in demand response and distributed energy and storage.”

Dr Finkel’s report has sparked a war inside Coalition. Prime Minister Malcolm Turnbull and Energy Minister Josh Frydenberg are locked in a bitter debate with an estimated 20-25 anti-renewable Coalition MPs led by former prime minister Tony Abbott.

Other contributing factors to price hikes, noted by many experts, has been heavy investment in poles and wires, opportunistic price gouging by retailers, and the fact that many companies are both retailers and wholesalers (which has dried up liquidity for energy derivatives, especially in South Australia).

Sydney public housing evictions a policy success?

From The Conversation.

Three years after New South Wales’ housing minister announced that all 579 public housing tenants in Millers Point, Dawes Point and the Sirius Building would be moved within two years and their homes sold, only 24 tenants are still resisting the move. So far, 151 properties have been sold for A$400.89 million, with a median sale price of $2.44 million.

One 90-year-old said others looked out for him in the Sirius Building. In his new housing, he feels utterly isolated. Ben Guthrie/AAP

The NSW government would argue that these statistics indicate the displacement has been a great success. But, drawing on 40 in-depth interviews I conducted with tenants, the displacement has been a monumental policy failure on various levels.

Let’s begin with the justifications for the displacement. The NSW government’s main justifications were that the homes were expensive to maintain and that the escalation of house prices in Millers Point represented an opportunity to raise $500 million that would be used to build 1,500 additional social housing dwellings.

Tenants interviewed were adamant that maintenance was negligible. Many spoke about maintenance requests being ignored or the work done being so shoddy that the problem was not fixed or promptly recurred. Many felt that a deliberate policy of neglect had been one of the key strategies to encourage tenants to move.

Doing the sums

The high cost of maintenance certainly cannot be used to justify the planned sell-off and destruction of the Sirius Building.

The age and concrete structure of the building mean that the maintenance costs per unit are probably lower than for many other public housing complexes. It is 35 years old – the average age of social housing properties in NSW is 45 years – and in good physical condition.

The government’s promise to use the sale proceeds to build 1,500 social housing homes has been its central justification for the displacement. On the surface, this appears reasonable. However, there are a several issues with this argument.

First, the actual number of additional homes will be closer to 1,100 as at least 400 homes have been lost in Millers Point and the Sirius Building.

Second, tenants posed the obvious question: why should public housing be financed by the sale of public housing? The massive increase in house prices in Sydney has resulted in a stamp-duty bonanza for the NSW government – around A$9 billion in the 2016-17 financial year.

The government is awash with cash. A surplus of around $4 billion is predicted for this financial year. Surely some of this money could have been used to reduce the scandalous public housing waiting list of more than 60,000 people.

Another question tenants raised was: why the rush? Why was it necessary to sell all the homes as soon as possible? It is highly likely that property prices in the area, within walking distance of the Sydney Opera House, will continue to increase.

If we accept this proposition, then the government could have compromised. It could have allowed tenants who were vehemently opposed to moving to stay, and sold off the homes of tenants who did not mind relocating.

‘Like leaving your family’

The main argument against the displacement is not so much the questionable financial justifications, but the devastating human cost.

Although some tenants were happy to move, the removal process and subsequent displacement has been traumatic for many. Tenants who had strong social ties in Millers Point and Sirius have been moved to areas where they know no one.

I interviewed a tenant who was moved out when he was 90. In the Sirius Building he knew a couple of people and his fellow tenants looked out for him. In his present housing complex he is totally isolated.
Another tenant interviewed was 85 when he was moved. He said that leaving Millers Point “was like leaving your family”.

The actual removal process was seriously flawed. Tenants were aghast that it was to be a blanket removal – those who were born in the area, were frail or had lived in the area for most their lives were to be forced out. Tenants had no choice but to move.

They were told that if they did not accept two “formal offers” of alternative accommodation, their public housing status would be terminated. This would have rendered most tenants homeless.

The total lack of consultation was particularly unfortunate. Tenants had no warning prior to the announcement. After making the announcement, the minister responsible, Pru Goward, refused to meet the residents. Her successor, Gabrielle Upton, also ignored requests for a meeting.

To his credit, Brad Hazzard, who replaced Upton in April 2015, met the working party representing the tenants and spoke to some of the older tenants. He was reportedly “persuaded, over scones and cream in residents’ homes, by their argument that it would be ‘a huge challenge’ for the elderly to move out of the area”.

The minister managed to persuade the NSW Treasury to fund the refurbishing of some existing properties. In November 2015, 28 apartments were made available for the 90 or so Millers Point residents who had not yet moved.

Unfortunately, yet again there was no consultation; 24 of these apartments are small one-bedroom apartments that are not suitable for most of the older residents who need an extra room for a carer and/or family visiting.

Social harm is irreversible

The displacement is also destroying an area of great historical significance. In 1999, the whole of Millers Point was declared a heritage site. The statement of significance said:

Its unity, authenticity of fabric and community, and complexity of significant activities and events make it probably the rarest and most significant historic urban place in Australia.

The displacement has exacerbated an already deep and growing spatial divide between rich and poor in Sydney. The social mix that was a feature of Millers Point has been obliterated along with its rich history.

The 24 remaining tenants are still hoping that the government may show some compassion and let them age in place. It’s a long shot, but it would be a marvellous and humane gesture.

Home Ownership and Work Redefined

In a new report, CBA says the Australian dream is still alive and well, as new goal posts emerge.

As the quarter acre block is becoming a threatened species and backyards are replaced by patios, just under half of Aussies (48 per cent) believe that the property dream is still alive and well, and for others (52 per cent), the Australian dream is being redefined.

In one of the largest national surveys since the Australian Census, with more than one million responses, the Commonwealth Bank has asked Australians about how they perceive their future, investigating attitudes around the property market, adapting to a changing workforce, and future proofing younger generations.

Partnering with demographer and futurist Claire Madden, the CommBank Connected Future Report examines national, economic and social trends that have emerged from the data.

According to Claire Madden, “The remarkable insights emerging from the CommBank ATM data overall is the resilience and tenacity Aussies have in the face of economic uncertainty. As a lead example, while the Australian property dream looks markedly different in 2017, the majority of Australians either fully own or are paying off their home. This has remained constant over the past five decades, so despite uncertainty, the Australian dream has clearly lived through time.”

The research shows while Millennials (Gen Y) are delaying traditional life markers like getting married or having a child, the average age of a first homebuyer has remained relatively constant over the last two decades, sitting at around 32 years of age.

The research has found that despite rapid digital disruption, increased global connectivity and the emergence of artificial intelligence, resilience seems to be a common trend amongst Australians. Almost half (49 per cent) believe our businesses are ready to face the future and 49 per cent believing our kids have the skills they need for tomorrow.

Key findings from the CommBank Connected Future Report include:

The architecturally designed dream

The Australian ‘dream home’ is no longer a weatherboard standalone house. It is an architecturally designed product, as the quality of dwellings has risen over time. Whilst 74 per cent of those living in cities and 81 per cent of those outside capital cities currently live in a stand alone house, 48 per cent of new residential approvals over the past year have been for medium or high density housing. CommBank data reveals 68 per cent of first home buyers purchased a house in the last year, 16 per cent desire to build their architectural dream home after purchasing vacant land, and 15 per cent purchased an apartment or townhouse.

Living in your state of optimism 

The data relating to the Australian property dream reveals that the state you live in impacts your state of optimism. The least optimistic were people residing in New South Wales (53 per cent) and Victoria (54 per cent), and this was significantly high with younger generations (57 per cent in both states). Those in Queensland (51 per cent), South Australia (53 per cent), Western Australia (54 per cent) and the Northern Territory (57 per cent) believe the dream is more attainable.

The ‘options’ Generation 

Gen Y have prioritised global travel, lifestyle experiences, stayed longer in formal education and attained the name KIPPERS (Kids in Parents’ Pockets Eroding Retirement Savings) for staying in the family home longer. Yet now they are in their prime career building and family forming years, they, like their predecessors, are finding a way to overcome the obstacles, respond to new realities, and see the (re)defined dream come alive. Even though the dream has taken a different form, the data reveals property ownership remains high on the aspirational list (average home buying age remains consistent at 32).

Gen Z and Gen Alpha 

According to the research, rapid digital disruption, increased global connectivity and the emergence of artificial intelligence are converging to reshape the business landscape and the way future generations define work. With high job mobility and the increased casualisation of the workforce, Gen Z (8-22 years old) will have 17 jobs across five careers in their lifetime.

As Gen Z and Gen Alpha (born 2010-2024) complete their schooling and enter the workforce, they will need to be adaptive and agile in order to integrate job roles with rapidly advancing automated systems and handle changing employment markets and organisational structures.

Women leading the way

Women are most optimistic about our kids being skilled up for the future with 52 per cent believing they are future ready, compared with 48 per cent of men. This is particularly evident amongst younger age groups, with the greatest gender gap amongst Gen Ys (25-39 year olds) with a 5 per cent differential between males and females.

Culture and society

With almost 3 in 10 Australians (29 per cent) born overseas1, and a quarter (27 per cent) of the population’s labour force born overseas2, immigration has significantly contributed to Australia’s workforce and economy. In the midst of this diversity, CommBank data reveals that almost half of Aussies (49 per cent) believe that our society truly embraces everyone.

Understanding the labor productivity and compensation gap

From The US Bureau of Statistics.

Increases in productivity have long been associated with increases in compensation for employees. For several decades beginning in the 1940s, productivity had risen in tandem with employees’ compensation. However, since the 1970s, productivity and compensation have steadily diverged.1 This trend, which will be referred to as the “productivity–compensation gap,” has received much scrutiny from both academics and policymakers alike.

Although research on the productivity–compensation gap has existed for some time, most work in this field has been conducted at the total nonfarm business sector or similar aggregate level.2 However, the Bureau of Labor Statistics (BLS) publishes a wealth of detailed industry-level labor productivity and compensation data. Industry data can be used to look at this topic from a fresh perspective in order to see what is driving trends in the broader economy. This Beyond the Numbers article studies underlying trends over the 1987–2015 period in 183 industries that are driving some of the widening gap between labor productivity and compensation observed in the nonfarm business sector.3 Most of the industries studied had increases in both labor productivity and compensation over the period studied; however, compensation lagged behind productivity in most cases.

Labor productivity, defined as real output per hour worked, is a measure of how efficiently labor is used in producing goods and services. There are many possible factors affecting labor productivity growth, including changes in technology, capital investment, capacity utilization, use of intermediate inputs, improved managerial skills or organization of production, and improved skills of the workforce. In this article, all references to labor productivity are labeled as productivity for ease of reference. In addition, labor compensation, a measure of the cost to the employer for securing the services of labor, is defined as an employee’s base wage and salary plus benefits. All references to labor compensation are on a per-hour basis and are adjusted for price change but are labeled as compensation for ease of reference.4 Measures of hours worked and compensation cover all workers including production, supervisory, self-employed, and unpaid family workers.

The productivity–compensation gap by sector and industry

To understand the productivity–compensation gap at an industry-level, it is helpful to first consider this relationship in different sectors of the economy. Each sector referenced below in chart 1 represents the combined activity of many individual industries that perform a similar type of activity.5

Productivity outpaced compensation for the 1987–2015 period in all sectors with significant industry coverage except for the mining sector. (See chart 1.) Some sectors including information, manufacturing, and retail trade exhibited major gaps between productivity and compensation, while other sectors such as accommodation and food services and other services showed slight differences. Compensation in chart 1 has been adjusted for inflation with the BLS Consumer Price Index (CPI).

As mentioned earlier, there have not been many studies of the productivity–compensation gap at the industry level. BLS industry productivity data allow for a deeper analysis by providing information on industries that make up each sector in the panels of chart 1. When examined at a detailed industry level, the average annual percent change in productivity outpaced compensation in 83 percent of 183 industries studied. (See chart 2.) The distance of each industry (represented by a dot) to the equal growth rates line indicates the size of the productivity–compensation gap. Industries above the equal growth rates line saw productivity outpace compensation and those below saw compensation outpace productivity. The largest differences between productivity and compensation occur in Information Technology- (IT) related industries such as computer and peripheral equipment manufacturing, and semiconductor and other electronic component manufacturing.

Does the type of price adjustment matter?

As mentioned above, compensation is calculated in real terms by adjusting nominal values to exclude changes in prices over time. The price indexes that are used to adjust dollar amounts for changes in prices are referred to as “deflators.”

The Consumer Price Index (CPI) is typically used to adjust compensation as it measures how the prices of a basket of consumer goods change over time. Thus, using the CPI shows how changes in workers’ purchasing power compare to productivity within their respective industries. In most cases, productivity gains did not equate to a proportional rise in workers’ purchasing power of goods and services. (See chart 2.)

However, the CPI might not be the most appropriate deflator to use when comparing compensation to productivity. Workers are compensated based on the value of goods and services produced, not on what they consume. Using an output price deflator, a measure of changes in prices for producers, instead of the CPI is an alternative that better aligns what is produced to the compensation that workers receive. Each industry has its own unique output deflator that matches the goods and services that are produced in that industry.6

If the output deflator is used to adjust compensation, a different story emerges. Chart 3 shows that the compensation workers are receiving is rising more in line with productivity than when CPI deflators are used to adjust compensation. The largest gaps from chart 2 shrink considerably once this adjustment is made. In fact, the size of the gap decreased in 87 percent of industries that previously showed productivity rising faster than compensation.

Charts 2 and 3 show an interesting contrast in employee compensation—employees are both consumers and producers. Using the CPI as a deflator is appropriate for analyzing the purchasing power of employees. However, from a producer perspective, using the output deflator is more appropriate for comparing the compensation workers receive for the goods and services they produce in their industry.

Components of the productivity–compensation gap

The gap between productivity and compensation can be divided into two components: (1) the difference between compensation adjusted by the CPI and by the output deflator, as detailed in the previous section and (2) the change in the labor share of income.7 The labor share of income measures how much revenue is going to workers as opposed to the other components of production—intermediate purchases and capital.8

Using the power generation and supply industry as an illustrative example, chart 4 shows how the overall gap in labor productivity and compensation within an industry can be divided into these two components. In this case, the decline in labor share and the difference in deflators contributed equally to productivity rising faster than compensation over the period studied. The composition of the gap, however, varies by sector and industry. For example, the software publishing industry posted a 42-percent decline in its labor share while the newspaper, periodical, book, and directory publishers industry experienced a 22-percent increase in its labor share. All 183 industries are affected differently by current economic trends, which would explain why the labor share and difference in deflators vary by industry.

Chart 5 shows the composition of the productivity–compensation gap at the sector level, which varied significantly. The difference in deflators contributed to the gap in seven of the sectors and was particularly large in the information, wholesale trade, and retail trade sectors. The change in labor’s share of income also contributed to the gap in seven of the sectors and was most important in explaining the gap in manufacturing. In the mining sector, an increase in the labor share led to hourly compensation growing faster than productivity. Both of these components are important in explaining the widespread existence of productivity–compensation gaps among U.S. industries.

The composition of the productivity—compensation gap at the detailed industry level shows 79 percent of the 183 detailed industries had an output deflator that increased slower than the CPI. This means that the rate of change in the productivity–-compensation gap grew faster when adjusted by the CPI than by an output deflator. This difference in deflators contributed to the overall gap between productivity and compensation. The median difference in growth rates between the output deflator and CPI was -0.6 percent per year.

The labor share of income declined in 77 percent of industries studied. This means that a growing share of income was going to factors of production other than employee compensation over the period studied. Factors of production include labor, capital (e.g. machinery, computers, and software), and intermediate purchases (purchased materials, services and energy that go into producing a final product). The median growth rate in the labor share of income was -0.6 percent per year. The median effect of the change in labor share was the same as that of the difference in deflators.

High productivity—wide compensation gaps

Industries with the largest productivity gains experienced the largest productivity–compensation gaps. (See chart 6.) This group of high productivity industries experienced huge technological advances during the IT boom. All of these industries saw compensation rise much more slowly than productivity over time. This was mainly due to the difference in deflators. The prices of the electronic components used in production for these industries fell substantially over time. This is in contrast to the CPI, which rose steadily over the same period. The change in labor’s share of income was a much smaller contributor to the gap for these industries but still declined in each one.

The strong correlation between productivity and the productivity–compensation gap was primarily due to the difference in deflators. The relationship between productivity and the change in labor share was much weaker, yet it still existed. The difference in deflators was the stronger effect among high productivity industries while the change in labor’s share of income was the stronger effect among most other industries.

What about the 17 percent of industries that saw compensation rise at least as fast as productivity?  These tended to be industries with low productivity growth or even productivity declines. (See chart 7.) The median change in productivity of these industries since 1987 was 0.4 percent per year. In contrast, the median change in productivity of industries that saw compensation rise slower than productivity was 1.9 percent.

Industries in which compensation grew the fastest relative to productivity include the water, sewage, and other systems industry; the golf courses and country clubs industry; and the newspaper, periodical, book, and directory publishers industry. The first industry had a large difference in deflators, the second industry saw a large increase in the labor share, and the third industry had a combination of these two components affecting the gap. All three of these industries had productivity declines over the period.

Why the decline in labor share?

Although the difference in deflators explains much of the gap, as mentioned earlier, the share of income going to workers has declined in 77 percent of industries since 1987.

This raises the question: if not for labor compensation, what were the revenues used for?9 Industries divide their income amongst three broad groups: intermediate purchases, capital, and labor compensation. Relative changes to both intermediate purchases and capital can affect labor compensation. It is likely that numerous factors are responsible for recent changes in the labor share.

Using the information sector as an example, we can see in chart 8 that some industries had significant declines in labor’s share of income while others had modest declines or even increases from 1987 to 2015. The largest declines in labor share were in newer, information technology-related industries such as software publishing and wireless telecommunications carriers, where labor share declined by 23 and 16 percentage points respectively. These industries also saw a large rise in output and productivity in this period. In contrast, labor share increased by 7 percentage points in the more established newspaper, periodical, book, and directory publishing industry, which declined in output and productivity.

It is important to note that the reason for declining labor share will likely vary significantly by industry. Here are some plausible explanations:

Globalization – Some of the income that might have gone to domestic workers is now going to foreign workers due to increased offshoring (i.e. the outsourcing of production and service activities to workers in other countries). This could have caused intermediate purchases to increase and labor compensation to decrease.10

Increased automation – It is possible that increased automation has been leading to an overall drop in the need for labor input. This would cause capital share to increase, relative to labor share as machines replace some workers.11

Faster capital depreciation – It is possible that the capital used by industries is depreciating at a faster rate in recent years than in the past. These assets include items such as computer hardware and software that are upgraded or replaced more frequently than machinery used in prior decades. This faster depreciation could require a higher capital share to cover upgrade and replacement costs.12

Change over time

The American economy is dynamic and changes over time. These changes appear in the productivity–compensation gap and its components. Chart 9 shows the components of the gap in each sector for the 1987–2000 and 2000–2015 periods. These periods roughly divide the data in half and use an important point in the business cycle as a breakpoint. Several observations can be made based on this chart.

First, the average productivity–compensation gap among the sectors grew faster in the first period than in the second. This was mainly due to changes in the utilities and wholesale trade sectors.

Second, the difference in deflators accounted for most of the gap on average in the first period, but had a smaller effect on average in the second period. This was particularly true in the utilities, manufacturing, wholesale trade, and transportation and warehousing sectors.

Third, there are large changes in labor’s share of income happening in the mining and manufacturing sectors during the two periods. The manufacturing sector’s drop in labor share during the 2000–2015 period was the largest decline observed in any sector and time period. Conversely, mining experienced the largest increase in labor share during the 2000–2015 period.

What about changes over time in detailed industries? Chart 10 shows how the components of the gap changed over time in industries with the highest employment in 2015. These 10 industries, ordered by employment, made up about 39 percent of the total employment of the 183 industries studied. The first three industries in the chart had component effects that flipped direction from one period to the next. Other general merchandise stores industry, which includes warehouse clubs and supercenters, had a very large drop in labor’s share of income in the first period and a much more modest drop in the second. Charts 9 and 10 show that the productivity and compensation dynamics of sectors, and the industries within them, are changing over time and will likely continue to do so as the economy evolves.

Choosing the right tools, focusing on industries

Studying the productivity and compensation trends of industries can help us better understand the productivity–compensation gap observed in the broader economy. It can show which industries have the largest gaps and the extent to which gaps are widespread. It is important to choose an appropriate deflator for compensation when comparing to productivity. Failing to do so can exaggerate the gap, especially for high productivity industries. A full 83 percent of industries studied here had productivity–compensation gaps when the same deflator was used for output and compensation. These gaps came from a declining labor share of income. Sectors with the strongest declines in labor share included manufacturing, information, retail trade, and transportation and warehousing. Although the causes of the decline in labor share are still unclear, focusing on industries may help to isolate and understand the causes unique to each industry.

1 See Susan Fleck, John Glaser, and Shawn Sprague, “The compensation–productivity gap: a visual essay,” Monthly Labor Review, January 2011, https://www.bls.gov/opub/mlr/2011/01/art3full.pdf.

2 For example, see Barry Bosworth and George L. Perry, “Productivity and Real Wages: Is There a Puzzle?” Brookings Papers on Economic Activity, 1:1994, https://www.brookings.edu/bpea-articles/productivity-and-real-wages-is-there-a-puzzle/.

3 The detailed industries in this article include all published industries at the 4-digit NAICS level as well as some industries at the 3-, 5-, and 6 digit level for cases where the 4 digit is not published. There is an exception for NAICS industry 71311, which is used in place of NAICS 7131. This was done because NAICS 71311 is published back to 1987 while NAICS 7131 is only published back to 2007 and the more detailed industry makes up most of the 4-digit industry.

4 The measure of real hourly compensation used in this article differs from the labor compensation measure typically published for the industries examined. Measures of labor compensation typically published are not adjusted for inflation or on a per-hour basis. The measures of real hourly compensation calculated here are available upon request.

5 The sectors in this article are 2-digit NAICS sectors. The detailed industries, defined in the third endnote, are components of these sectors.

6 Industry output deflators are mostly based on Producer Price Indexes (PPIs) unique to each industry. PPIs measure price change from the perspective of the seller. Consumer Price Indexes (CPIs) for individual products are used to deflate output in some industries (e.g. industries in retail trade).

7 The rates of change calculated in this article are compound annual growth rates. One must use logarithmic changes for the components of the gap between productivity and real hourly compensation to equal the total gap in all cases. For most industries, the components sum up to the total gap using either method but may differ by 0.1 percent due to rounding.

8 Intermediate purchases include all of the purchased materials, services, and energy that go into producing a final product. Measures of the labor share included in this analysis are not directly comparable with the labor share measures of the nonfarm business sector, business sector, or nonfinancial corporate sector. The difference has to do with how output is measured at the industry and major sector levels. Measures at the industry level exclude intra-industry transactions but include all other intermediate purchases. Output at the major sector level is constructed using a value-added concept and subtracts out all intermediate purchases. Thus, industry output can be divided between labor, capital, and intermediate purchases, whereas major sector output can only be divided between labor and capital.

9 For another BLS discussion of the labor share of income, see Michael D. Giandrea and Shawn A. Sprague, “Estimating the U.S. Labor Share,” Monthly Labor Review, February 2017, https://www.bls.gov/opub/mlr/2017/article/estimating-the-us-labor-share.htm.

10 See Michael W. L. Elsby, Bart Hobijn, and Aysegul Sahin, “The Decline of the U.S. Labor Share,” Brookings Papers on Economic Activity, Fall 2013, https://www.brookings.edu/wp-content/uploads/2016/07/2013b_elsby_labor_share.pdf. A number of possible explanations for the declining labor share were examined. Analysis showed that offshoring of labor-intensive work is a leading potential explanation.

11 See Maya Eden and Paul Gaggl, “On the Welfare Implications of Automation,” Policy Research Working Paper, No. 7487, World Bank Group, November 2015, http://documents.worldbank.org/curated/en/2015/11/25380579/welfare-implications-automation. Some of the decline in labor’s share of income can be linked to an increase in the income share of information and communication technology (ICT). ICT effects may have had a larger impact on the distribution of income among workers.

12 See Dean Baker, “The Productivity to Paycheck Gap: What the Data Show,” Center for Economic and Policy Research, April 2007, http://cepr.net/publications/reports/the-productivity-to-paycheck-gap-what-the-data-show This is one of many articles that documents the fact that a rising share of GDP goes to replace worn-out capital goods. Income going towards replacing these goods should not be expected to raise living standards.

Aussies expect mortgage rates will keep rising

From The Real Estate Conversation.

Despite most economists predicting the Reserve Bank board will leave rates on hold at today’s board meeting, many Australians expect mortgage rates will rise this year, and are considering switching to fixed rate loans.

Despite most economists predicting the Reserve Bank board will leave rates on hold at today’s board meeting, many Australians expect mortgage rates will rise within six months, and are considering switching to fixed rate loans. The trend towards fixed-rate mortgages was strongest amongst young Australian homeowners.

A new survey by Gateway Credit Union shows that almost one in five respondents with a variable or split-rate home loan are considering making the switch to a fixed-rate loan.

Gateway CEO, Paul Thomas, said the results could reflect increased household financial pressure.

Household debt is at all-time high, said Thomas, adding that “a rise in home loan interest rates may very well tip some households over the edge financially.”

“Borrowers might be seeking the certainty of a fixed rate home loan,” said Thomas.

The research revealed that men were more likely to switch to a fixed-rate home loan than women (22.4 per cent compared with 14.7 per cent).

“Traditionally women tend to be more risk averse than their male counterparts when it comes to investment decisions. However, it seems like men may be more conservative when it comes to home loan repayments, opting to hedge their bets,” suggested Thomas.

Younger Australians were most likely to be considering shifting to fixed-rate loans. Of survey respondents aged between 18 and 29, 32.6 per cent were considering switching, compared with 20 per cent of those aged between 30 and 49, and only 9 per cent of those aged 50 or older.

Thomas said the fact that Australians are considering shifting to fixed-rate loans indicates that homeowners are feeling cautious.

“The fact that mortgage holders are looking to switch their home loans to fixed rate products over the next 3–9 months just goes to show that there is a sentiment of concern. Factors such as out-of-cycle rate hikes, the new bank levy, stagnant wage growth, and high levels of household debt are all converging to create an environment where borrowers need to act with caution,” he said.

Fixed-rate loans “secure certainty and help households avoid financial distress”, said Thomas.

Australians Curb Spending as Household Debt Balloons

From Reuters.

Australia’s economy may have achieved a remarkable winning streak, avoiding a recession for 25 years, but there are now clear signs that the consumers who have driven much of the growth are running out of puff.

With cash interest rates at a record low and house prices near record highs, the nation’s household debt-to-income ratio has climbed to an all-time peak of 189 percent, according to the Reserve Bank of Australia (RBA).

That means there are an increasing number of people who have little cash for discretionary spending – on everything from cars to electrical appliances and new clothes – as their pay packets get consumed by large mortgages and high rental payments in the country’s red-hot property market.

And it’s not as if a sudden plunge in home prices would help – it might well expose and exacerbate the problem, at least in the short run, squeezing many who have bought into the frothy market with high mortgage repayments and little equity in their homes.

“We are seeing a considerable spike in stress even in more affluent households. Large mortgages, big commitments but no income growth,” said Digital Finance Analytics (DFA) Principal Martin North. “Stressed households are less likely to spend at the shops, which acts as a drag anchor on future growth.”

North estimates a record 52,000 households risk default in the next 12 months and that 23.4 percent of Australian families are under mortgage stress, meaning their income does not cover ongoing costs. That compares with about 19 percent a year ago.

“People are up to their ears in mortgages,” said Brad Smith, a car sales consultant at MotorPoint Sydney which has seen a stark slowdown in sales in the past six months. “They are all on a budget. Everyone’s got all their money in houses, that’s how it is.”

Australians are also facing a cash crunch because price inflation in essential items such as food, electricity and insurance is accelerating at a 3.4 percent annual rate at a time when Australian wages are rising at their slowest pace on record, just 1.9 percent in the year to March.

Meanwhile, growth in retail sales, personal loans and luxury car sales are all at multi-year lows, suggesting the household sector – nearly 60 percent of Australia’s A$1.7 trillion ($1.3 trillion) economy – is under severe strain.

A CONSUMPTION PROBLEM

Australia’s love affair with property is worrying the RBA which has repeatedly warned against the danger of excessive real estate borrowing and the impact on spending elsewhere in the economy.

The central bank is reluctant to raise interest rates to cool the property market as it is concerned that would hit domestic demand at a time when real wages growth has turned negative. Besides, borrowing by businesses is growing at the slowest rate in three years.

Still, signs of a spending pullback is prompting economists to rethink Australia’s strong growth projections.

Only last month, the RBA upgraded its gross domestic product (GDP) forecast by 25 basis points to an annual 2.75-3.75 percent by the middle of next year from 2.50-3.50 percent it projected in February.

RBA’s confidence emanates from a levelling off in mining investment after years of steep falls, a rebound in the price of iron ore and coal prices – Australia is a major exporter of both – from 2015 lows, and the home building boom.

However, many believe the central bank’s forecast might prove too optimistic.

Both Morgan Stanley and National Australia Bank believe the economy might have slammed into reverse in the March quarter, after rising 1.1 percent in the December quarter. First-quarter GDP data is due on June 7.

“As the housing market slows, we see consumption growth as a major risk amid record-low wages growth and ongoing headwinds to discretionary cash flows,” Morgan Stanley economist Daniel Blake said.

RETAILING PAIN

Weak consumer spending is proving a huge drag on retailers’ performance, with shares in furniture and appliance chain Harvey Norman and electronics shop JB Hi-Fi both trading near one-year lows.

Retail sales have hardly grown in the past few months. Even online sales have slowed, with all major categories including homeware, games and toys, daily deals and takeaway food shrinking in April, according to the NAB Online Retail Sales Index.

Car sales have flattened this year after solid growth in 2016 while sales of luxury cars and sports utility vehicles are at a four-year low.

For consumers such as Sydney resident Marie-Aimee Guillermin, there’s little ‘play money’ left after stepping into Sydney’s housing market with a A$1.4 million 3-bedroom house last month.

“We thought once we had the house we could take our foot off the brake a little bit but now that we have it I feel even less certain in terms of stability and financial security,” she told Reuters.

“So whether we’ll end up spending a bit more on clothes and restaurants and going out and what have you I don’t see that happening.” ($1 = 1.3377 Australian dollars)

(Reporting by Swati Pandey; Editing by Jonathan Barrett and Martin Howell)

 

Fair Work Commission to cut wages within four weeks

From The New Daily.

More than 600,000 low-wage workers in the services sector will suffer a wage cut on the first day of next month, after a judicial bench refused pleas to cancel or delay cuts to penalty rates.

In a decision handed down on Monday, the Fair Work Commission denied requests from unions for the wage cuts to be postponed for two years or, at the very least, for currently employed Australians to be quarantined from the cuts.

Instead, the Commission chose to stagger the cuts to Sunday loadings, which means workers will have their wages cut every year on July 1 until 2019 or 2020, depending on their industry.

The verdict applies to workers paid Award rates in the hospitality, fast food, retail and pharmacy sectors.

ACTU secretary Sally McManus urged Parliament to legislate against the “devastating” cuts.

“This can be stopped. Our Parliament can stop it. Malcolm Turnbull can stop it,” she told reporters.

“There is a bill before Parliament as we speak and it can be voted on in the next two weeks and bring a stop to these penalty rate cuts.

“These cuts are devastating. It’s $70 a week in total on average for workers. These are the lowest paid workers in our community.”

Employer groups had urged the Commission to not phase in penalty rate cuts at all, arguing this would boost employment sooner.

The Commission dismissed this argument by acknowledging it was “cautious” about any boost to employment flowing from lower rates of pay. Instead, it argued that workers would benefit from “an increase in overall hours worked”.

However, it did decide to impose the public holiday penalty cuts all at once, from July 1, 2017.

Ms McManus disagreed, telling The New Daily that workers would end up “working longer for less pay”.

From July 1, Sunday penalty rates will be cut by 5 percentage points across the four sectors for full- and part-time workers, bringing penalty rates to 145 per cent for fast food; 195 per cent for pharmacy and retail; and 170 per cent for hospitality.

The McKell Institute, commissioned by the ACTU, has calculated, based on 2011 census data, that if the Sunday penalty rate cuts had been implemented in full on July 1, roughly 621,000 workers would have lost $1.4 billion in disposable income a year, with rural and regional areas the worst hit.

Some, such as Warren Entsch, Liberal MP for the worst affected electorate of Leichardt, have dismissed these numbers as exaggerated.

But even if the disposable income and affected worker numbers were overstated by the McKell Institute’s methodology, it would not affect the rankings. Rural and regional workers would remain the worst hit.

penalty rates electorates

The Australian Industry Group said the Commission’s decision was “fair”, but that it would have preferred for the cuts to be implemented straight away, not phased in.

Rob Mitchell, Labor MP for Australia’s second-worst affected electorate, told The New Daily that penalty rates are important because weekend workers “are missing out on what we value in Australia”.

“I know from my experience when I was with the RACV, having to work on Christmas Day and doing weekend work on both day shifts and night shifts, how this had a big impact on family life and the loss of participation in special family occasions,” Mr Mitchell said.

“This cut attacks the young, it attacks the vulnerable. The FWC does its work, and in this case it got it wrong – very badly wrong.”

Mr Mitchell was especially concerned about the impact of the cuts on consumer spending.

“For many in our communities, these cuts will mean that people have less discretionary spend. If they’ve got less discretionary spend, they’re going to be tightening things up, they won’t be going to restaurants or to the shops, so you could actually see a contraction in small town economies.”

How the changes will be phased in:

 

NSW first home buyer demand set to surge post July 1

From CoreLogic.

Abolishing stamp duty for first home buyers is likely to create some headaches for eligible buyers who have recently entered into contracts. Additionally we can expect first home buyer activity to stall before surging higher on July 1 2017. The long term outcome may be self-defeating due to higher demand pushing up prices.

The decision yesterday by the News South Wales Government Premier Gladys Berejiklian to provide first home buyers with a stamp duty exemption for properties with a price tag under $650,000 is likely to boost demand for this under represented segment of the market. Based on recent Australian Bureau of Statistics (ABS) data, first home buyers comprised only 8% of owner occupier mortgage commitments in March 2017, which is only marginally higher than the record low of 7.5% recorded in September last year and well below the long term average of 17%.

According to the latest CoreLogic ‘Perceptions of Housing Affordability’ report, it highlighted that across New South Wales the largest proportion of respondents (48%) identified that stamp duty was the most significant obstacle to housing affordability. Additionally, almost three quarters of respondents (74%) felt that removing or reducing stamp duty would be an effective way to improve housing affordability in New South Wales.

Clearly the state government is responding to one of the most significant pain points for prospective buyers.

The current policy provides a stamp duty exemption to first home buyers purchasing a new home with a price tag under $550,000. The new policy has substantially broader scope, providing an exemption for both new and established housing with a price tag under $650,000 and sliding discounts up to $800,000.

To put these limits into context, over the past twelve months, 45.4% of dwellings sold across New South Wales had a price tag of $650,000 or less and 58% of dwelling sales had a price tag $800,000 or less. The proportion of properties that meet the exemption criteria falls away sharply if the analysis is confined only to the Sydney metropolitan area where 25.8% of dwelling sales over the past twelve months were at a price of $650,000 or less.

With a substantial premium on detached housing, the proportions are also substantially different between the broad product types. The past twelve months saw 20.0% of Sydney houses sell for $650,000 or less while unit sales comprised just over one third of all sales (33.5%) at or below this price.

Additionally, with investor demand likely to be slowing due to higher mortgage rates, tighter credit policies and low yields; there is the potential that a rise in first time buyer demand could fill the ‘hole’ left by fewer investors in the market and offset the recent slowdown in the pace of capital gains.

First home buyers still need to contend with the challenges of raising a deposit, which is another major barrier to market entry. Housing prices in Sydney are the highest amongst the capital cities, with the latest data from CoreLogic putting the median house price at just over $1 million and median unit price at just under $743,000. Those buyers who can’t stump up a 20% deposit have been given another leg up, with stamp duty for lenders mortgage insurance also abolished.

Stamp duty on lenders mortgage insurance is charged at 9% of the premium; so a first home buyer with a 5% deposit on a $650,000 property is likely to save themselves around $2,250 (based on a premium of $25,000).

Removing or reducing the transactional costs for first home buyers is likely to provide both positive and negative consequences across the New South Wales housing market.

From a positive sense, policies aimed at improving housing accessibility for first time home buyers are likely to be positively received. Sydney is Australia’s most unaffordable housing market by any measure, and for many buyers, the cost of entry, including stamp duty and raising a deposit, is the most significant barrier to entry. On a $650,000 dwelling purchase, a non-first home buyer would be paying stamp duty costs of around $25,000; so the exemption is a substantial cost saving for a first home buyer.

On the negative side, it’s widely accepted that policies aimed at stimulating demand tend to push prices higher; there is a possibility that the new policy could ultimately be self-defeating, increasing housing demand which could place further upwards pressure on the price of housing which will exacerbate the affordability challenges even further.

The new policy comes into effect on July 1st, so we can expect first home buyer sales to stall over the remainder of June and likely surge higher from the beginning of the new financial year. For those buyers who are potentially eligible for the new exemptions but have recently entered into contacts, there is likely to be some severe disappointment that these rules aren’t applied retrospectively.

Perfect storm for housing affordability

From Mortgage Professional Australia.

First home buyers’ day of reckoning as Sydney and Melbourne prices drop and stamp duty is slashed

Property prices fell in Sydney and Melbourne over the month of March, by 1.3% and 1.7% respectively, according to CoreLogic’s Home Value Index.

Published yesterday, the Index coincided with an announcement by NSW’s State Government that stamp duty was to be abolished for first home buyers on existing and new properties under $650,000. Discounts on stamp duty will be available on properties up to $800,000.

“I want to ensure that owning a home is not out of reach for people in NSW,” explained NSW premier Gladys Berejiklian “These measures focus on supporting first homebuyers with new and better-targeted grants and concessions, turbocharging housing supply to put downward pressure on prices and delivering more infrastructure to support the faster construction of new homes.”

The state government will commit $3bn of funding for infrastructure and abolish stamp duty charged on lender mortgage insurance for FHBs. Conversely, stamp duty concessions have been removed for investors buying off the plan and the stamp duty charged on foreign investors will double to 8%.

Improving landscape for FHBs across Australia

Prospects are finally improving for first home buyers on the eastern seaboard. Both NSW and Victoria now have stamp duty exemptions for first home buyers and cooling housing markets, with property prices not moving in Sydney and increasing by just 0.7% in Melbourne over the past quarter.

CoreLogic’s data also revealed that prices in Perth and Darwin continue to fall, with sudden reversals in Hobart and Canberra and only moderate growth in other cities.

However Corelogic head of research Tim Lawless warned that price falls may not continue: “The May home value results should be viewed in the context of demonstrated seasonality; values have fallen during May in four of the past five years. Reading through the seasonality indicates that value growth in the market has lost momentum, particularly in Sydney and Melbourne where affordability constraints are more evident and investors have comprised a larger proportion of housing demand.”

Further action by APRA could reduce demand, according to Lawless: “considering we are yet to see the full effect of the recent round of macroprudential measures flow through, there is a high possibility that investor activity, and consequently housing demand, will slow further during 2017.”

Are stamp duty concessions the right way forward?

Former RBA governor Glenn Stevens, who advised the NSW government, has stated he’s not a ‘big fan’ of measures such as grants and concessions as these can simply drive up prices.     He argued that “the government might expect to achieve much more for affordability in the longer run by spending this money in other ways that would lead to lower cost supply of new housing.”

Labor has pledged to scrap negative gearing, although Treasurer Scott Morrison has claimed removing it could actually harm affordability by raising rents.

The UK government has turned against negative gearing for investors, with tax relief being phased out by 2021. This has had a huge effect on prices in London, which grew by 1.5% in the year to March compared with 15% growth the year before.