Australian competitiveness changing the landscape



By Martin ConboyWhat is happening around the world as currency markets readjust to take into account the changing global economic conditions like the slow down in China, the stagnant European markets and the USA starting to see the end of the tunnel, is impacting upon the outsourcing market in Australia.

Labour costs in Australia have grown at twice the pace of other OECD countries over the past decade, which would suggest that wages in Australia are out of line with the rest of the world. This has resulted in major announcements from major Australian manufacturing companies that they are either pulling out of Australia or in the case of major service organisations

(Banks, Telcos, Financial companies etc)  they are now finding that the cost of the labour price  differential in Asia too compelling to ignore.

However OECD figures show the difference in growth in labour costs between Australia and its peers is less significant than the dramatic rise in the Australian dollar’s value over the same period.

Over the decade from 2002, on average, labour costs per unit of output rose 3.25 per cent a year in Australia. That is more than twice the 1.4 per cent annual growth in the decade to 2001. It tells us that wages were rising much faster than labour productivity. The gap between wage growth and productivity growth in Australia was easily the highest among the 10 largest Western economies. Growth across the OECD averaged about half of Australia’s rate.

Australian Dollar versus the US Dollar and the Great Britain Pound

Australian Dollar versus the US Dollar and the Great Britain Pound

Last year, as Australian business focused on raising its productivity levels, job growth slumped and growth in unit labour costs fell back to about the OECD average. Having said that we are still basically still at full employment with the unemployment rate currently at 5.5 per cent, but official figures show another 7 per cent of workers in casual or part-time roles are willing and able to work more hours.

It is estimated that 35 per cent of Australia’s workforce is now employed on a casual or contract basis and that is most certainly the case in the Australian call centre industry.

Employer groups say workplace flexibility is needed to achieve economic growth. They suggest there are also growing numbers of Australians who are choosing casual and part-time jobs. There are even job websites dedicated entirely to them.

Over the decade, unit labour costs rose 37 per cent in Australia, compared with 21 per cent in the US and 6 per cent in Germany.

Its not rocket science to know that when costs rise faster in Australia than in other countries, it weakens Australian competitiveness. But the difference between Australia and the rest of the world in labour cost growth, while significant, is far smaller than the impact of the rise in the value in the Australian dollar, which only amplifies the cost differential when compared to the Philippine Peso or the Indian Rupee against the US dollar.

Graph Australian Dollar versus Philippines Peso

Australian Dollar versus Philippines Peso and Indian Rupee January 2000 to June 2013.

The Philippines was the second fastest growing nation in Asia last year thanks to the value of their outsourcing sector and as a result they are starting to see their currency appreciate which is causing their price competitiveness to be challenged by new players coming into the market. It’s a different story in India as the Indian rupee continues to decline against the Australian dollar.

July 8, 2013

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