The chasm in Australian employment statistics grows deeper

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By Leith van Onselen

Yesterday, John Black, former Labor senator and present chief executive of Australian Development Strategies, wrote an interesting critique of the employment picture painted by the Australian Bureau of Statistics’ (ABS) official labour force data. From the AFR:

The days of being able to rely on the unemployment rate to take the pulse of the labour market are well and truly over. These days, a falling unemployment rate across our regions often means would-be workers are giving up and joining the longer-term groups of students, retirees and carers outside the mainstream labour force, pulling down the participation rate and shrinking the economy…

Politicians can’t pick up the signals because most of the new unemployment growth is hidden in the ranks of a million or so discouraged workers, most of whom want jobs and are available to start within a month but have simply stopped looking because the local jobs aren’t there.

These workers don’t meet the tight definitions used to define the official unemployment rate so they simply aren’t in the monthly published figures…

The problems for the federal government began during the latter stages of the GFC when it spent too much on stimulus payments that were no longer needed. By the second half of 2010, unemployment was down to 4.8 per cent, about as far it could go in a more regulated labour market. The extra public sector demand began to suck in anyone who wanted a job and this fed into the participation rate, pulling it back just above December 2007 levels to 66.4 per cent by December 2010…

After gathering their votes, even Wayne Swan worked out that this sort of spending was unsustainable and promised to restore balanced budgets.

But this swung the spend pendulum wildly the other way, especially at the state level. As a result, we have seen the more marginal workers who were sucked into the economy between November 2007 and December 2010 being pushed back out of the workforce, pulling down the participation rate. This trend has been further exacerbated by slowdowns in private sector jobs in agriculture, mining, construction and wholesaling.

What’s happening now in Australia, with a more regulated labour market, is that the official unemployment rate is remaining steady and the impact of fiscal and monetary policy is being played out with the participation rate…

Black offers an interesting perspective that perhaps goes part of the way to explaining why Australia’s official unemployment rate has remained so low in the face of a steady stream of redundancies announced across the economy over the past year or so. Certainly, Black’s suggestion that job losses are being played-out via falling labour force participation seems reasonable in light of the significant fall in both the participation rate and the employment-to-population ratio since 2010 (see below charts).

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The alternative labour market data also points to a deteriorating jobs market, contradicting the official statistics produced by the ABS.

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For example, the alternate Roy Morgan Research estimate of Australia’s unemployment rate increased by 0.3% in November to 10.0% (see next chart).

The Roy Morgan measure of unemployment is broader than the ABS’ and is not seasonally-adjusted. As such, it is always higher than the official unemployment rate and is more volatile.

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Nevertheless, perhaps because the Roy Morgan measure picks-up discouraged workers, it began to diverge from the official statistics in mid-2010, after tracking closely together for a decade prior. In fact, the difference between the two non-seasonally-adjusted measures hit a record 5.1% in November, which is well above the average 2.3% divergence since the Roy Morgan series commenced in January 2001 (see next chart).

Recent job ads data also points to a weakening labour market.

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According to the ANZ job advertisements series released last month, the total number of job ads fell for the eighth consecutive month, down -2.9% in November. Moreover, the total number of job ads in November was the lowest since January 2010 and -17% below levels seen in November last year (see next chart).

Like the Roy Morgan unemployment measure, the ANZ job ads series has traditionally shown a strong correlation to the official unemployment rate (see below chart). The divergence lately might also be due to the falling participation rate which, as mentioned above, is masking an increase in unemployment.

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In a similar vein, Wednesday’s ABS job vacancies data for the November quarter revealed that the total number of job vacancies hit 30-month lows, again pointing to a deteriorating jobs market (see below chart).

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Finally, the most recent unemployment expectations survey by Westpac showed a big pick-up in unemployment expectations in December (see next chart).

Historically, such surges in unemployment expectations have been followed by corresponding increases in the official unemployment rate (see next charts). However, like the other measures, this relationship has broken-down recently, with the official unemployment rate so far remaining steady.

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Clearly, a deep chasm has developed between the official unemployment rate produced by the ABS and the alternative labour market measures. These divergences, in turn, cast doubt over the oft-purported strength of the Australian employment market.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.