Australian labour market weakens in July 2018

The Australian Bureau of Statistics released the latest – Labour Force, Australia, July 2018 – today which show that the Australian labour market weakened in July 2018 and one is lead to think that the June 2018 improvement was an outlier after several months of poor results earlier in the year. It looks like the labour market has settled back into that weak pattern. Overall employment growth was negative but this was all down to the teenage segment, where there were substantial losses of part-time work. Unemployment fell marginally but only because the participation rate fell by 0.1 points, which meant that the labour force contracted by more than employment. Overall, my assessment is that the Australian labour market remains in an uncertain state, but is on the weak side, and, is still a considerable distance from full employment. There is room for some serious policy expansion at present.

The summary ABS Labour Force (seasonally adjusted) estimates for July 2018 are:

• Employment decreased 3,900 (0.0 per cent) – full-time employment increased 19,300 and part-time employment decreased 23,200.
• Unemployment decreased 5,700 to 706,100 but only because participation fell.
• The official unemployment rate decreased by less than 0.1 points to 5.3 per cent.
• The participation rate decreased by 0.1 points to 65.5 per cent, which is still below its previous peak (December 2010) of 65.8 per cent.
• Aggregate monthly hours worked increased 4 million hours (0.2 per cent).
• The monthly estimates for July 2018 show that underemployment fell by 20.5 thousand and was estimated to be 8.4 per cent of the labour force. The total labour underutilisation rate (unemployment plus underemployment) was rose to 13.62 per cent. There were 1,117.2 thousand persons underemployed and a total of 1,806.9 thousand workers either unemployed or underemployed.

Employment growth negative in July 2018

Employment growth was negative in July and returned to the several months of mediocrity that preceded June.

Employment decreased 3,900 (0.0 per cent) – full-time employment increased 19,300 and part-time employment decreased 23,200.

The following graph shows the month by month growth in full-time (blue columns), part-time (grey columns) and total employment (green line) for the 24 months to July 2018 using seasonally adjusted data.

It gives you a good impression of just how flat employment growth had been leading into 2017.

Overall: today’s result signals a weaker labour market and is more consistent with the performance of the earlier months of 2018. June 2018 is looking like an outlier at this stage.

The following table provides an accounting summary of the labour market performance over the last six months. The monthly data is highly variable so this Table provides a longer view which allows for a better assessment of the trends.

Overall there have been just 80.5 thousand jobs (net) added in Australia over the last six months while the labour force has increased by 62.1 thousand. The result has been that unemployment has fallen by 18.4 thousand.

These aggregate changes signify a weak labour market performance.

Given the variation in the labour force estimates, it is sometimes useful to examine the Employment-to-Population ratio (%) because the underlying population estimates (denominator) are less cyclical and subject to variation than the labour force estimates. This is an alternative measure of the robustness of activity to the unemployment rate, which is sensitive to those labour force swings.

The following graph shows the Employment-to-Population ratio, since February 2008 (the low-point unemployment rate of the last cycle).

It dived with the onset of the GFC, recovered under the boost provided by the fiscal stimulus packages but then went backwards again as the last Federal government imposed fiscal austerity in a hare-brained attempt at achieving a fiscal surplus.

The ratio began rising in December 2014 which suggested to some that the labour market had bottomed out and would improve slowly as long as there are no major policy contractions or cuts in private capital formation.

The series turned again as overall economic activity weakened.

The ratio fell by 0.1 points in July 2018 to 62.1 per cent and remains well below pre-GFC peak in April 2008 of 62.9 per cent.

To put the current monthly performance into perspective, the following graph shows the average monthly employment change for the calendar years from 2005 to 2018 (the 2018 result is up to July 2018 only).

It is clear that after some lean years, 2017 was a much stronger year if total employment is the indicator.

It is also clear that the labour market has weakened considerably in the first six months of 2018.

To provide a longer perspective, the following graphs shows the average monthly changes in Total employment (upper panel), and Full-time and Part-time employment (lower panel) in thousands since 1978 (when the current dataset began).

The 2018 average is up to June only so is not definitive.

The interesting result is that during recessions or slow-downs, it is full-time employment that takes the bulk of the adjustment. Even when full-time employment growth is negative, part-time employment usually continues to grow.

Teenage labour market deteriorates in July 2018

Total teenage employment fell 19.8 thousand jobs in July 2018 with full-time teenage employment rising by 1.3 thousand and part-time employment falling by 21.1 thousand.

This means that the deterioration in the overall labour market was entirely concentrated in the part-time teenage segment – at the same time the second tranche of penalty rate cuts came in.

The following graph shows the distribution of net employment creation in the last month by full-time/part-time status and age/gender category (15-19 year olds and the rest)

Over the last 12 months, teenagers have gained 42.2 thousand (net) jobs overall while the rest of the labour force have gained 258.1 thousand net jobs.

Teenagers have gained around 14 per cent of the total net employment growth over the last 12 months but only represent around 6.2 per cent of the total labour force. So they are doing relatively better in that sense.

The following graph shows the change in aggregates over the last 12 months.

In terms of the current cycle, which began after the last low-point unemployment rate month (February 2008), the following results are relevant:

1. Since February 2008, there have been 1,927.6 thousand (net) jobs added to the Australian economy but teenagers have lost a 63.2 thousand over the same period.

2. Since February 2008, teenagers have lost 100.7 thousand full-time jobs (net).

3. Even in the traditionally, concentrated teenage segment – part-time employment, teenagers have gained only 53.5 thousand jobs (net) even though 828.4 thousand part-time jobs have been added overall.

To put the teenage employment situation in a scale context (relative to their size in the population) the following graph shows the Employment-Population ratios for males, females and total 15-19 year olds since February 2008.

You can interpret this graph as depicting the loss of employment relative to the underlying population of each cohort. We would expect (at least) that this ratio should be constant if not rising somewhat (depending on school participation rates).

The absolute loss of jobs reported above has impacted more on males than females.

The male ratio has fallen by 8.9 percentage points since February 2008, the female ratio has fallen by 3.1 percentage point and the overall teenage employment-population ratio has fallen by 6 percentage points.

The gains earlier in 2018 reversed in July 2018.

The other statistic relating to the teenage labour market that is worth highlighting is the decline in the participation rate since the beginning of 2008 when it peaked in February at 61.4 per cent.

In July 2018, the participation rate was 54.8 per cent (down by 1 percentage point). The falling participation rate reflected the weaker employment growth for teenagers.

However, the difference between the 2008 level, amounts to an additional 90.2 thousand teenagers who have dropped out of the labour force as a result of the weak conditions since the crisis.

If we added them back into the labour force the teenage unemployment rate would be 24 per cent rather than the official estimate for July 2018 of 15.6 per cent.

Some may have decided to return to full-time education and abandoned their plans to work. But the data suggests the official unemployment rate is significantly understating the actual situation that teenagers face in the Australian labour market.

Overall, the performance of the teenage labour market leaves a lot to be desired. The decline in full-time employment for teenagers was particularly worrying.

This situation doesn’t rate much priority in the policy debate, which is surprising given that this is our future workforce in an ageing population. Future productivity growth will determine whether the ageing population enjoys a higher standard of living than now or goes backwards.

I continue to recommend that the Australian government immediately announce a major public sector job creation program aimed at employing all the unemployed 15-19 year olds, who are not in full-time education or a credible apprenticeship program.

Unemployment decreased 5,700 to 706,100

The official unemployment rate moved from 5.355 to 5.316 per cent July 2018 and total unemployment fell by 5,700.

While employment growth was negative, the labour force fell by a greater extent due to the falling participation rate.

A double negative in other words – when unemployment declines for the wrong reasons.

The following graph shows the national unemployment rate from February 1978 to July 2018. The longer time-series helps frame some perspective to what is happening at present.

After falling steadily as the fiscal stimulus pushed growth along, the unemployment rate slowly trended up for some months.

It is still 0.4 points above the level it fell to as a result of the fiscal stimulus and 1.3 points above the level reached before the GFC began.

Conclusion: there is still considerable slack in the labour market that should be absorbed with fiscal stimulus.

Broad labour underutilisation at 13.6 per cent

The results based on the Monthly data for July 2018 are:

1. Underemployment fell by 20.5 thousand and was estimated to be 8.4 per cent of the labour force (down from 8.6 per cent). This is the result of a fall in part-time work and the falling participation rate – meaning workers who were probably underemployed have dropped out of the labour force for the time being.

2. The total labour underutilisation rate (unemployment plus underemployment) was 13.62 per cent (down from 13.73 per cent).

3. There were 1,117.2 thousand persons underemployed and a total of 1,806.9 thousand workers either unemployed or underemployed.

So the relatively weak employment growth over 2018 has delivered a labour market that has around 1.8 million workers available for work who cannot find sufficient hours.

In terms of the quarterly data, the following graph plots the seasonally-adjusted underemployment rate in Australia since February 1978 to the May-quarter 2018 (blue line) and the broad underutilisation rate over the same period (green line).

The difference between the two lines is the unemployment rate.

You can see the three cyclical peaks corresponding to the 1982, 1991 recessions and the more recent downturn.

The other difference between now and the two earlier cycles is that the recovery triggered by the fiscal stimulus in 2008-09 did not persist and as soon as the ‘fiscal surplus’ fetish kicked in in 2012, things went backwards very quickly.

The two earlier peaks were sharp but steadily declined. The last peak fell away on the back of the stimulus but turned again when the stimulus was withdrawn.

If hidden unemployment (given the depressed participation rate) is added to the broad ABS figure the best-case (conservative) scenario would see a underutilisation rate well above 15 per cent at present. Please read my blog post – Australian labour underutilisation rate is at least 13.4 per cent – for more discussion on this point.

The next quarterly update will be for the August-quarter 2018 and will be published published in the September 2018 Labour Force release. In between those releases, the monthly estimates will guide our thinking.

Aggregate participation rate – fell by 0.1 points to 65.5 per cent

Unemployment fell this month despite the negative employment growth because the labour force fell more quickly as a result of decline in participation.

By how much would unemployment have risen if the participation rate had not fallen?

The labour force is a subset of the working-age population (those above 15 years old). The proportion of the working-age population that constitutes the labour force is called the labour force participation rate. Thus changes in the labour force can impact on the official unemployment rate, and, as a result, movements in the latter need to be interpreted carefully. A rising unemployment rate may not indicate a recessing economy.

The labour force can expand as a result of general population growth and/or increases in the labour force participation rates.

The following Table shows the breakdown in the changes to the main aggregates (Labour Force, Employment and Unemployment) and the impact of the rise in the participation rate.

The change in the labour force in July 2018 was the outcome of two separate factors:

• The underlying population growth added 16.8 thousand persons to the labour force. The population growth impact on the labour force aggregate is relatively steady from month to month but has slowed in recent months; and
• The fall in the participation rate meant that there were 26.5 thousand workers dropping out of the labour force (relative to what would have occurred had the participation rate remained unchanged).
• The net result was that the labour force declined by 9.6 thousand (rounded).

If the participation rate had not have fallen, total unemployment, at the current employment level, would have been 732.4 thousand rather than the official count of 706 thousand as recorded by the ABS – a difference of 26.5 thousand workers (the ‘participation effect’).

Thus, without the fall in the participation rate in May 2018, the unemployment rate would have been 5.5 per cent (rounded) rather than its current value of 5.3 per cent (rounded).

The conclusion is that hidden unemployment rose slightly in May 2018 along with underemployment – a sign of a weakening situation.

There is considerable monthly fluctuation in the participation rate but the current rate of 65.5 per cent is still below its most recent peak in November 2010 of 65.8 per cent.

What would the unemployment rate be if the participation rate was at the last November 2010 peak level value?

The following graph tells us what would have happened if the participation rate had been constant over the period November 2010 to May 2018. The blue line is the official unemployment rate since its most recent low-point of 4 per cent in February 2008.

The red line starts at November 2010 (the peak participation month). It is computed by adding the workers that left the labour force as employment growth faltered (and the participation rate fell) back into the labour force and assuming they would have been unemployed. At present, this cohort is likely to comprise a component of the hidden unemployed (or discouraged workers).

With the rise in participation in recent months, the red line has fallen but is still above the actual unemployment rate.

1. Total official unemployment in July 2018 was estimated to be 706 thousand.

2. Unemployment would be 756.5 thousand if participation rate was at its November 2010 peak.

3. The unemployment rate would now be 5.7 per cent rather than the official July 2018 estimate of 5.32 per cent.

The difference between the two numbers mostly reflects, the change in hidden unemployment (discouraged workers) since November 2010. These workers would take a job immediately if offered one but have given up looking because there are not enough jobs and as a consequence the ABS classifies them as being Not in the Labour Force.

There has been some change in the age composition of the labour force (older workers with low participation rates becoming a higher proportion) but this only accounts for less than 1/3 of the shift. The rest is undoubtedly accounted for by the rise in hidden unemployment.

Note, the gap between the blue and red lines doesn’t sum to total hidden unemployment unless November 2010 was a full employment peak, which it clearly was not. The interpretation of the gap is that it shows the extra hidden unemployed since that time.

This gap shrinks as participation rises relative to the November 2010 peak.

Hours worked – increased by just 4 million hours (0.23 per cent).

The following graph shows the monthly growth (in per cent) over the last 24 months.

The dark linear line is a simple regression trend of the monthly change – which depicts a very flat trend – distorted somewhat by the outlier in May 2017 (the trend would have been more sharply downward without that positive spike).

You can see the pattern of the change in working hours is also portrayed in the employment graph – zig-zagging across the zero growth line although less so in 2017.

Conclusion

My standard monthly warning: we always have to be careful interpreting month to month movements given the way the Labour Force Survey is constructed and implemented.

Today’s figures show that the Australian labour market weakened in July 2018 and one is lead to think that the June 2018 improvement was an outlier after several months of poor results earlier in the year.

It looks like the labour market has settled back into that weak pattern.

Overall employment growth was negative but as we showed above, this was all down to the teenage segment, where there were substantial losses of part-time work.

Unemployment fell marginally but only because the participation rate fell by 0.1 points, which meant that the labour force contracted by more than employment.

Taken together, my overall assessment is:

1. The labour market remains in an uncertain state but is on the weak side.

2. It remains a considerable distance from full employment.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.