Australian labour force data – underutilisation rate rises to 23.4 per cent

Whatever way you want to interpret it, the Australian labour market fell off a very steep cliff in the four weeks from around March 12 to April 12. The latest data from the Australian Bureau of Statistics – Labour Force, Australia, April 2020 – released today (May 14, 2020) is shocking. Like all the data releases at the moment. All the main aggregates moved in extremely adverse directions. Employment fell by 4.6 per cent (594,300). Unemployment rose by 104,500 thousand. But that is a gross understatement of the problem given that the participation rate fell by 2.4 points, which meant the labour force fell by 489.8 thousand. Without the fall in the participation rate in April 2020, the unemployment rate would have been 9.7 per cent rather than its current value of 6.2 per cent). Monthly hours of work fell by 9.2 per cent. And the broad labour underutilisation rate is now at 19.9 per cent, after underemployment rose by 4.9 points to 13.7 per cent. There are now 2,639.4 thousand workers either unemployed or underemployed. That number swells to 3,142.6 (or 23.4 per cent) if we add the rise in hidden unemployment back into the ‘jobless’. Any government that oversees that sort of disaster has failed in their basic responsibilities to society. Its fiscal stimulus is totally inadequate.

The summary ABS Labour Force (seasonally adjusted) estimates for April 2020 are:

• Employment decreased 594,300 (4.6 per cent) – Full-time employment decreased 220,500 and part-time employment decreased 373,800.
• Unemployment increased 104,500 to 823,300 persons.
• The official unemployment rate increased 1.0 points to 6.2 per cent.
• The participation rate decreased by 2.4 points to 63.5 per cent.
• Aggregate monthly hours worked decreased 163.9 million hours (-9.2 per cent).
• Underemployment rose by 16.5 thousand or 4.9 points to 13.7 per cent. Overall there are 1,816.1thousand underemployed workers. The total labour underutilisation rate (unemployment plus underemployment) increased by 5.9 points to 19.9 per cent. There were a total of 2,639.4 thousand workers either unemployed or underemployed.

Employment decreased 594,300 or 4.6 per cent in April 2020

1. Employment decreased 594,300 (2.5 per cent).

2. Full-time employment decreased 220,500 and part-time employment decreased 373,800.

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 April 2020 using seasonally adjusted data.

Last month, I wrote that “I expect that next month, the green line will plunge into the negative area”.

Plunge is an understatement.

The following table provides an accounting summary of the labour market performance over the last six months.

As the monthly data is highly variable, this Table provides a longer view which allows for a better assessment of the trends.

Assessment:

1. Every bad thing that can happen has happened – employment collapse, participation rate collapse, labour force collapse, which reduces the collapse in official unemployment.

2. As a consequence while unemployment rose 100 thousand, hidden unemployment will have risen substantially as well (see below for quantification).

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 April 2008 (the low-point unemployment rate of the last cycle).

It fell with the onset of the GFC, recovered under the boost provided by the fiscal stimulus packages but then went backwards again as the Federal government imposed fiscal austerity in a hare-brained attempt at achieving a fiscal surplus in 2012.

The ratio fell by 2.9 points in April 2020 at 59.6 per cent. The ratio is now 3.3 points 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 1980 to 2020 (to date).

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

2. It is also clear that the labour market weakened considerably over 2018 and that situation worsened in 2019.

3. 2020 has not started well and the deterioration will get deeper in the months to come.

The following graph shows the average monthly changes in Full-time and Part-time employment (lower panel) in thousands since 1980.

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.

However, this crisis is different because much of the employment losses are the result of lockdowns and enforced business closures in sectors where part-time employment dominates.

Unemployment increased 104,500 to 823,300 or 6.2 per cent

The official unemployment rate increased by 1 point to 6.2 per cent but the actual unemployment arising from the crisis is much higher given the sharp fall in the participation rate.

Most of the fall in the Labour Force (-489.8 thousand) will be hidden unemployed who have not satisfied activity tests in the survey (that is, they probably said they had given up looking).

Further on I will quantify what that means for the underlying unemployment rate.

The following graph shows the national unemployment rate from January 1980 to April 2020. The longer time-series helps frame some perspective to what is happening at present.

Assessment:

1. Any time the unemployment rate rises like this you know one other thing – the extent of fiscal policy support is inadequate.

2. There is clearly still considerable slack in the labour market that could be absorbed with further fiscal stimulus.

3. The government is choosing to allow this rise in joblessness.

Broad labour underutilisation rose by 4.9 points to 19.9 per cent

The results for April 2020 are (seasonally adjusted):

1. Underemployment rose by 603.3 thousand.

2. The underemployment rate rose by 4.9 points to 13.7 per cent.

2. Overall there are 1815.1 thousand underemployed workers.

3. The total labour underutilisation rate (unemployment plus underemployment) increased by 5.9 points to 19.9 per cent.

4. There were a total of 2639.4 thousand workers either unemployed or underemployed.

5. In other words, nearly 20 per cent of the labour force are idle (but see below to appreciate those that have dropped out of the labour force).

The following graph plots the seasonally-adjusted underemployment rate in Australia from January 1980 to the April 2020 (blue line) and the broad underutilisation rate over the same period (green line).

The difference between the two lines is the unemployment rate.

The three cyclical peaks correspond 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.

In the coming months these graphs will turn sharply upwards.

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 23 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.

Unemployment and broad labour underutilisation indexes – last four downturns

The following graph captures the evolution of the unemployment rates for the 1982, 1991, GFC and COVID-19 downturns.

For each episode, the graph begins at 100 – which is the index value of the unemployment rate at the low-point of each cycle (June 1981; December 1989; February 2008, and January 2020, respectively).

We then plot each episode out for 90 months.

For 1991, the peak unemployment which was achieved some 38 months after the downturn began and the resulting recovery was painfully slow. While the 1982 recession was severe the economy and the labour market was recovering by the 26th month. The pace of recovery for the 1982 once it began was faster than the recovery in the current period.

During the GFC crisis, the unemployment rate peaked after 16 months (thanks to a substantial fiscal stimulus) but then started rising again once the stimulus was prematurely withdrawn and a new peak occurred at the 80th month.

The COVID-19 downturn, while in its early months, is obviously worse than anything of the previous recessions shown.

In relative terms, the current episode is now worse than the other three downturns (in terms of deviation from low-point unemployment rate).

The graph provides a graphical depiction of the speed at which each recession unfolded (which tells you something about each episode) and the length of time that the labour market deteriorated (expressed in terms of the unemployment rate).

After three months, the unemployment had risen from 100 to:

1. 108.8 index points in 1982.

2. 109.2 index points in 1991.

3. 107.1 index points in the GFC.

4. 122.0 index points currently (and note the point below about participation rate declining)

Note that these are index numbers and only tell us about the speed of decay rather than levels of unemployment.

The next graph performs the same operation for the broad labour underutilisation rate (sum of official unemployment and underemployment).

Aggregate participation rate decreased by 2.4 points to 63.5 per cent

The fall in the labour force participation rate meant that the labour force fell by 489.8 thousand.

That number would have been added to official unemployment had the workers (in all probability) not given up looking for work.

In other words, the 1 point rise in the official unemployment rate is a gross underestimate of what is actually goin on with respect to job loss.

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 April 2020 was the outcome of two separate factors:

• The underlying population growth added 13.4 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 503.2 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 fell by 489.8 thousand.

Assessment:

1. If the participation rate had not have fallen, total unemployment, at the current employment level, would have been 1,326.5 thousand rather than the official count of 823.3 thousand as recorded by the ABS – a difference of 503.2 thousand workers (the ‘participation effect’).

2. Without the fall in the participation rate in April 2020, the unemployment rate would have been 9.7 per cent (rounded) rather than its current value of 6.2 per cent).

3. Hidden unemployment thus rose by 502.2 thousand.

4. If we add the change in hidden unemployment back into the broad labour underutilisation rate currently estimated to be 19.9 per cent, we would get a total wastage rate of 23.4 per cent. Hideous. Policy. Failure.

Teenage labour market collapses in April 2020

1. Total teenage net employment fell by 102.7 thousand in April 2020 (14.8 per cent) – as a result of the closures in hospitality, recreation and arts etc.

2. Full-time teenage employment fell by 24.1 thousand (16.1 per cent) and part-time employment fell by 78.7 thousand (14.4 per cent).

3. The teenage unemployment rate rose by 1.5 points to 18/1 per cent.

The following Table shows the distribution of net employment creation in the last month and the last 12 months by full-time/part-time status and age/gender category (15-19 year olds and the rest).

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 April 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.

1. The male ratio has fallen by 14.2 percentage points since February 2008.

2. The female ratio has fallen by 11.7 percentage points.

3. The overall teenage employment-population ratio has fallen by 13 percentage points.

4. In other words, over the entire cycle that has just ended, teenagers went backwards.

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 April at 61.4 per cent.

In April 2020, the participation rate was just 48 per cent. This is a very unreliable statistic overall – it fluctuates widely on a monthly basis.

However, the difference between the 2008 level, amounts to an additional 194 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 35.4 per cent rather than the official estimate for April 2020 of 18.1 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 is disastrous and will undermine future productivity and prosperity as our society ages.

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.

This is desperately required now.

Hours worked decreased 163.9 million hours (-9.2 per cent) in April 2020

As I indicated last month, I expected both the number of workers and the total working hours to simultaneously collapse this month.

That has certainly happened.

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 sharp decreasing trend. Even before the coronavirus crisis struck, the trend was downwards.

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.

Given the survey week for the April data release ended towards the end of the second week in April, I expect the situation to deteriorate even further.

The April 2020 data reveals that the Australian economy is in dire straits now.

All the main aggregates moved in extremely adverse directions.

Employment fell by 4.6 per cent (594,300 thousand).

Unemployment rose by 104,500 thousand.

But that is a gross understatement of the problem given that the participation rate fell by 2.4 points, which meant the labour force fell by 489.8 thousand.

Without the fall in the participation rate in April 2020, the unemployment rate would have been 9.7 per cent rather than its current value of 6.2 per cent).

Monthly hours of work fell by 9.2 per cent.

And the broad labour underutilisation rate is now at 19.9 per cent, after underemployment rose by 4.9 points to 13.7 per cent.

There are now 2,639.4 thousand workers either unemployed or underemployed. That number swells to 3,142.6 (or 23.4 per cent) if we add the rise in hidden unemployment back into the ‘jobless’.

My overall assessment is:

1. The current situation can best as catastrophic.

2. The Australian labour market needs massive fiscal policy intervention targetted at direct job creation.

3. The prior need for a fiscal stimulus of around 2 per cent has changed to a fiscal stimulus requirement of several times that.

4. There is clear room for some serious fiscal policy expansion at present and the Federal government’s attempts to date have been seriously under-whelming.

5. Any government that oversees that sort of disaster has failed in their basic responsibilities to society. Its fiscal stimulus is totally inadequate.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.