Australian labour market weakens – unemployment would be 4.5 per cent if not for the sharp fall in participation

Today (January 18, 2024), the Australian Bureau of Statistics released the latest – Labour Force, Australia – for December 2023, which tells us where things were at by year’s end. This looks likes the first real signs of a slowdown although the rather large swing in participation suggests there is some sampling variability and the incoming rotation group for December 2023 did have a lower participation rate than the outgoing group. Employment growth has been unusually strong in the previous few months but has now turned negative. Without the very sharp fall in participation, the official unemployment rate would have been 4.5 per cent rather than the official recorded rate of 3.9 per cent – a difference of 98.3 thousand workers. While we will see whether the data will be revised next month, a substantial number of workers who may have been or become unemployed have left the labour force in December as the demand-side weakened. There remains 10.4 per cent of the available and willing working age population who are being wasted in one way or another – either unemployed or underemployed. Australia is not near full employment despite the claims by the mainstream commentators and it is hard to characterise this as a ‘tight’ labour market.

The summary ABS Labour Force (seasonally adjusted) estimates for December 2023 are:

• Employment fell 65,100 (-0.5 per cent) – full-time employment decreased by 106.6 thousand and part-time employment increased by 41.4 thousand. Part-time share of total was 30.5 per cent.
• Unemployment fell 800 to 573,600 persons.
• The official unemployment rate was steady at 3.9 per cent.
• The participation rate fell 0.4 points to 66.8 per cent.
• The employment-population ratio fell by 0.2 points to 64.4 per cent.
• Aggregate monthly hours fell by 10.4 million hours (-0.54 per cent).
• Underemployment rate was steady at 6.5 per cent (-3.8 thousand). Overall there are 963.7 thousand underemployed workers. The total labour underutilisation rate (unemployment plus underemployment) was steady at 10.4 per cent. There were a total of 1,537.2 thousand workers either unemployed or underemployed.

In the ABS Media Release – Unemployment rate remains at 3.9% in December – the ABS noted that:

With employment dropping by 65,000 people, along with a small fall in the number of unemployed people (1,000), the unemployment rate remained steady at 3.9 per cent in December …

With the fall in both employment and unemployment in December, the seasonally adjusted participation rate fell 0.4 percentage points to 66.8 per cent, back to around the September level. The employment-to-population ratio also fell, down 0.4 percentage points to 64.2 per cent. This was the lowest employment-to-population ratio since May 2022, but still 1.9 percentage points higher than March 2020 …

The underutilisation rate, which combines the unemployment and underemployment rates, also remained at 10.4 per cent.

Conclusion: A major drop in employment after two months of strong employment growth – which makes it hard to know where the trend is.

Employment fell by 65,100 (-0.5 per cent) in December 2023

1. Full-time employment decreased by 106.6 thousand (-1.1 per cent) and part-time employment increased by 41.4 thousand (0.9 per cent).

2. The employment-population ratio fell by 0.2 points to 64.4 per cent.

The following graph show the month by month growth in total, full-time, and part-time employment or the 24 months to December 2023 using seasonally adjusted data.

The following table provides an accounting summary of the labour market performance over the last six months to provide a longer perspective that cuts through the monthly variability and provides a better assessment of the trends.

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 January 2008 (that is, since the GFC).

The ratio fell by 0.2 points to 64.4 per cent in December 2023.

Despite the attempts by the RBA to kill off employment growth, the graph shows that the relationship between employment and the working age population has been very stable over the rate hike period and this has been a time where population growth has accelerated.

For perspective, the following graph shows the average monthly employment change for the calendar years from 1980 to 2023.

1. The average employment change over 2020 was -8.9 thousand which rose to 36.7 thousand in 2021 as the lockdowns eased.

2. For 2022, the average monthly change was 44.1 thousand.

3. For 2023, the average change was 31.7 thousand.

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

Aggregate monthly hours fell 10.4 million hours (-0.54 per cent) in December 2023

The relatively large drop in hours worked reflects the large drop in full-time employment.

The following graph shows the monthly growth (in per cent) over the last 24 months (with the pandemic restriction period omitted).

The dark linear line is a simple regression trend of the monthly change.

Unemployment fell 800 to 573,600 in December 2023

Unemployment fell this month even as employment growth turned negative because there was a very significant fall in labour force participation (-0.4 points), which means that hidden unemployment probably rose a few points at least.

The following graph shows the national unemployment rate from January 1980 to December 2023. The longer time-series helps frame some perspective to what is happening at present.

Broad labour underutilisation was steady at 10.4 per cent in December 2023

1. Underemployment rate was steady at 6.5 per cent (-3.8 thousand).

2. Overall there are 963.7 thousand underemployed workers.

3. The total labour underutilisation rate (unemployment plus underemployment) was steady at 10.4 per cent.

4. There were a total of 1,537.2 thousand workers either unemployed or underemployed.

It means that 10.4 per cent of available and willing workers are without work in one way or another (unemployed or underemployed), which makes a mockery of claims by economic commentators and policy officials that Australia is near full employment or that this is a tight labour market.

The following graph plots the seasonally-adjusted underemployment rate in Australia from April 1980 to the December 2023 (blue line) and the broad underutilisation rate over the same period (green line).

The difference between the two lines is the unemployment rate.

Aggregate participation rate fell 0.4 points to 66.8 per cent in December 2023

This is a substantial decline.

Given the significant drop in employment in December, the unemployment would have risen by several points if the participation rate had not fallen.

Here are the calculations.

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 (and vice versa).

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

The change in the labour force in December 2023 was the outcome of two separate factors:

• The underlying population growth added 32.4 thousand persons to the labour force. The population growth impact on the labour force aggregate is relatively steady from month to month; and
• The fall in the participation rate meant that there were 98.3 thousand LESS workers entering 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 65.9 thousand.

Assessment:

1. If the participation rate had not have fallen in December 2023, total unemployment, given the current employment level, would have been 671.9 thousand rather than the official count of 573.6 thousand as recorded by the ABS – a difference of 98.3 thousand workers (the ‘participation effect’).

2. Without the rise in the participation rate, the official unemployment rate would have been 4.5 per cent (rounded) rather than its current official value of 3.9 per cent).

Teenage labour market deteriorated in December 2023

Overall teenage employment fell by 13.5 thousand with full-time employment falling 8.2 thousand and part-time employment falling by 5.3 thousand.

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 July 2008.

You can interpret this graph as depicting the change in employment relative to the underlying population of each cohort.

In terms of the recent dynamics:

1. The male ratio fell 1.3 points over the month.

2. The female ratio fell 0.5 points over the month.

3. The overall teenage employment-population ratio fell 0.9 points over the month.

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.

My overall assessment is:

1. This looks likes the first real signs of a slowdown although the rather large swing in participation suggests there is some sampling variability and the incoming rotation group for December 2023 did have a lower participation rate than the outgoing group.

2. Employment growth has been unusually strong in the previous few months but has now turned negative.

3. Without the very sharp fall in participation, the official unemployment rate would have been 4.5 per cent rather than the official recorded rate of 3.9 per cent – a difference of 98.3 thousand workers.

4. While we will see whether the data will be revised next month, a substantial number of workers who may have been or become unemployed have left the labour force in December as the demand-side weakened.

5. There remains 10.4 per cent of the available and willing working age population who are being wasted in one way or another – either unemployed or underemployed.

6. Australia is not near full employment despite the claims by the mainstream commentators and it is hard to characterise this as a ‘tight’ labour market.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.