A bleak jobs picture that's set to worsen

If we can believe the data -- and honestly, who knows at this point -- Australia's labour market has eased further over the second half of the year and the unemployment rate is at its highest level since September 2002.

With the mining sector set to cut thousands of jobs and the automobile sector to do likewise, it might be a long time before conditions turn around.

Recently the ABS' labour force survey has been plagued with difficulties. With its credibility in tatters, it admitted last month that the labour force data for August -- which pointed to exceptionally strong growth -- had instead been a statistical quirk (Is the data real, or just another snow job?, October 9).

This month the ABS introduced a new methodology for estimating the seasonality of labour force data, but for now that methodology applies only to the December 2013 to October 2014 period. The ABS has assessed the effects of supplementary surveys on the labour force estimates and adjusted the data to reflect this.

To its credit, the new estimates do appear to be more sensible and certainly less volatile. But it does mean that for months -- most of 2014 actually -- the likes of the Reserve Bank of Australia (RBA) have been flying blind.

I'm not the biggest fan of seasonally-adjusted data at the best of times -- particularly compared with less volatile trend estimates -- and readers should continue to treat such estimates with a grain of salt. The data may be improved but the trend remains the more reliable indicator -- though admittedly even the trend has suffered through this saga -- and offers a more coherent assessment of the Australian labour market.

On a trend basis, employment rose by 1,300 people in October, following growth of 1,700 in September, and has slowed considerably since its peak in March this year. The Australian economy has produced 114,300 new jobs over the past year, which remains well below the federal government's estimates and is particularly low by historical standards.

Employment growth continues to be concentrated in part-time jobs and the number of full-time jobs has declined over the past four months.

Interestingly the revisions introduced this month appear to have disproportionately affected measures of female employment. Last month I noted that female employment had outperformed male employment -- owing presumably to the increasing casualisation of the workforce -- whereas after the revisions that is no longer the case.

The unemployment rate was revised up to 6.2 per cent in September and remained at that level during October. There remains a clear upward trend though and, with the looming sectoral changes noted above, I expect the unemployment rate to continue its upward trend over the next year.

As always a correct assessment of the labour market requires consideration of the participation rate. Considering either measure in isolation can often be misleading.

The participation rate was broadly unchanged during October but has declined by 0.2 percentage points over the past year. That shift has been concentrated among male workers, since a vast majority of Australian workers facing retirement are male.

As a result, the labour market is arguably weaker than the headline data suggests since a declining participation rate puts downward pressure on the unemployment rate.

The participation rate is expected to decline further over the next decade as an increasing share of ‘baby boomers' retire. That may be partially offset by the eventual increase in the retirement age and the decision by many older Australians to stay in work. Nevertheless, the ageing of Australia's population appears likely to weigh on labour force participation and economic growth.

At the state level, employment growth remains concentrated in Western Australia and New South Wales. Employment in Queensland was unchanged over the past year, highlighting the ongoing struggles in Australia's tourist hotspot.

A softer dollar -- now at a four-year low against the US dollar -- should support activity in Queensland in the medium term and the employment outlook for both NSW and Victoria remains quite reasonable. Growth in WA, however, will continue to ease as conditions deteriorate in the resource sector.

Although the labour force data exceeded market expectations -- at least in seasonally-adjusted terms -- this was yet another weak labour force reading. The economy and labour market is unfortunately developing in line with my predictions from earlier this year and the unemployment rate is likely to push higher before conditions improve.

Many market economists continue to maintain that the RBA will raise rates next year but it is time that they revised their outlook. If the RBA makes a move next year it will almost certainly be down; otherwise they will simply stay put until 2016.