Australia’s budding labour market nightmare

A sharply declining participation rate means the labour market is even weaker than unemployment rate suggests, and the RBA will find it difficult to react. ‘Trend growth’ could soon become a pipedream.

Australia’s unemployment rate is at its highest level in a decade and is set to deteriorate further but the unemployment rate continues to understate the swift deterioration of labour market conditions.

The unemployment rate hit 6 per cent in January, rising from 5.8 per cent in December, and is now at its highest level since June 2003. More problematic – for the RBA, governments and businesses – is the swift fall in the participation rate, which indicates that the labour market is much weaker than the headline unemployment rate data suggests.


Graph for Australia’s budding labour market nightmare

The participation rate was unchanged in January but has fallen 0.6 percentage points since June. Taken together, the unemployment and participation rates provide an indication of labour market strength and it is obvious that the labour market has deteriorated rapidly.

If the participation rate had remained at its June 2013 level, rather than declining rapidly, the unemployment rate would now be at around 6.8 per cent. Confirming this view is employment growth.

Employment fell by 3,700 in January, following a decline of 23,000 in December, with employment unchanged over the year. Employment losses continue to be felt among full-time jobs, with part-time jobs rising modestly. Full-time job losses have historically been associated with either recessions or downturns and with each passing month it is becoming harder to be optimistic about the economic outlook for 2014.


Graph for Australia’s budding labour market nightmare

Unfortunately the news isn’t great for the Australian labour market. There is little reason for the participation rate to pick-up anytime soon. The first of the ‘Baby Boomer’ generation hit retirement age in 2011 and since then we have witnessed a sharp decline in the participation rate.

This process is only beginning and the reality is that an ageing population will continue to put downward pressure on the participation rate for years to come. Increasingly we will be relying on a smaller share of our population to drive the economy.

The obvious implication is that it will become increasingly harder to maintain the level of growth that Australians have become accustomed to. For years favourable demographics and a resource boom has hidden our lacklustre productivity performance but now the worm has turned.

Now we find ourselves at the beginning of a structural change and unless our productivity performance improves what we now consider ‘trend growth’ will become a pipedream.

Further complicating matters is that it will be difficult for the RBA to react. Currently faced with both rising unemployment and rising inflation (up 3.7 per cent in six month annualised terms in the December quarter), the RBA will be reluctant to lower rates further even if employment and growth prospects warrant it.

The one factor that could drive a further cut is that the rise in inflation is likely to be temporary – driven by a depreciation in the Australian dollar – and therefore the RBA could lower rates without sending inflation permanently above their target band of 2 to 3 per cent annual inflation. But that would be a tough sell to the public, particularly with lending skyrocketing and housing market rife with speculation.

Perhaps more problematic is that the weakness in the labour market will make it increasingly difficult for the Coalition government to achieve the type of savings that they campaigned on. If ideology reigns over common sense then the Coalition could run the economy into the ground.

The economy clearly needs every dollar of government spending and that will remain true when the next budget is released in May. Sharp spending cuts to an economy that is already struggling would prove disastrous – as it has in no shortage of developed economies following the onset of the global financial crisis.

Recession talk is premature but the reality is that the labour market will only get worse before it improves. Recent announcements of job cuts by the likes of Ford, Qantas and Telstra only reinforce this fact – not to mention the impending longer-term job cuts from the likes of Holden and Toyota.

Related Articles