Take Australia's unemployment rate shocker with a grain of salt

Australian society is changing and so are our work habits. Until the participation rate stabilises there's no point fretting over a small lift in the unemployment rate.

I'm not sure that markets should be particularly worried about the unemployment rate 'shocker'. Certainly households shouldn't be -- many analysts don't even view the recent lift as reliable, given the sample rotation, survey changes and the fact that the data is very volatile anyway. But let's just say the figures are right -- even then, panic merchants should quieten down.

To see this, you have to think about the broader picture for the Australian labour market. Have a sense of perspective. The fact is, we are witnessing a transition phase. A move away from the pre-GFC period from 2003-2008 which was characterised by a number of booms -- a global growth boom, credit boom, housing booms, a consumption boom etc. That period was not the norm or the benchmark for comparison and I get the sense that policymakers and many commentators have forgotten this.

From the ashes of that credit-induced orgy, our labour market is trying to find its new equilibrium. That is, find a rate of employment growth and unemployment consistent with sustainable demand and a healthy economy. It's quite clear that in the build-up to the GFC, the global economy was not healthy; our economy was not healthy. As a result, those unemployment rates we saw around 4 per cent to 5 per cent can't be viewed as rates consistent with sustainable growth. They were the product of a policy-induced fiction.

The problem that we have today is that no one knows what the new 'natural' unemployment rate is. That recent unemployment outcomes have been whipped around by changes in participation makes it harder to define. Participation has been volatile and there are changes going on here that no one understands.

For instance, the spike in unemployment last week was largely the result of only a small lift in participation. If participation had been constant (that is, unchanged over the month), the unemployment rate could still be about 6 per cent. Similarly, it is these changes in participation that make all fear surrounding a 12-year-high unemployment rate completely disingenuous.

Twelve years ago, the participation rate was at 63.3 per cent. If that same rate held today, under the same conditions that we have today (i.e. no major job-shedding), then the unemployment rate would likely be between 4 per cent and five per cent. On the flipside, if we had a participation rate that held at its 2010 peak (65.8 per cent), then the unemployment rate today could be closer to 7.5 per cent.

So what's the 'normal' participation rate? No one knows. The drivers of labour force participation are extremely complex. The argument that the decline in the rate since 2010 is attributable solely to discouraged workers is useless -- by that logic the labour market is actually extremely healthy relative to 12 years ago, because participation is much higher.

Demographic changes (the ageing population, fertility rates), tax policy, welfare policy, childcare costs, house prices, changes in the structure of the economy -- all of these things and more affect the decisions of individuals to supply their labour to the market. There are even trends within trends.

Take the recent decline in labour-force participation from the 2010 peak. This has been almost entirely driven by men and, more specifically, unmarried men. We can rule out a discouraged worker effect, because this recent fall is actually a continuation of a trend decline in evidence since the 1970s. In the late '70s to early '80s, male participation was at a peak at around 80 per cent. Today its 71 per cent -- and that's split between married (83 per cent to 75 per cent) and unmarried (73 per cent to 64 per cent) men. The only reason unmarried men seem to be the drivers of the fall since the 2010 peak is because participation for married men appears to have stabilised at about 75 per cent.

Social factors are very obviously driving this change. As female participation rates have increased sharply, men no longer have the pressure of being the sole provider. This provides greater flexibility for men to opt of the labour market -- if just for a time -- to pursue interests like travel, retraining for a new job, volunteering, looking after the kids or just taking time out, for whatever reason.

Obviously these are not just options for men, but I am talking in the context of the male/female participation convergence. People choose to do these things, and increasingly they can because they either have the wealth or the dual income to do so. We are travelling overseas in record numbers; wealth is at a record.

All of this serves to highlight a fundamental truth: moves in the unemployment rate and participation that are not driven by job-shedding are usually harmless. Seen in this context, a temporary lift in the unemployment rate is of little consequence -- the unemployment rate is still historically low and jobs growth is robust -- and set to surge following the spike in construction, business conditions and confidence.

Where the participation rate settles is anyone's guess, but it is pointless fretting over the unemployment rate until trends in participation become clearer. Given Australia's ageing population problem, we should hope that participation rises -- the worse result is unemployment falling on the back of falling participation. Not because that would indicate a weak economy, but because we need more workers to replace baby boomers as they retire. It should be unanimous: unemployment is not the problem of today or tomorrow -- finding sufficient workers is.

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