Tumbling participation and the decline of full-time jobs means that the Australian labour market is at its weakest level in a decade. But don’t expect today’s data to push the Reserve Bank to act in February.
The unemployment rate ticked up slightly in December, according to the Australian Bureau of Statistics, but due to rounding it remains at 5.8 per cent – slightly below its peak during the global financial crisis. However, the unemployment rate hides how weak the labour market is right now. Employment growth and the participation rate is where the real information is.
Total employment fell by 22,600 in December, with full-time employment down 31,600 people. This offsets the rise in employment of 15,400 in November. Combining the two months gives a pretty accurate view of the state of the labour market and it is always worth remembering that we shouldn’t overreact to a single month of data. Yes, conditions are weak – but not as weak as the monthly decline indicates.
It has been a terrible year for full-time employment. Part of this reflects an increasing casualisation of the Australian workforce, but is also a big sign that labour market conditions have deteriorated.
The loss of full-time jobs is not now – nor has it ever been – a sign of strength in the economy. Look at the graph below: each instance of full-time employment growth turning negative on a year-ended basis is associated with conditions weakening across the economy.
The participation rate declined a further 0.2 percentage points in December to 64.6 per cent – the lowest level since April 2006. Since June the participation rate has declined by 0.7 percentage points. By my calculations, if the participation rate had remained unchanged since June, the unemployment rate would be 6.7 per cent.
Perhaps the most pressing issue is that there is little reason for the participation rate to turn around. The baby boomers began turning 65 in 2011, and since then we have seen a distinct decline in the participation rate. An ageing population will continue to put downward pressure on the participation rate for a number of decades.
The participation rate will eventually push below its average in the 1990s, well below I suspect, though this process will occur over a number of years. The obvious implication is that it will become more difficult to maintain the type of growth that Australians have become accustomed to. We are at the beginning of a structural shift in the labour market, with the demographics working against growth for the first time in decades.
For years, favourable demographics hid our lacklustre productivity performance. Unless that improves, we will soon find that what we consider ‘trend growth’ is little more than a pipedream. Labour market participation and an ageing population will prove to be a huge issue for Australia – and indeed most of the developed work – in the years ahead.
Anyone ignoring the participation issue at the moment is fundamentally misreading the Australian labour market and by extension too optimistic about the domestic economy (Australia’s irrevocable, inevitable growth challenge, November 15).
For the Reserve Bank, today’s data doesn’t change things a great deal. In the November Statement on Monetary Policy, it stated that they expected the unemployment rate to gradually trend upwards over the next year. Nothing that has happened since then should have changed that view.
In addition, the Reserve Bank has hosed down expectations of another cash rate and appears happy to let the current cuts work their way through the economy. As a result, I doubt the RBA is any more likely to cut rates now than they were yesterday.