About Australia’s April unemployment rate (probably not ~4.9%)

The decline in the unemployment rate (-23bps to 4.94%) is eye-catching, and certainly surprised with strength – most market economists, and the official family, expect the unemployment rate to rise to ~5.5% or so over the short to medium-term.

In the month of April, the decline in the unemployment rate was mostly a participation rate story. The participation rate fell 14bps to 65.2% (about half of which was due to females aged 15-19), and this turned a 3bps decline in the unemployment rate (to 5.15%) into a 23bps decline.

When thinking about the economics of labour force participation, it’s helpful to consider what it means to be unemployed. To be classified as unemployed you must be looking for work and ready to start. So a decline in the labour force participation rate may suggest that jobs are harder to find – in eco-speak, the expected returns from job search are low, so folks make the sensible decision to spend their time doing something else.

The gross flows data support this interpretation of the headline labour market numbers.

The hazard rate is trending up once again. That is, if you have a job, the probability of losing it is trending up. In the last three months, the hazard rate increased ~10bps to ~0.9% (this means that around 0.9% of the employed transition to the ranks of the unemployed each month).

The re-hiring rate (transitions from unemployment to employment) remains subdued. This fell from ~26% to ~20% between early 2007 and late 2008, and has not convincingly held ~23% since that time. In April, the probability of transitioning from unemployment to employment declined ~100bps, to ~22%.

In response to this frustrating search experience (which is possibly a reflection of structural change), folks are giving up looking. Exits from unemployment to ‘Not In the Labour Force’ are elevated, at ~25%. That is, about 25% of those who are unemployed quit looking each month. This is around the level reached in 2008.

In times like this, it is perhaps best to look at the employment to population ratio. This remained steady at 62% (M +0.16ppts to 68.36%; F: -0.12ppts to 55.8%) in April. That is a high level (for Australia), but it does not suggests that the labour market has tightened in a material way.

In the end, what this means for monetary policy comes down to two judgements.

1/ does the PR rise once again – or equivalently does the hidden slack still press down on wages?
2/ if not, does the fiscal authority respond to the fact that their budget deficit is now ‘more structural’?

I think that the participation rate will probably rise once again. If I am wrong about that, I predict more fiscal drag – a lower participation means that more of the budget deficit is structural, so you need more tightening to get back to surplus.

Still, it makes it hard to see the RBA lowering their policy rate in June – they’ll probably want a bit more information about what’s going on.

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9 Responses to About Australia’s April unemployment rate (probably not ~4.9%)

  1. On your Marx says:

    Surely the reason for a declining PR is sub-trend GDP rate otherwise wages would be rising robustly

  2. On your Marx says:

    I wasn’t aware of this.

    • BK says:

      Not sure how reliable that info is but is why you should pretty much just look at the headline rate rather than get bogged down in the details

    • Ricardo says:

      I have been banging on about what crap the jobs numbers are for ages. The ABS just guesses the pop numbers. They make mistakes like eveyone else.

      The survey is not designed to measure jobs – just the unemployment rate.

      Makes me uncomfortable dismissing yesterday’s headline UR number…

      Sent from my iPad

    • Andrew says:

      This is over exaggerated. Yes there was an over and then an under estimation. But go back and apply the e to p to the revised population figures and you’ll see it only has a marginal impact on the level estimates for 2010 thru to 2011. Bottom line 2010 was a good year 2011 not so good…the story hasn’t changed.
      Its a shame Colebatch didn’t get into the details…he’s usually better than this.

    • Andrew says:

      Plus it looks as if Tim is being a little loose with his language around how they actually adjust pop growth figures for jobs numbers. Its funny they had this article out the day before Tim’s.
      http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6202.0Main%20Features2Apr%202012?opendocument&tabname=Summary&prodno=6202.0&issue=Apr%202012&num=&view=

  3. BK says:

    I agree with the overall arguments made there. Labour market has neither tightened or weakened and as a result the RBA will be waiting for more info

    • Ricardo says:

      Yeah, i feel uncomfortable dismissing it. You can really over do this stuff. In this case it makes sense to me … But i feel that i am out on a limb.

      Sent from my iPad

      • BK says:

        Given the poor backdrop its been remarkably sticky which goes against all common sense – only time will tell.

        Have you seen any forecasts on how the participation option rate is likely to trend over say the next decade? I remember reading that the US participation option rate is likely to fall a fair bit due to baby boomers

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