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.