Continued slowdown in the labour market July 2014

The Australian labour force data for July points to a continued weakening in key labour market indicators. The very positive momentum of earlier this year has all but been erased. Employment growth is still better than this time last year, but growth has continued to slow over the last five months. This is not great news for the economy. One of the most important features of the labour market over the last forty-three months has been that employment growth remains well below that which is required to absorb growth in population. This has resulted in a lower participation rate, a higher proportion of PT employed persons and rising unemployment. The total number of unemployed persons remains elevated and is sitting well above GFC levels in terms of actual number and in terms of unemployment rate – yet we aren’t in a recessionary period. A significant and sustained turnaround in employment growth is required in order to turn this situation around. Two important leading indicators of employment growth suggest at least more of the same growth over the next few months. It’s hard to imagine how this situation won’t have an impact on demand, but so far, economic growth is holding up.

Note that all data used here is trend data unless otherwise stated.

National Summary

The National summary provides some mixed highlights:-

Source: ABS

In the most recent month – July v June – the slow-down in employment growth is evident with growth in total employed persons (+4.5k persons) lower than growth in total unemployed persons (+9.4k persons).

The data has been more positive over the last 6 months with FT employment growth the major driver of total employed persons. The return of FT employment growth over the last six months has been a welcome sign in the labour market.

The chart below tracks the month on month changes in total employed, unemployed and changes in the labour force due to participation rate changes. The sum of the last twelve monthly changes equals the annual change, so it provides a more insightful view of which way the indicators are heading underneath the annual and six monthly numbers.

The underlying change in trend over the last five months is obvious:-

Source ABS

Growth in total employed persons has slowed considerably since the Feb 2014 peak and the growth in total unemployed persons has accelerated in that time.

Despite the recent increase in total unemployed persons, the Labour Force Participation Rate (LFPR) has been steady during this time. This represents a big reversal of recent trends. Compare July 2013 – total unemployed grew by 2.7k persons, but the change in the labour force due to the declining participation rate was -12.5k persons (leaving the labour force). Fast forward to July 2014. The total number of unemployed persons grew by 9.5k and the change in the labour force due to an increase in the participation rate was 600 persons. My point is that unemployment is still growing, but people are no longer leaving the labour force (as a response?) and its is unclear what is driving this change in behaviour.

Total Employed Persons

The monthly growth in total employed persons in July was driven by growth in FT employed persons of +6.3k versus -1.8k decline in PT employed persons. Higher growth in FT employed persons (versus PT employed) is usually a very positive sign (more demand, higher incomes etc) but the trend of that growth is concerning – the monthly growth in FT employed persons is slowing down, not increasing (blue trend line below).

Source: ABS

At the same time, growth in PT employed persons is now negative (month on month). Both measures of employment growth are slowing down.

There is also a concerning trend developing in the gender-based view of employment growth.

Whilst total employed persons grew by +4.556k persons, total employed males declined by -1.49k and total employed females grew by +6.046k. Growth in PT employed males has declined month on month over last 5 months and at the same time growth in FT employed males has slowed from a high of +9.8k persons in March to +4.1k persons in July. But it must be noted that growth in FT employed males is higher than it was a year ago.

At the same time, there has been a significant acceleration in the growth of unemployed males and no change in male participation.

Source: ABS

Taking a more long term view, current annual employment growth remains below historical growth benchmarks.

Source: ABS

The ten year average growth in total employed persons for July is +209k persons. The annual growth at July 2014 is currently half that at +110k. Its growth in FT employed persons that is mostly driving this trend. The ten year average growth in FT employed persons is +133k persons and the current annual rate of growth in FT employed persons is +59k – well below half the historical rate.

As a result, the proportion of PT employed persons in the labour market is close to historical highs at 30.3% of those employed are PT employed. This growth in PT employment, starting since the GFC, has undoubtedly saved the unemployment numbers from looking far worse. The all-time high in the proportion of PT employed persons of 30.46% was only reached in January 2014.

Another way to benchmark employment growth is to compare it with the growth in working age population. You could argue that this is the measure that matters the most – is employment growing fast enough to absorb what population growth is adding to the labour force? The short answer is ‘no’.

Ideally the economy should be adding at least enough jobs to match population growth. If the difference is negative, then that difference, people, either become unemployed or leave the labour force (reduction in participation rate). The chart below highlights that over the last forty-three months, employment growth has been lower than what population has been adding to the labour force. This isn’t the only period in our recent history where this has happened, but it is the most prolonged so far:-

Source: ABS

As of July 2014, annual population growth added approx. 214k persons to the labour market, yet total employment only grew by +110k. This left an approx shortfall of 104k persons during this last year. Of this group, 39k left the labour force and total unemployed persons grew by +65k.

As mentioned, this is not a recent trend, as highlighted by the circled area in the chart. This is forty-three consecutive months where employment growth has been lower than population growth that’s been added to the labour force, leaving 331.914k persons either unemployed (+165k persons) or exiting the labour market (-166k persons).

Let’s put that into some context by comparing this current period to other similar periods where employment growth has been lower than what population growth has added to the labour force.

When

# Consecutive Months

Total Shortfall of Jobs to Population added to the LF

# Left Labour Force (net chg)

Change to Total Unemployed Persons

Recession 80’s – Jul 81 – Jun 83

24

422.616k

84k persons

+338k persons

Recession 90’s – Jun 90 – Jun 93

37

594.416k

213k persons

+381k persons

GFC 2008 May 08 – Sept 09

17

228.951k

40k persons

+188k persons

Current period – Jan 11 – July 14 and counting

43

331.914k

166k persons

+165k persons

Source: ABS

The current shortfall is by far, the longest period recorded – forty-three months, but it’s not the most severe in terms of total shortfall. What makes this current period different to the other three highlighted in the table is that this is not related to a recessionary period or event. As a result, unemployment growth has been lower than in any of the other periods, but this has been the second strongest in terms of the fall in labour force participation.

One potential reason for the decline in participation is the ageing population. As workers now move into older age groups, the participation rate will naturally decrease as older workers generally have a lower participation rate – but the assumption is that as older workers move into older age groups, their participation decreases (via retirement). The evidence suggests that whilst the population share of older age groups has increased, so has their participation.

This still doesn’t explain why growth in employment has been well below trend and below what is required to absorb population growth in the labour market. If the effect was purely one of demographic change, it’s not likely that we’d see a corresponding increase in total unemployed persons.

Forward Indicators of Employment Growth

What do some of the forward indicators say about what to expect in employment growth into the near future? The ANZ Job Ad series provides some insight. There is a similar pattern here – there was an improvement in the number of jobs in the latter part of 2013 and a slow down since early 2014.

Source: ANZ http://www.media.anz.com/phoenix.zhtml?c=248677&p=irol-jobad&nyo=0 (b) The trend estimates have been derived by applying a 13-term Henderson moving average to the seasonally adjusted series. This smoothing technique enables estimates to be produced for the latest month, but it also results in revisions to the most recent six months as additional observations become available.

The slow-down in the monthly rate of growth in job ads suggests that employment growth will remain low over the next few months.

The other indicator of what might be ahead for employment growth is hours worked. There is a fairly positive trend in place with regard to growth in FT hours worked in the economy (blue line in the chart below):-

Source: ABS

Here we are starting to see an acceleration in FT hours worked. There is some suggestion that growth in hours leads growth in employment – those working on PT hours increasingly shifting to FT hours where there is demand. This may result in a continued shift from growth in PT to growth in FT employed persons over the next few months.

Total Unemployed Persons

The monthly growth in unemployed persons saw a large jump in July, driven by an acceleration in growth of total male unemployed persons.

Source: ABS

Over the last four months, growth in total unemployed males has been accelerating – male unemployment is now growing at numbers not seen since the GFC.

The longer term averages also show that growth in total unemployed persons is historically high. The ten year average increase in unemployed persons at July is +9.6k persons. The current annual rate of growth at July 2014 is +65k persons. The total number of unemployed persons now exceeds the highs reached in the GFC and the unemployment rate continues to edge up.

Source: ABS

Labour Force Participation

Given the change in the LFPR, the unemployment rate doesn’t really provide the most accurate view of total unemployment in the economy. The current unemployment rate is 6.13%. As alluded to earlier, a relatively large number of persons have left the labour force over the last forty-three months. What is unknown, is the proportion of those that have left the labour force that would be deemed as ‘discouraged’ workers. Over the last forty-three months, I’ve estimated that over 166k persons have left the labour force (for various reasons). In that time the LFPR has declined from an all-time high of 65.65% in Dec 2010 to 64.74% at July 2014. Lower male participation has been the key driver of this trend.

Source: ABS

A declining participation rate may tend to understate the unemployment rate because, if discouraged workers (those that can’t find employment) are leaving the workforce, then they don’t get counted as ‘unemployed’.

The quite large declines in the LFPR of a year ago have stabilized over 2014.

Source: ABS

This has been driven mostly by an increase in female participation during this time. But the month of July was the first month that male participation increased in twenty months (+120 male persons in July v June ’14). This is a fairly significant turnaround from a year ago where both male and females were leaving the labour force. Instead now, we are seeing higher growth in unemployment and a more stable participation rate. It’s unclear what is driving this shift in behaviour – a positive or a negative sentiment? To answer that without any robust data is mere speculation. The trend in participation has switched nonetheless and as long as employment growth stays relatively low and unemployment continues to grow, a more negative view of the labour market will remain in place.

 

 

 

 

 

 

 

 

 

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