Is the performance of the labour market really that good? January 2016

The labour force data continues to raise more questions about its own methodology than it answers about the performance of the labour force. There remains a very wide 95% confidence interval around the ‘true’ change in employed persons between January and December, which is somewhere between a -65k decline in employed persons and a +50k increase in employed persons. But the 95% confidence interval around the ‘true’ unemployment change figure is now just skirting zero at the lower bound, between -9.6k and +70k. So while the interval is wide, it’s starting to be more likely that unemployment increased in January.

There is a different way to present the data to get an idea of how the market is performing. In this post, I will focus on the difference between the monthly change in employed persons and the monthly change in the labour force during the last year. The reason for looking at the labour market in this way is to gain a different perspective on the drivers behind changes in unemployment and to understand the ‘health’ of employment growth over time – is it accelerating or slowing? This provides a different view on the performance of the labour market by state. All does not seem well in NSW, our main employment growth engine. The labour markets in VIC, WA, TAS and NT are also showing some signs of deterioration. The most positive performance is in QLD and ACT, with SA still mixed.

Overall annual employment growth remains over 300k persons

At this point in time, the labour market still looks like it is performing above average on an annual basis, with employment growth well above the 10 year average for January (+186k). Growth in full-time (FT) employed persons continues to exceed growth in part-time (PT) employed persons and total unemployed persons continues to decline across all time periods.

Source: ABS

What you can’t see from this chart is that the annual growth in employment is skewed to one state, with NSW accounting for 56.3% of the National annual growth in employed persons. NSW represents 32% of all employed persons in Australia.

Unemployment continues to fall, but not in all states

The good news is a bit more limited when it comes to the change in unemployed persons, especially when you break it down on a state by state basis and when you start to look at the performance over more recent time periods. It’s really only NSW, SA and QLD where unemployed persons has continued to fall in any large and meaningful way throughout the year (looking at time periods of six months or less).

It looks like unemployment has started falling in WA in the last quarter as well, but this is a function of the labour force growth slowing faster than employment growth. I’ll come back to this point in more detail shortly.

Source: ABS

The mixed performance of total unemployed persons across the states raises some questions of just how widespread this strong labour market performance really is.

When employment grows faster than the labour force, unemployment falls

This is true even when employment growth is slowing faster than labour force growth, which is what has been happening at a National level over the last 5 months:-

Source: ABS

Employment growth has exceeded labour force growth throughout most of 2015. The positive gap between the two measures since August 2015 equals the decline in total unemployed persons during that time of -28.9k persons.

The trend shows that both the growth in employment and the growth in the labour force has been slowing during that time. Whether this is an enduring trend or not remains to be established. But the gap between the two has been narrowing since October 2015 – which means employment growth is slowing faster than the labour force. If this trend continues over the next few months, unemployment could start to grow again on a National basis.

As an aside, why is labour force growth slowing?

The analysis above looks at the labour force as the sum of all employed persons plus all unemployed persons that are looking for work. Another way to view the labour force is by 1) contribution from population growth and 2) contribution from changes in participation. It seems we are seeing less contribution from participation growth over the last six months:-

Source: ABS

The contribution from growth in participation has more than halved since peaking in August 2015. In the last six months, participation has fallen in VIC, SA, WA, TAS and NT.

I’m less concerned with the apparent drop off in population growth over the last two months. This seems to be a regular feature of the data. But there has been a slow-down in what underlying population growth has added to the labour force since its peak in Feb 2008.

But we live in a country where economic fortunes have differed greatly among the states and is in the process of shifting from the mining-led states back towards to the eastern seaboard. It’s worthwhile looking at each state in a bit more detail to understand this transition.

NSW – the main engine driving the so-called post-mining transition is sputtering

The state of NSW has been the strongest performing state in terms of employment growth during 2015. As mentioned above, NSW alone accounted for over 56% of the annual National employment growth in 2015. The current level of annual growth in employment in NSW is extremely strong in historical terms as well – it’s the highest level of annual employment growth on record for NSW. Previous peaks were between +110k and +120k growth in annual employment. The current level of annual employment growth in NSW is +170k employed persons (Jan 2016). This is almost on par with the National 10 year average in January.

The monthly change in employment growth in NSW has now halved over the last six months from the peak of +17.3k growth in employed persons in May 2015 to +7.9k growth in employed person in January 2016.

Growth in FT employed persons had far exceed growth in PT employment over the last year, with FT employment growth of +142k versus PT employment growth of 28k persons. This has reversed as of December, with PT employment now growing faster than FT on a monthly basis. As of January, FT employment growth has slowed to a very low +2.6k persons – down from the peak of 15.9k as recently as July.

What has ‘saved’ unemployment from growing in NSW is that the labour force growth has also slowed – faster than the slow-down in employment growth.

Source: ABS

Since the peak in labour force growth in June 2015, total unemployed persons has actually declined by 20k in NSW. While this is great news, the gap between the measures is narrowing. This state will be important to watch.

VIC – labour market is deteriorating

There are two problems in VIC. The first is that employment growth during 2015 has been subdued. It’s a big state, representing 25% of employed persons, yet only accounted for 14% of employment growth in 2015. Most of the reason for this seems to be that PT employment has been slowing and is now declining (last 4 months). There are early signs that FT employment may have also peaked in this current cycle. For a short time, unemployment was declining. Which brings me to the second problem. Employment growth has now slowed faster than labour force growth and unemployment has started to increase again in the latest quarter.

Source: ABS

It’s a negative pattern – employment growth is slowing from a low peak and unemployment has started to increase again over the last 3 months.

QLD – labour market performance is good

During 2015, QLD had made a bigger contribution to employment growth than VIC, accounting for 25% of the annual National employment growth. For most of 2015, employment has grown faster than the labour force in QLD resulting in lower unemployment. The trend of the employment growth looks positive too – it has been accelerating. The only thing slowing down employment growth in QLD has been lower PT employment growth. Growth in FT employment is still accelerating.

Source: ABS

Unemployment in QLD continues to fall, but this has slowed to zero in the last two months.

SA – performance has been mixed

Employment in SA has continued to grow, with recent growth on par with previous peaks in growth. But most of the current employment growth has been in PT employed persons, whereas FT employment growth was only positive for the last 4 months of 2015. But at least the growth in PT employment was still higher than the growth in labour force – and unemployment has fallen as a result.

Source: ABS

WA – unemployment falling, but it’s hardly a robust market

This is the frontline of the slowing mining investment engine. While employment has started growing again in the last half of 2015, it is well below recent growth levels.

All of the growth has been PT in nature as well. FT employed persons has declined by 24k persons in the last year, whilst PT employed persons has increased by 28k. Cost cutting continues in earnest, but at least there are PT jobs available.

The decline in the level of unemployed persons is mostly the result of slowing growth in the labour force, rather than strong growth in employment.

Source: ABS

TAS – the labour market has deteriorated

The annual rate of employment growth in TAS has turned negative over the last 3 months. Only for a short period during 2015 was employment growth positive and above the level of growth in the labour force. FT employment continues to decline (-2k FT employed persons), but at least in the last few months there has there been some small level of growth in PT employed persons (not enough to offset the falls in FT employment though).

Source: ABS

Unemployment has started to increase again in the last few months of 2015. The current level of unemployed persons, 17k persons, whilst still elevated, remains below the 2013 peak of 20k persons.

NT – employment is declining and unemployment is miraculously falling

The mining transition continues to hurt NT, with employment declining in the latter half of 2015. Even though employment has been declining on a monthly basis, it hasn’t been declining as fast as the labour force. As a result, the level of unemployment has actually declined over the last six months.

Source: ABS

Just looking at a declining rate of unemployment wouldn’t give you the full story about the labour market in NT.

ACT – labour market is improving

The level of employment growth in ACT had been consistently low throughout 2012-2014. But since the latter half of 2014, and in the latter half of 2015, employment growth has started to accelerate. The current level of employment growth is not high by historical standards, but it’s a good sign that it is accelerating and this is different to many other states. Unemployment has grown on an annual basis because the labour force size has grown faster than employment.

Source: ABS

Another positive sign is that FT employment has overtaken PT employment growth as of October 2015.

It doesn’t take much scratching below the surface to see that in most states, the labour market is no longer as strong as the annual figures suggest. It also highlights the need to review a range of different measures, rather than just relying one figure at a point in time as a gauge of labour market strength. The big watch out at the moment is slowing employment growth relative to the labour force across the bigger population states, especially NSW.

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