Saturday, October 17, 2015

Nitty-gritty of unemployment shows small improvement

Why does unemployment increase? For a lot more reasons than you probably imagine.

It's a good question to ask this week when the media informed us that, last month, the number of people in employment fell by 5000, the number unemployed fell by 8000 and the proportion of people participating in the labour force fell from 65 per cent to 64.9 per cent, but the rate of unemployment was unchanged at 6.2 per cent.

I could devote the rest of this column to trying to explain that puzzle. Or I could say that the media and the markets make the jobs figures more puzzling than they need to be by focusing on the version of them that jumps about from month to month for no apparent reason, rather than looking at the smoothed, "trend" figures the Bureau of Statistics calculates for the express purpose of helping us see what's going on.

Those figures show the rate of participation rising by a fraction in September, as employment rose by more than 12,000 and unemployment rose by 4000, which wasn't sufficient to change the rate of unemployment from 6.2 per cent – pretty much where it's been sitting for a year.

So back to the question: why does unemployment increase? You can answer that at the macro-economic level or the strictly mechanical level.

From an economy-wide perspective it's obvious: unemployment increases when the economy turns down. But that's not the full story. Unemployment can increase even when the economy's growing steadily and employment's increasing.

Why? Because the labour force is always growing, thanks to "natural increase" (more young people entering than retired people leaving) and immigration. This means the economy and employment have to be growing at a certain rate just to stop unemployment rising.

With that sorted, let's look at the mechanics. Why does unemployment increase? Because people lose their jobs?
Yes, but that's just the biggest reason. As well as those workers who are sacked or laid off are those leaving their jobs voluntarily, hoping to find a better one.

Then there are former workers re-entering the labour force to look for work and, finally, the new entrants to the job market, including young people leaving school or university.

Set beside that, the oppose question – why does unemployment decrease? – is easier: either because people find a job, or because they give up looking and so get reclassified as NILF – not in the labour force.

I raise all this because, Kieran Davies, chief economist of Barclays Bank, has been delving deep into the official figures to get a better idea of what components have been driving unemployment in recent years.

In very round figures, he found that "job losers" account for about 40 per cent of all the unemployed, with "job leavers", "re-entrants" and "new entrants" accounting for about 20 per cent each. Bet you didn't know that.

Next Davies looked more finely at how each of the four categories has been contributing to the rate of unemployment since its most recent low point of about 5 per cent in 2010-11.

He found that most of the increase in unemployment since then is explained by an increase in job losers, caused by "job shedding" by employers.

Unemployment resulting from job shedding rose from a low of 1.7 per cent of the labour force in 2010 to reach 2.4 per cent in late 2014. This was just under the peak of 2.6 per cent reached during the global financial crisis.

Most of these job losses were in mining, manufacturing, professional services and education, Davies finds.

Since late last year job shedding has eased a little, so the stock of job losers has fallen a fraction to 2.3 per cent of the labour force. A good sign, even if a small one.

The stock of (voluntary) job leavers reached a multi-decade low of 1 per cent just before the global financial crisis, when it was easier to line up a new job before jumping.

It then moved up to 1.4 per cent in 2014, its highest level since 2002. This is a sign of increasing confidence – don't worry, I'll soon find one – though it's recently eased back a little to 1.3 per cent.

Former workers seeking to re-enter the workforce accounted for just 0.9 percentage points of the overall rate of unemployment during the global financial crisis, another multi-decade low.

Clearly, not many married women and others thought it a good time to be actively seeking a job.

But with returning confidence since then the rate has steadily increased to 1.4 per cent, its highest since 2003.

That leaves new entrants to the jobs market. The proportion of these people who'd failed to find work fell to a multi-decade low of 0.9 per cent just before the financial crisis, before rising to just over 1 per cent following the crisis.

The proportion rose to 1.3 per cent in 2013, according to Davies' calculations, a sign that education leavers have borne much of the brunt of the relatively weak economic and employment growth in recent years.

Fortunately, the proportion has since eased to 1.1 per cent, which may suggest education leavers are having less trouble finding a berth, though it may mean we've had fewer overseas people – including students and backpackers – coming to Oz and looking for work.

Putting all this together, it's reasonably good news. We already know – and this week's jobs figures confirm – that unemployment has been steady for a year or more, even though the economy hasn't been growing all that strongly.

Davies' delving tells us the worst contributor to unemployment – businesses shedding jobs – has stopped getting worse and fallen back a little, to have its place taken by more hopeful contributors, former workers re-entering the market.

Davies' prediction is that the unemployment rate will remain steady, though there's a chance it may fall a little.