The Australian government — and the nation’s economists — will have eyes on one thing this week: the Australian Bureau of Statistics July labour force data, which is dropping on Thursday at 11.30am. The numbers have rarely come out at a more crucial time, and an enormous amount depends on them.
The Reserve Bank of Australia (RBA) is in the middle of an axe-swinging frenzy, hacking at interest rates. It has cut them from record lows down, ever further, into the dark uncharted territory near zero. This has, in turn, sparked wild depreciation of the Australian dollar, speculation about what will happen if interest rates hit zero, record-breaking falls in bond yields, extremely cheap mortgages and dramatic sharemarket volatility.
When will the rate-cutting frenzy end? The central bank will decide based on what the labour market does.
What numbers are we shooting for?
RBA Governor Philip Lowe told a Senate committee last week that “we probably need to get down to an unemployment rate of 4.5% to have wage growth consistent with the inflation target”.
“That’s the world in which we’ll be raising rates.”
So how do we get unemployment down to 4.5%? What does that mean in terms of getting people into work? How many extra people does Australia need to get into work each month? This calculation is vital.
When the labour force data comes out, it includes several figures: the unemployment rate, the participation rate, and the underemployment rate. These rarely budge, and when they do it is by 0.1% at a time. To really take the pulse of the labour market it is useful to look at how many extra people got employed in the month.
(Note: I’m careful to talk about “getting x people into employment”, instead of the usual “Australia added x jobs”. Once upon a time it was probably a fair thing to say because one person = one job. But what the data actually show is employed persons. And these days an employed person can have multiple jobs.)
Last month, 500 more people got jobs, as the number of Australians employed rose from 12,871,200 to 12,871,700. To be frank, that is not nearly enough.
If we get just 500 extra people into jobs a month, we are going to go backwards fast. There are far more people than that entering the labour force. Far more.
The labour force includes everyone who has a job and everyone who wants a job. It grows when people graduate from school and university, migrate to Australia, come back from maternity leave, come out of retirement, or for any reason decide to get a job in this country. It gets smaller when people retire, are unable to work, or give up on trying to find a job.
How many people join the labour force each month? It’s a surprisingly big number, and that’s why putting 500 a month into work is too few. The number varies, but in the last six months approximately 30,000 net new people a month have joined the labour force.
This number often surprises people. Adding 500 new employed people in a month might sound adequate for an economy like Australia, but it is actually pitiful compared to the 30,000 eager new workers on the scene.
Running to stand still
To stand still, Australia needs to get around 30,000 people into jobs a month. If we manage that, we should stay at 5.2% unemployment. But the next part of the puzzle is figuring out how many extra people need to get into work each month to get us down to the magical level of 4.5% unemployment.
The current unemployment rate means 94.8% of the labour force is employed, and 5.2% is unemployed (702,000 people). We want to improve that to 95.5% employed and 4.5% unemployed (612,000 unemployed). This means that as well as absorbing 30,000 new labour market entrants each month, the economy needs to absorb 90,000 people from the ranks of the unemployed (i.e. 702,000 minus 612,000).
That doesn’t have to happen all in one month, mind you. Let’s assume a 12-month time period is adequate and spread out the 90,000 over 12 months; we need to get 7500 new people into work each month. In total, that means getting 37,500 new people into work each month for 12 months to reach 4.5% unemployment.
The next graph shows how we’ve performed on that task historically. While there have been months when Australia got even more than 37,500 people into work in a month, there have been far more months when we underperformed.
In the last decade there have only been three months when the economy got more than 37,500 people into jobs in a month. This suggests that driving our unemployment rate down to the natural rate of unemployment is going to be very hard indeed.
The RBA is slashing interest rates, but the idea that this will be sufficient to turn the economy around appears to be rapidly fading from public debate. We are very likely to need more policy action. But who will crack first? Will Lowe be forced to adopt quantitative easing? Or will Treasurer Josh Frydenberg be forced to spend some of the surplus he has so lovingly gathered?
If Thursday’s data shows the number of new people moved into work is below 37,500, the pressure will build on the government: it’s time to do something different.