Making Sense of the 5.9% Unemployment Rate

Australia’s unemployment rate fell to 5.9% in October, beating expectations. The headline unemployment figure was down from 6.2% in September. While it was a solid month for jobs, the figures are slightly deceptive all the same. As always, the devil is in the detail.

When the ABS compiles its jobs data, it does so using two measurements. The figures you see commonly reported on are the seasonally adjusted (SA) estimates. These are short term indicators for the most part. And, in most cases, they’re the less useful of the two metrics.

The one most serious economists focus on instead are the so-called trend estimates. This describes underlying changes over a longer period of time. It smooths out the sort of noise you get with monthly SA estimates.

Looking at trend estimates, we find unemployment remained unchanged at 6.1% in October. Which sounds a lot worse than 5.9%, doesn’t it? And yet most people will walk away today believing unemployment fell by 0.3%.

It’s curious that we have two different ways of measuring jobs data. Especially when they present a different picture of how things stand. If nothing else, it raises the importance of looking beyond the headline figures.

Most publications run with the SA data because it’s sexy. Seasonal figures can rise and fall sharply, as they did last month.

It just makes for better headlines. ‘Unemployment rate plunges to 5.9%!’… That’s what most people will see. And it’s what stays with them. Even if, whether they’re aware of it or not, it’s merely one way of measuring unemployment. Unfortunately it also happens to be metric most resembling a straw poll…

Of course, there’s nothing wrong with publications using SA estimates. But it gives people a false perspective of the jobs market.

And yet…

The jobs market did improve in October. That’s evident just by looking at the data. There were more people working in October than during September. Ultimately, that’s the only thing that matters.

Yet in the interests of clarity, it’s worth treating the 5.9% figure with some suspicion.

Lies, damned lies and statistics

Despite the differences between SA and trend estimates, it was a decent month for jobs. Both metrics showed a decline in the number of unemployed. On SA terms, unemployment fell 33,400. At the same time, 58,600 people found new employment last month.

Full time employment rose by 40,000 across the country. Whereas part-time employment grew up by 18,600.

The participation rate, meanwhile, went up 0.1% to 65%.

On trend estimates, the data was less upbeat. But it was positive nonetheless. Unemployment fell by 3,100. The number of people with jobs rose by 18,800.

On trend estimates the participation rate remained steady at 65%.

The takeaways from these figures?

On the one hand, the jobs market improved last month however you look at it. Whichever metric you use, there are more people working today. That can only be a positive thing.

But, as mentioned, headline figures of 5.9% are misleading. It’s not that the jobs market isn’t holding up well — it is. Especially against a backdrop of global volatility in commodity prices. But job creation wasn’t the only factor pushing unemployment down. We simply can’t divorce unemployment figures from the participation rate.

The participation rate describes the number of people actively searching for work. Every one of these people is classified as unemployed. Which makes sense, doesn’t it? If you’re looking for work, and don’t have a job, you’re unemployed. There’s no way of sugar-coating that.

Yet the ABS manages to make mountains out of mole-hills. If you stopped looking for work, you’d no longer count as unemployed. If that sounds counter-intuitive, it’s because it is.

In other words, the unemployment rate falls as people give up on looking for work. It’s an unusual way of measuring the state of the workforce. What difference does it make if people are looking for work or not? They’re unemployed one way or another. And they’re going to stay that way. Yet they stop figuring into ABS’ unemployment calculations once they call it quits.

Knowing this then, it’s important not to read too much into unemployment headlines. Most people inevitably will. And they’ll assume the jobs market is faring better than it is.

None of this is to downplay the market performance in October. It was a positive month, no question. In fact, as a bear on the Aussie economy, it’s surprising how well employment is holding up.

What’s more, the participation rate alone doesn’t explain this uptick in jobs. Job creation played the most important role. That, more than anything, is proof that businesses have enough confidence to hire in a time of uncertainty.

A breakdown of the unemployment data

Unfortunately, we don’t have a crystal ball showing which sectors are hiring. But we can say with a degree of confidence that services accounted for the bulk of the jobs growth.

We also know that employment among 15 to 24 year olds was instrumental in the positive figures last month. From that, we can deduce that low paying entry level jobs played a key role.

Looking at a breakdown by state performance, the results were mixed.

New South Wales recorded the best unemployment figures, down 0.3% to 5.5%.

Victoria saw its unemployment rate plunge from 6.3% to 5.6%.

The effects of the mining downturn are still evident in Western Australia. Unemployment rose from 6.1% to 6.4% in October.

South Australia, meanwhile, still struggles with high unemployment. Its jobless rate remained relatively high at 7.7%.

In all, a good month for jobs. But not as good as major outlets will have you believe.

Mat Spasic,

Contributor, Markets and Money

PS: Australia’s unemployment rate is holding steady, but for how long? Weak growth prospects are forcing businesses to hold back on spending. This is expected to ramp up next year, as Australia’s weaker economic growth catches up with us.

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