Why Unemployment Rose to 6.3%, Despite 38,500 New Jobs

Australia High Resolution Economy Concept

Australia’s unemployment rate rose by 0.3% to 6.3% in July. It did so despite the fact that 38,500 new jobs were added for the month.

On the plus side, that bettered expectations. Economists predicted a total of 10,000 new jobs in July. At the same time, they estimated the unemployment rate would come in at a lower 6.1%.

If you’re looking at these figures feeling slightly puzzled, you’re not alone. If the economy is creating new jobs, why is the unemployment rate rising? How do we account for such inconsistent data?

It all has to do with what’s known as the ‘participation rate’.

The participation rate measures the number of people that are either in, or looking for, work.

In July, this figure rose 0.3% to 65.1%. In other words, the number of people actively looking for work is rising. And, even though 38,500 jobs were filled, demand for work is growing.

The participation rate explains why the unemployment rate rose in July by 0.3%. Jobseekers, who fail to find jobs, count among the ranks of the unemployed. In other words, there were a lot more new jobseekers in July. But the number of people who didn’t find work outweighed the 38,500 who did, sending unemployment up.

Economists prefer to look at the trend unemployment rate

There’s no doubt this way of reporting monthly unemployment figures is confusing. That’s why economists prefer medium-term unemployment trends.

This removes the up and down nature of the monthly data. In doing so, it gives us a better picture for the direction unemployment is going in — and at what speed.

If we use the trend unemployment rate, we’d see that the jobless rate isn’t getting worse. The trend unemployment rate was unchanged for July, at 6.1%. This is probably the most accurate picture of the current jobs market. But even this should be taken with a pinch of salt.

The unemployment rate, if you weren’t familiar, doesn’t actually measure the total number of people without jobs. It’s an estimate, at best.

The ABS, which gathers the unemployment data, uses household surveys for their research. They don’t go through official channels like government agencies. Roughly 60,000 people take part in these surveys. These samples are then used to make generalisations about the national unemployment rate.

In other words, it’s an educated guess.

Sometimes, even the ABS can’t narrow down the jobless rate to a single figure.

In January 2014, they announced an unemployment rate of anywhere between 5.8–6.2%. That’s not very specific, is it? It tells us very little about the true state of employment in the economy..

That’s why the trend is a more useful guide in measuring unemployment. But even this is a rough guide, rather than a reflection of the true state of the economy.

Total hours worked falls as employment rises…what gives?

Another curious bit of data released shows that the total hours worked declined by 0.2% in July. That’s despite an additional 12,400 new full time workers, and 26,100 part time workers.

What this tells us is that the quality of these jobs leaves a lot to be desired.

The ABS counts anyone who works more than one hour a week as employed. Of course, this is an absurd way to measure employment. One hour doesn’t provide anyone with a liveable wage. Most people, even on part time jobs, do work more than one hour, that’s true. But the point is that it doesn’t really tell us whether these jobs are good for the economy.

Are these workers earning enough to be financially independent and secure? Do they have a disposable income to lift spending? Well, let’s look at what we know for certain.

In July, almost 70% of new jobs added were part-time work. At the same time, total hours worked declined by 0.2%. The only conclusion to make here is that most of the part-jobs were on the low-end in terms of hours they offer workers.

The ABS account for part time job quality by measuring the so-called underemployment rate. This looks at the number of people who’d like to work more hours.

The underemployment rate gives us some clue about the quality of these jobs. If people want more hours at work, then it’s clear their salary is presently insufficient.

Unfortunately, the ABS releases underemployment figures infrequently. But we do have some recent data to draw on.

In Victoria, the underemployment rate was 9.5% as recently as March 2015. Further, national estimates in September 2014 put the number of underemployed workers at 1 million.

These are significant numbers. It’s a lot of people who clearly feel their hours, and subsequent wages, aren’t up to scruff. Yet all these people technically keep the unemployment rate down.

In any case, economists will probably look at the latest figures with optimism. The unemployment rate is up, because the number of jobseekers is rising. Experts will have you believe that’s a good thing. It isn’t — searching for work isn’t the same as finding it.

If every unemployed person started looking for work, we might find the real unemployment at well over 6.5%.

Mat Spasic,

Contributor, The Daily Reckoning

The Daily Reckoning’s Greg Canavan believes Australia’s economy is heading for disaster.  As one of Australia’s leading investment analysts, Greg is convinced that Australia faces a recession in 2015.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals why our economy finds itself in the hole it’s in. He’ll show you why debt levels have spiralled out of control. And why that means a recession is almost inevitable. But there are actions you can take to lessen the impact of the recession.

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