Robust employment not enough to prevent rising unemployment: Westpac

EXPERT OBSERVER

The robust update on employment continues but with strong growth in working age population, and rising participation, it is not enough to prevent a rise in unemployment. Participation hit a new record high of 66.2 with the unemployment rate drifting up to 5.3% from 5.2%. Underemployment is also moving higher, 8.56% from 8.42% in July and back to on par with May 2019 which was the recent high. 

Westpac is forecasting the unemployment rate to continue to rise from here, on the back of a soft patch in employment, to 5.4% by end 2019 but given unemployment is now 5.3%, this is no longer a big call. 

In the year to August, the largest share of employment gains have been for full-time females (3.1%yr), male full-time employment (1.9%yr) has grown slower than total employment (2.5%yr), suggesting employment gains remain focused in the services industries that are rich in female employment. We get an industry update on employment next week. 

Rising unemployment in this update gives us some comfort that the RBA is on track to cut rates at the October Board meeting. The RBA has also given more attention to underemployment, than just unemployment on its own, when thinking about the outlook for wages a further indicator the labour market is moving in the wrong direction. 

The August Labour Force Survey reported a 34.7k gain in employment. As we head through the third quarter of the year, growth in employment remains quite robust with a three month average gain of 24k in August, almost unchanged from 25.9k in July and only slightly down from 31.9k in May.

Back in May the survey reported a strong +40.4k gain in employment with participation surging to 66.0%, boosting the labour force and therefore holding unemployment flat at 5.2% despite the very strong gain in employment. Since then, while there has been some month to month volatility in employment, the trend remains robust and yet the unemployment has drifted up to 5.3%.

Why is this so? A combination of robust working age population growth and, perhaps more importantly, participation rising to new record high.

In the year to July, employment has grown 311.0k or 2.5%. The pace of employment growth has eased back from 2.8%yr in May but it is still stronger than the 2.2%yr at the end of 2018, while the six month annualised pace has lifted to 2.6%yr from 2.3%yr in July. Our Jobs Index suggests employment should be growing around 2.3%yr currently before slowing to 2.0%yr by year end.

In August, unemployment rounded up to 5.3% but given that at two decimal places it was 5.25% from 5.24% in July we think it is better to describe it as being flat. Nevertheless given the robust gains in employment this is still a disappointing outcome.

In August participation hit a new record high of 66.2% (66.15% at two decimal places from 66.06% in July) resulting in a solid 38.8k gain in the labour force. We had expected that a soft employment print associated with flat participation would have driven a rise in unemployment but given the ongoing strength in population growth, it seems that employment growth can remain sound but not robust enough to bring down, or even hold, unemployment.

Today’s update is further confirmation that we are observing a robust upward trend in participation in both NSW and Victoria and while participation has eased a little in NSW, since the May record high of 66.2%; participation in Victoria hit a new record high of 66.2%.

Back in June we were surprised by the drop in underemployment (those employed who are willing and able to work more hours) which fell 0.4ppts to 8.2%.

Underemployment did not improve as much as unemployment through 2018 and in early 2019 had been trending higher compared to the unemployment rate.

So we were not surprised that in July underemployment bumped back up to 8.4% and in August it rose again to 8.6%. Rising underemployment is a further sign that that labour market continues to underperform and that excess capacity is rising in the economy.

Justin Smirk is ‎senior economist at the Westpac Group.

This article was first published on Westpac IQ.