Unemployment has dipped, but don’t be fooled – the jobs market is weakening

For some time now – gradually, but nevertheless relentlessly – the Australian labour market has been weakening.

Today’s Bureau of Statistics employment report, telling us what happened in the month to May, show that direction is unchanged.

Certainly, employment growth of almost 40,000 in the month and a slight dip in the unemployment rate from 4.1% to 4% is good news.

Not only that, the labour market remains in a much better state than prior to COVID. You need to go back to the early 1970s to find another period of 30 consecutive months when the unemployment rate was below 4.5%.

And the employment-to-population ratio (the proportion of the population aged 15 and older that is employed) remains not too far off its all-time high at 64.1%. That’s a full two percentage points above where it was when COVID hit in early 2020.

Yet the labour market is weakening.

Not that it has always been easy to see. Take growth in employment. Since June last year, when the rate of unemployment began to rise, employment has increased at an annualised rate of 2.6%.

That rate is much faster than in any of the previous three episodes since 2000 when the rate of unemployment rose appreciably.

This resilience in employment has muted the rise in the rate of unemployment that would have otherwise occurred.

Okun’s law, named after US economist Arthur Okun, tells us how we ought to expect the unemployment rate to change for any given rate of economic growth.

Gross domestic product grew 1.1% in the year to March. Okun’s law says this should mean the unemployment rate climbed 0.9 of a percentage point. Instead, it climbed by only one-third as much, 0.3 of a percentage point.

More employed than might be expected

So, why has employment been growing faster than expected? There are several reasons.

One is rapid population growth. Population has grown at an annual rate of 2.9% since last June, more quickly than in previous times when unemployment rose.

More people means more demand for services and more demand for workers.

Another reason concerns job vacancies. During the recovery from COVID, the proportion of vacant jobs almost doubled, climbing to 3.1% in mid-2022 compared to just 1.6% prior to COVID.

Since then the vacancy rate has fallen back to 2.3%. This matters for employment. Drawing down on the stock of existing vacancies allows a larger number of extra workers to be employed.

And average work hours have fallen, from about 138.5 hours per month in June last year to 136 hours in May. With each worker doing fewer hours on average, the total hours of work can be divided among more workers.

Jobs growth heading down

Even with these special circumstances, the pace of employment growth is falling. In the past six months annualised employment growth has almost halved compared to the first six months of 2023. It’s decreased from 3.7% to 2%.

And other indicators show a more pronounced downward trend.

Annual growth in monthly hours worked averaged close to 7% in the first six months of 2023, but only 0.8% in the past six months.

Annual growth in the number of jobs reported to the Australian Tax Office payroll system over the same period fell from around 6% to 2%.

All this spells hard times ahead for the government and the Reserve Bank.

With the labour market bubbling along and the rate of unemployment hardly budging, there seemed to be little trade-off between pursuing an inflation-first policy and full employment.

That is no longer the case. The trade-off is becoming clear to see, and looming larger with every new release of data on the state of the labour market.