How in the world did the unemployment rate fall last month? Here’s how the trick was done

 In Home News Section, Uncategorized

Did you scoff when you heard the unemployment rate fell last month?

I wouldn’t blame you.

Not only did it fall, it fell to a 13-year low.

And it happened during a pandemic where 60 per cent of the population is now under some kind of lockdown.

It doesn’t make sense.

When trust in our institutions is already eroding, a falling unemployment rate in this environment has probably exacerbated people’s cynicism.

But l want to shine light on the numbers for you.

Australia’s statisticians aren’t trying to trick you. It was a by-product of a statistical model that can go haywire during unusual economic shocks (like lockdowns).

I’ll show you why it happened.

But I have another goal.

I want to leave you with the tools to understand why a decline in the unemployment rate can be a bad thing.

And next time you hear a politician talking about the unemployment rate, I want you to be able to see through the numbers to the deeper reality.

It relies on a simple concept

If you’re like me, and you’ve never felt naturally comfortable with numbers, your eyes might glaze over when you see numbers on a page.

So l want to talk about numbers differently.

This exercise is very simple. I promise it won’t get more complicated than the basics.

Have a look at the image below.

I’m going to show you how to express the size of the small rectangle as a percentage of the big rectangle.

You’ll need this to understand how the unemployment rate works.

Imagine doing this operation on your calculator.

Ready?

You take the small rectangle, divide it by the big rectangle, then press equals, then multiply it by 100.

That’s it.

That’s the formula you need to memorise:

“Take the small rectangle, divide it by the big rectangle, press equals, then times it by 100.”

Now let’s do it with numbers.

See the image below. I’ve assigned numbers to the rectangles this time.

The size of the large rectangle is 200, and the size of the small rectangle sitting inside the big rectangle is 10.

Remember the formula?

Take the small rectangle (10), divide it by the big rectangle (200), press equals (which gives you 0.05), then times it by 100.

Your answer will be 5 per cent.

That’s it.

That’s expressing the small number (10) as a percentage of the large number (200).

The small rectangle is worth 5 per cent of the big rectangle.

Next step: the unemployment rate

When officials from the Bureau of Statistics talk about the “unemployment rate”, they’re using the same calculation as the one above.

They just assign different names to the rectangles.

Here’s how the ABS works out the unemployment rate.

It grabs the small rectangle (the number of officially unemployed people) and divides it by the big rectangle (the number of people in the labour force).

So let’s do it with numbers.

Let’s say there are 700,000 officially unemployed people, and 13,500,000 people in the labour force.

To get the unemployment rate:

You take the small rectangle (700,000 unemployed people), divide it by the big rectangle (13,500,000 people in the labour force), press equals (which gives you 0.0518), then times it by 100.

Your answer is 5.2 per cent (rounded up).

And that’s your unemployment rate.

The unemployment rate is simply expressing the number of unemployed people as a percentage of the labour force.

So when there are 700,000 unemployed people, and there are 13.5 million people in the labour force, the unemployment rate is 5.2 per cent.

Easy, huh?

This step is very important

OK.

We’re up to the final stage.

This section will put you on the path to becoming a magician.

I want to show you what happens to the unemployment rate when the size of those two rectangles changes.

This is the key to understanding why Australia’s unemployment rate fell to 4.6 per cent last month, to a 13-year low, even though jobs were being destroyed around the country.

The unemployment rate will either increase or decrease depending on how those two rectangles are growing or shrinking in relation to each other.

For example, if the (unemployed people) increases while the (labour force) stays the same size, the unemployment rate will increase.

Why? Because as a proportion of the labour force, the number of unemployed people has increased.

Or take a different example.

If the (unemployed people) shrinks while the (labour force) increases, the unemployment rate will fall.

Why? Because as a proportion of the labour force, the number of unemployed people has decreased.

There are lots of combinations you can experiment with that will show the unemployment rate rising or falling under wildly different circumstances.

Below are just some of the scenarios.

It highlights why it’s important to know the reasons behind any movement in the unemployment rate, rather than just caring if the unemployment rate went up or down.

What happened to the unemployment rate in July?

According to the ABS, the unemployment rate fell noticeably last month.

But here’s why — and it’s not good.

If you look at the table above, the final scenario is what happened to our labour market.

The number of unemployed people declined, and the number of people in the labour force also declined.

Both groups shrank.

But since the number of unemployed people declined at a faster pace than the decline in the labour force, the unemployment rate went down.

It was a situation where a declining unemployment rate was a bad thing.

Why? Two reasons.

Firstly, a shrinking labour force is not a sign of a healthy economy. You want your labour force to be growing, not shrinking.

Secondly, the decline in the number of officially unemployed people was not a good thing either.

The number of people considered officially unemployed fell last month not because they found jobs, but because they dropped out of the labour force completely.

To be considered officially unemployed, you have to be actively looking for work and able to start work promptly, but the lockdowns in Greater Sydney were making it extremely difficult for people to look for new jobs and start new jobs, because their movement was severely restricted.

So the labour force shrank, and the number of officially unemployed people declined because they couldn’t actively participate.

And that’s why the unemployment rate fell significantly.

It was a very unusual situation.

And that’s just the start of it.

The ABS’s labour force survey was taken between July 4 and July 17, so the July unemployment rate only captured the state of the labour market in the first half of July, which was five-to-six weeks ago.

A lot of economic destruction has occurred since then.

Anyway, I’ll leave you with a two-minute video of my explanation of why the unemployment rate fell last month.

It deals with the same concepts but in a dynamic way.

Keep it in mind next time you hear a politician talking about the unemployment rate.

Hopefully you’ll see through their numbers a bit better.

By business reporter Gareth Hutchens (Original ABC Article)