The unemployment rate has increased, so why do economists say it’s a positive sign?

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The unemployment rate increased last month, from 6.9 per cent to 7 per cent, but economists say it’s a positive sign.

How could that be? It’s a statistical artefact.

They say other developments in the economy suggest the economy is recovering, and more positive news is likely in coming months.

Think of it like a football club

Imagine a struggling football club, which has watched its membership dwindle from 20,000 to 5,000 fans.

If 4,000 of those 5,000 remaining members are turning up to the club’s matches every week, the club’s owners might try to put a positive spin on things by boasting that 80 per cent of their members are still attending matches regularly.

But now imagine the club starts winning again, so its membership grows from 5,000 to 10,000.

If 5,000 of those 10,000 members start attending every match, that means 50 per cent of the club’s members are now attending regularly.

Statistically, you could say there’s been a huge decline in the proportion of the club’s members who are attending its games every week — from 80 per cent, to 50 per cent.

Does that mean the club’s members are fleeing the organisation?

Not at all.

A disgruntled sports reporter could spin the statistic to “prove” the club was failing badly, but the reality would be the opposite.

The club has managed to turn its fortunes around and its membership base has started expanding again.

Even though it’s obviously not as strong as it was, things are moving in the right direction.

The fact that it’s experienced a decline in the proportion of members attending every match is good news: the negative statistic is simply a by-product of positive developments.

A similar phenomenon is occurring with the unemployment stats

Australia’s unemployment rate increased from 6.9 per cent to 7 per cent in October.

However, that was a by-product of positive developments in the economy.

Economists say a huge number of Australians have been re-entering the labour force as the economy improves, and data show last month there was a surge in the “participation rate” — which expresses the labour force as a percentage of the working-age population — from 64.9 per cent to 65.8 per cent.

That’s why the unemployment rate edged up, because people are officially re-entering the labour force to look for work so the pool of available workers has increased but not all of them have found jobs.

Nationally, the number of people considered officially unemployed increased by 25,500 last month, increasing the total to 960,900.

But the number of people with jobs increased by a much larger 178,800 (full time: 97,000, part-time: 81,800), which brought the total number of employed people to 12,773,900.

“So far, the economy has recovered 75 per cent of jobs lost since the pandemic,” Citi economists Josh Williamson and Faraz Syed explained in a note to clients.

“Based on the national experience, the Victorian economy should regain around 75 per cent of jobs by year’s end; so far, it’s been just below 50 per cent.”

It’s still early days, but there’s room for optimism

In economics, everything is relative.

Australia is trying to dig itself out of the worst recession in 90 years and millions of Australians remain out of work or are struggling to get more hours.

The Federal Government’s decision to reduce the level of its emergency income support payments in September had a negative impact on a huge number of households, with hundreds of thousands of people falling back into poverty.

In Senate estimates recently, forecasts shared with senators showed Treasury officials were expecting the number of people on the unemployment JobSeeker payment to jump from roughly 1.5 million to 1.8 million by Christmas.

And wages are currently growing at their slowest pace in recorded history – according to the latest Wage Price Index, released this week, the average workers’ wage increased by just 0.1 per cent in the September quarter, and by 1.2 per cent over the last 12 months.

Economists say the recovery is underway

But the news from Victoria was positive last month, and other states have seen jobs growth.

According to the Bureau of Statistics, employment in Victoria lifted by 81,600 in October (though its unemployment rate jumped from 6.7 per cent to 7.4 per cent as its participation rate picked up).

Employment lifted in other states too, while the unemployment rates increased in every other state except New South Wales and Western Australia, for the same reason as Victoria.

But importantly, Victoria’s job increases occurred largely before its lockdown ended.

That bodes well for next month’s labour force data, because the restrictions on economic activity in Victoria were eased significantly in late October – so they wouldn’t have been captured in this data.

“Restrictions in Victoria were relaxed a touch at the end of September which, together with low [level of COVID] cases in the month, may have given businesses the confidence to start rehiring,” said Ben Udy from Capital Economics.

“The rises [in employment in other states] came despite the changes to JobKeeper which reduced the payout to businesses from the end of September.

“Those changes meant that businesses had to cover more of an employee’s wages out of pocket.

“That underlines that the economic recovery [was stronger than] the headwind from the phasing out of JobKeeper, as we always said it would [be].”

Are we past the peak in unemployment?

Mr Udy thinks Australia is probably past its peak in unemployment now.

He said the national underemployment rate fell last month, from 11.4 per cent to 10.4 per cent.

The underutilisation rate — which combines the unemployment rate with the underemployment rate — also fell, from 18.3 per cent to 17.4 per cent, though it’s still well above its pre-virus rate of around 13.5 per cent.

But these are small improvements.

Since Australia’s population growth will be muted in coming months (because international borders are heavily restricted), future gains in employment are unlikely to be offset by rising labour force participation, he said.

“We therefore expect the unemployment rate to decline in the months ahead and fall to 6 per cent by the end of 2021,” he said.

What about prospects for the economy?

Belinda Allen, an economist at Commonwealth Bank, said she has adjusted her forecasts for the economy and the unemployment rate now.

“There is plenty of evidence creeping into the data that signals strong outcomes next year are more likely than not,” she wrote to clients.

“As a result, we have upwardly revised our profile for gross domestic products in 2021 and by extension have lowered our profile for the unemployment rate.

“We now expect the unemployment rate to be 5.75 per cent at the end of 2021 (compared to 6.5 per cent previously).

“And we forecast the unemployment rate to be 5 per cent at the end of 2022. By comparison the Reserve Bank expects the unemployment rate to be 6 per cent at the end of 2022.”

By business reporter Gareth Hutchens (Original ABC Article)