Unemployment is back near pre-pandemic levels. A CBA economist says missing foreign workers are one reason why

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We know employment in Australia has rebounded strongly from the recession.

More people are employed than ever before, according to monthly labour force data.

But do you feel like something’s not quite right about that story?

Commonwealth Bank economist Gareth Aird says something is amiss.

And he thinks he’s figured out why.

He says the monthly labour force data is excluding a vital element of Australia’s labour force: foreign workers who’ve been working in Australia for less than 12 months.

He says once you take those “short-term” workers into account, the employment picture changes dramatically.

It could help explain why job vacancies are at record highs and why employers are complaining that it’s difficult to find workers.

The missing puzzle piece?

Mr Aird sent a note to clients this week saying there appeared to be a mismatch between the “monthly” and “quarterly” labour force data published by the Bureau of Statistics (ABS).

He says when the ABS publishes its quarterly data, the detailed dataset includes all people who contribute to Australia’s economic activity.

But when the ABS publishes its monthly data, the dataset excludes overseas non-resident workers who have been working in Australia for less than 12 months.

What does that mean?

It means the ABS’s monthly labour force data — which provides the unemployment rate every month — may not be accurately capturing the impact of the international border closures on Australia’s labour market at the moment.

As you can see from the graph below, which Aird’s economics team has produced, employment for the usually resident Australian population surpassed its pre-COVID level this year.

But the total number of people working in the economy (which includes short-term foreign workers) has not returned to its pre-COVID level.

That group’s pre-COVID high was 13,511,800 people, but at the end of the March quarter this year it was sitting at 13,226,600 people, so it’s still 2.1 per cent lower than it was a year ago.

Why would that be?

Because hundreds of thousands of foreign workers have left Australia in the past year.

Mr Aird says the number of short-term foreign workers has declined from roughly 521,000 (in the first quarter of last year) to roughly 235,000 (in the first quarter of this year).

And that number will continue to fall while our international borders remain closed, eventually whittling down to zero, he says.

To illustrate the impact this is having on the labour market, Mr Aird has produced another graph, which is below.

He says short-term foreign workers, as a share of total workers, has been fairly stable for the last 20 years, sitting near 4 per cent of all workers in Australia.

But that figure has dropped to just 1.8 per cent recently.

Mr Aird says this would help to explain why job vacancies are at record highs at the moment.

Nearly 300,000 foreign workers are no longer here.

He says if they couldn’t qualify for JobKeeper or JobSeeker, how could they afford to stay in Australia?

And when you combine that phenomenon with the boom that’s occurring in residential construction at the moment (thanks to government programs like HomeBuilder), and the boom in domestic travel (since no one can travel overseas), you can understand why there are record high job vacancies.

It’s because domestic demand is exceptionally strong — but employers can’t boost their production to meet that demand as easily as they once could, now that an extra source of labour supply (short-term foreign workers) has been cut off.

So can we expect wages growth?

Mr Aird says if this situation continues, employers will have to start paying higher wages to attract workers.

“Those industries that have a higher concentration of foreign workers, like hospitality, have an incredibly high number of vacancies,” Mr Aird wrote in his note to clients.

“Job vacancies have surged for all skill levels. The labour market will tighten very quickly from here.

“A lift in wages growth is the inevitable consequence of a tight labour market as firms are forced to pay more to attract workers,” he said.

A question of methodology?

Why would the ABS monthly labour force data exclude foreign workers who have been working in Australia for less than 12 months?

It’s a methodological issue.

The ABS’s monthly labour force survey covers 26,000 households (roughly 50,000 people), and it tracks every household in the survey for eight months in a row to ensure continuity in the data.

But some groups are always excluded from the survey.

They include: members of the permanent defence forces, certain diplomatic personnel of overseas governments, members of non-Australian defence forces (and their dependents) stationed in Australia, and overseas residents in Australia.

The monthly survey will account for foreign residents if they work in Australia for over 12 months, or if they plan to.

Mr Aird says before the COVID lockdowns, the ratio of resident workers to short-term foreign workers was fairly stable.

He says short-term foreign workers, as a share of total workers in Australia, sat around 4 per cent for 20 years.

That explains why the level of employment and unemployment among Australia’s resident workers seemed to move in line with the level of job vacancies.

But he says with hundreds of thousands of foreign workers leaving Australia in the last 12 months, that relationship has broken down.

And that helps to explain why, despite employment among the resident population having surged back above its pre-COVID high, job vacancies can still be at record highs.

By business reporter Gareth Hutchens (Original ABC Article)