What’s Behind Australia’s Falling Unemployment Rate?

Reports from other countries took a back seat to the ECB’s rate decision and the U.S. NFP report this past week. And so, for today’s edition of Piponomics, I’m gonna review one of the most interesting economic data recently released–Australia‘s jobs report.

Since the global financial crisis, Australia has been the envy of most countries. Its labor market has been pretty resilient while those of its counterparts have struggled to generate jobs.

A quick glance at Australia’s most recent employment data might lead one to say that labor conditions in the Land Down Under are still A-okay. After all, the unemployment rate dropped to 5.1% in August from 5.2% in July. On top of that, the figure beat expectations as market junkies braced for an increase in joblessness to 5.3%!

Unfortunately, the good news stops there.

A closer look at the employment data reveals that the number of employed individuals fell by 8,800 during the month amid expectations for an increase of 5,100. Adding more salt to the injury was the downward revision to July’s reading to 11,700 after being initially reported that jobs grew by 14,000 during the month.

So, how can both the unemployment rate and total number of employed go down?

For the most part, it is a result of the decline in the participation rate, which is the proportion of the population that is unemployed and actively looking for work. The data for August shows that the participation rate dropped (after holding steady at 65.2% in June and July) to 65.0%–the lowest level we’ve seen since March 2007!

To put 0.2% difference into context, let me discuss the calculation that Australia’s Bureau of Statistics used.

Since June, the country’s working-age population expanded by 64,000 but only a net total of 8,000 jobs was created. That should’ve lead to a surge in unemployment right? It did not. In fact, unemployment only rose by 4,000. The bureau says that the 52,000 individuals that are unaccounted for actually left the workforce or didn’t even try looking for jobs!

If the data for August was a one-time event, I guess there would be nothing for us to worry about. However, that is not the case.

Australia’s Bureau of Statistics reports that the participation rate has been falling since it peaked in the latter part of 2010 at 66.0%.

Australia's Participation Rate vs Unemployment Rate

In the two years that passed, the adult population has increased by 386,000 but only a net total of 95,000 jobs have been generated. Meanwhile, the number of those who are actively looking for jobs only grew by 21,000. Why the big discrepancy between the population increase and those actively looking for work? Well, it has to do with the fact that many have left or not entered the workforce at all. This explains why the unemployment rate has remained steady despite the measly growth in jobs.

However, it looks like markets still welcomed the mixed employment data for August. It seemed that expectations for the report were really low. After all, recent news about foreign companies (e.g. BHP Billiton and Fortsecue Metals) scaling back on their investments in Australia have given traders more reasons to sell the Aussie.

AUD/USD rallied at the wake of the release. As Big Pippin pointed out in his AUD/USD Daily Chart Review for September 6, 2012, the pair traded past resistance at the major 1.0200 handle when the data came out.

AUD/USD 15-minute Chart

Don’t let the market’s reaction fool you though. If you ask me, it’s not all good in the hood in the Land Down Under with more and more Australians leaving the labor force. So don’t get your hopes up that the decline in the unemployment rate would be enough to convince the RBA to sit on the sidelines and not cut rates!

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