Falling participation rate highlights weakening labour market conditions

Thursday 3 November, 2016

The most recent labour force figures released by the Australian Bureau of Statistics (ABS) have been a source of much discussion and commentary in the past fortnight, with the official unemployment rate for Queensland falling by 0.1 points to 6.1 per cent.

While this headline figure suggests improving economic conditions and an increased capacity for employers to create jobs and drive employment growth, a more detailed analysis reveals that the unemployment rate is falling because of a declining participation rate.

The participation rate is the proportion of working-age people that are engaged in the labour force through employment, or by actively looking for work, and is something that fluctuates over time depending on economic and labour market conditions.

When economic conditions are weak for example, the participation rate will likely decline as an increasing proportion of the working-age population pursue full-time study, or become discouraged by the lack of available employment and cease looking for work.

This raises the question: what is currently happening with the labour market in Queensland and why are people leaving?

In the month of September, the number of unemployed people in Queensland fell by 2300 in trend terms, but only a fraction of this (200) was as result of people gaining employment.

The remaining 2100 left the labour force entirely in September, and as indicated above, it is assumed that a number of these people will now be part of the hidden unemployed, which are the discouraged job seekers that have stopped looking for work.

Had these people continued an active search for work, and the participation rate had remained unchanged in September, the total number of unemployed people in Queensland would have increased by 1800 people (64.6 per cent), as opposed to the fall of 2300 that was officially recorded.

Significantly, the trend unemployment rate would have increased by 0.1 points to 6.3 per cent, rather than falling by 0.1 points. 

The table below provides an overview of the key labour force statistics for September and what they would have been had the participation rate remained at the level that was recorded in August 2016 (64.6 per cent).

161103 ParticipationRate

Source: ABS; CCIQ

As this suggests, a fall in the unemployment rate needs to analysed critically, especially when labour market conditions are soft and job creation in the private sector is weak, which is currently the case across much of Queensland.

The official participation rate of 64.5 per cent is of further concern because it is now at its lowest level in the past decade and 3.5 points below the peak of 68.0 per cent that was recorded in February 2009.

The implications of this drop in participation is highlighted in the graph below, which indicates what the unemployment rate would be if labour force participation had remained constant at the 10-year high of 68.0 per cent.

161102 labour graphic

Source: ABS; CCIQ

If the people that left the labour force following the participation peak in February 2009 were reintroduced, and assumed to be unemployed, the implications for Queensland would be considerable.

Had the participation rate remained constant at the high point of 68.0 per cent, the unemployment rate would now be 10.9 per cent, with an additional 135,000 people looking for, but unable to find work.

Significantly, as shown in the chart above, the difference between the official and adjusted unemployment rates have been diverging in Queensland since December 2015, which does suggest that labour force conditions have been weakening across the past three quarters.

For this reason, a continued effort to restore confidence in the economy and increase spending on goods and services remains a priority for Queensland, sustained improvement in profitability, private sector investment and job creation is to be achieved.

 

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