Whither Unemployment This Week?

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When this year’s bud­get was deliv­ered, Trea­sury fore­cast that the unem­ploy­ment pic­ture for the next few years was pos­i­tive:

Aus­trali­a’s medi­um-term prospects remain strong, with the econ­o­my expect­ed to grow at an above-trend rate over the next two years, unem­ploy­ment fore­cast to fall and the bud­get still on track to return to sur­plus in 2012–13.

While the high Aus­tralian dol­lar and lega­cy effects from the glob­al finan­cial cri­sis are weigh­ing par­tic­u­lar­ly heav­i­ly on some sec­tors, the over­all growth out­look is strong.

Sus­tained high prices for our min­er­al resources under­pin record invest­ment inten­tions in the min­ing sec­tor and strong fore­cast growth in com­mod­i­ty exports.

This is expect­ed to dri­ve strong growth in the over­all econ­o­my and employ­ment. With the unem­ploy­ment rate already low, capac­i­ty pres­sures are expect­ed to re-emerge. (Bud­get State­ment 1, p. 1–5)

Fig­ure 1: Trea­sury fore­casts & pro­jec­tions, p 1–7 of State­ment 1, May 2011

The RBA felt the same, writ­ing in its Feb­ru­ary State­ment on Mon­e­tary Pol­i­cy that:

Employ­ment is expect­ed to grow at an above-aver­age pace over the fore­cast peri­od, con­sis­tent with the fore­cast for GDP. While growth in the labour force is also expect­ed to remain above aver­age over the fore­cast peri­od, labour mar­ket con­di­tions are expect­ed to tight­en grad­u­al­ly, with the unem­ploy­ment rate declin­ing from its cur­rent rate of 5 per cent to 4½ per cent by mid 2013.

Fig­ure 2: RBA Fore­casts Feb­ru­ary 2011

How­ev­er unex­pect­ed­ly, the data began to diverge from these fore­casts short­ly after they were penned: the down­ward trend in unem­ploy­ment since its GFC peak in mid-2009 appeared to reverse: hav­ing fall­en below the 5% lev­el in March, it rose in May, hit 5.3% in August, and fell back only slight­ly in Sep­tem­ber (the fall was tru­ly trivial—from 5.2862044% to 5.2477873%, a change of a mere 0.04%—but it was just enough to allow the round­ed rate to fall by 0.1%).

Fig­ure 3: Unem­ploy­ment falls after GFC but then ris­es

The unex­pect­ed rise was par­tial­ly blamed on the Queens­land floods—which sure­ly did have a neg­a­tive impact on employ­ment. How­ev­er this should have dis­si­pat­ed by now—as the RBA observed, “The largest impacts of the rains on the path of GDP are like­ly to be in the Decem­ber, March and June quar­ters”. This led some com­men­ta­tors to instead argue that the most recent data was just a sta­tis­ti­cal glitch:

The next ques­tion is, how reli­able is the indi­ca­tor? The job fig­ures are based on a rotat­ing sam­ple sur­vey, mean­ing they’re sub­ject to sam­pling error (as well as a lot of oppor­tu­ni­ty for oth­er, human errors).

They tend to bounce around from month to month for rea­sons you can nev­er put your fin­ger on but that don’t reflect the more sta­ble real­i­ty of the labour mar­ket. The nation­al accounts also bounce around and are sub­ject to heavy revi­sion as more reli­able data comes to hand. So, both the key indi­ca­tors are a bit ropey, and econ­o­mists often use one as a check on the oth­er… (Ross Git­tins, “When is a rise in unem­ploy­ment num­bers not a rise in unem­ploy­ment?”, SMH 12th Sep­tem­ber 2011)

I some­times agree with Git­tins, but that’s nor­mal­ly the excep­tion rather than the rule. This time I’m revert­ing to the rule. My inter­pre­ta­tion instead was that the rise in unem­ploy­ment was due to the neg­a­tive impact of slow­ing cred­it growth, which was more than coun­ter­bal­anc­ing the unde­ni­ably large stim­u­lus com­ing from min­ing. My key met­ric here is the “Cred­it Accel­er­a­tor”, which as I explained in “A much more neb­u­lous con­cep­tion”, is a causal fac­tor behind the change in unem­ploy­ment (not the lev­el; Fig­ure 4 sim­ply illus­trates that the rise in unem­ploy­ment coin­cid­ed with the col­lapse in the Cred­it Accel­er­a­tor. The causal link is shown in Fig­ure 5).

Fig­ure 4: Cred­it Accel­er­a­tor tend­ing down as unem­ploy­ment tends up

With the Cred­it Accel­er­a­tor now head­ed back towards neg­a­tive ter­ri­to­ry after the effects of the First Home Ven­dors Boost have final­ly end­ed, I thought it was pos­si­ble that aggre­gate unem­ploy­ment could start to rise, even though exports to Chi­na were push­ing strong­ly in the oppo­site direc­tion.

Fig­ure 5: Cred­it Accel­er­a­tion dri­ves unem­ploy­ment, & cred­it accel­er­a­tion is falling

This week’s ABS unem­ploy­ment data won’t cat­e­gor­i­cal­ly decide whether the “it’s just a glitch” or “unem­ploy­ment real­ly is ris­ing cour­tesy of slow­ing cred­it growth” argu­ment is cor­rect, but the recent­ly released Roy Mor­gan sur­vey implies that the ABS data will show a con­tin­ued rise in unem­ploy­ment after the slight fall last month (from 5.2862 to 5.2478). Mor­gan’s data, which involves a much larg­er sam­ple size with a much more real­is­tic def­i­n­i­tion of unem­ploy­ment than used by the ABS, has jumped sharply from 7.7 to 8.6 per cent.

 

Fig­ure 6: Roy Mor­gan reports a strong rise in unem­ploy­ment

The trend in Mor­gan’s sur­vey is now dis­tinct­ly for ris­ing unem­ploy­ment. If the ABS data next week con­firms the trend, the Trea­sury and RBA fore­casts of a boom­ing econ­o­my at the begin­ning of the year will have to be thrown out the window—as will expec­ta­tions of return­ing the bud­get to sur­plus by 2013. If the econ­o­my is head­ed back down again, this is no time to be hairy-chest­ed about bud­get sur­plus­es—deficit spend­ing will be required to stop the econ­o­my slump­ing fur­ther, and indeed a deficit will be forced on the gov­ern­ment by declin­ing tax rev­enues and ris­ing wel­fare pay­ments.

How­ev­er, I have no doubt that both major polit­i­cal par­ties will con­tin­ue to play the “my sur­plus would be big­ger than yours” game.

Fig­ure 7: Roy Mor­gan’s data implies a rise in the ABS fig­ure

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.