Which way Australian unemployment?

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The most recent ABS data implies that unem­ploy­ment is falling, and that those who saw the econ­o­my as either sta­ble or boom­ing were right. Both the sea­son­al­ly adjust­ed and the trend esti­mates fell, and the sea­son­al­ly adjust­ed unem­ploy­ment is now 0.2% below the peak it reached in August 2011 of 5.3%. This looks good—though not as good as con­ven­tion­al Neo­clas­si­cal fore­cast­ers were expect­ing a year ago: in the 2011-12 bud­get, the Trea­sury, using its TRYM mod­el, pre­dict­ed a smooth fall in unem­ploy­ment from 5% in June 2010 to 4.75% in June 2011 and 4.5% in June 2012.

Fig­ure 1: ABS Unem­ploy­ment Data and Trea­sury Fore­casts

Clear­ly the Trea­sury did­n’t expect the rise in unem­ploy­ment that occurred in mid-2011. But the last five months of sea­son­al­ly adjust­ed ABS data appear to imply that this dete­ri­o­ra­tion was an aber­ra­tion, and the expect­ed recov­ery is on its way once more.

Fig­ure 2: Trea­sury fore­casts (& pro­jec­tions of a return to equi­lib­ri­um) in the 2011-12 MYEFO

Or is it? As I not­ed in my most recent post, the def­i­n­i­tions of employ­ment and unem­ploy­ment are now seri­ous­ly com­pro­mised. The for­mal def­i­n­i­tion of unem­ploy­ment used by the ABS is:

Per­sons aged 15 years and over who were not employed dur­ing the ref­er­ence week, and:

  • had active­ly looked for full time or part time work at any time in the four weeks up to the end of the ref­er­ence week and were avail­able for work in the ref­er­ence week; or
  • were wait­ing to start a new job with­in four weeks from the end of the ref­er­ence week and could have start­ed in the ref­er­ence week if the job had been avail­able then.

The def­i­n­i­tion of “active­ly looked”:

Includes writ­ing, tele­phon­ing or apply­ing to an employ­er for work; answer­ing an adver­tise­ment for a job; check­ing notice­boards; being reg­is­tered with Cen­tre­link as a job­seek­er; check­ing or reg­is­ter­ing with any oth­er employ­ment agency; adver­tis­ing or ten­der­ing for work; and con­tact­ing friends or rel­a­tives.

The def­i­n­i­tion of employed is:

All per­sons aged 15 years and over who, dur­ing the ref­er­ence week:

  • worked for one hour or more for pay, prof­it, com­mis­sion or pay­ment in kind in a job or busi­ness, or on a farm (com­pris­ing employ­ees, employ­ers and own account work­ers); or
  • worked for one hour or more with­out pay in a fam­i­ly busi­ness or on a farm (i.e. con­tribut­ing fam­i­ly work­ers);

On these def­i­n­i­tions, peo­ple who are dis­cour­aged by the job-seek­ing process—so that they haven’t applied for a job in the pre­vi­ous 4 weeks—are not unem­ployed. If they have worked for one hour or more in the pre­vi­ous fort­night, they will be clas­si­fied as employed; if not, they will be “Not in the Labour Force”.

As not­ed in the pre­vi­ous post, these def­i­n­i­tions dis­guise the real lev­el of unem­ploy­ment, and they inspired Roy Mor­gan to con­duct its own sur­vey with a rather more straight­for­ward def­i­n­i­tion:

The Roy Mor­gan sur­vey, in con­trast, defines any respon­dent who is not employed full or part-time and who is look­ing for paid employ­ment as being unem­ployed. ” (Roy Mor­gan, Sep­tem­ber 2001)

When Roy Mor­gan reports a trend in unem­ploy­ment, this can be tak­en seriously—with caveats about the small­er size of the Roy Mor­gan sam­ple (4,500 ver­sus 30,000 for the ABS), and the fact that the data is not sea­son­al­ly adjust­ed. When the ABS reports a trend, it could be a trend, or it could be an arte­fact of its def­i­n­i­tions.

Curi­ous­ly, the ABS itself implied in today’s state­ment that its unem­ploy­ment data should be tak­en with a grain of salt. They rec­om­mend­ed instead using the ratio of employ­ment to pop­u­la­tion

A dif­fer­ent method of analy­sis that removes the effect of pop­u­la­tion growth is to com­pare aver­age employ­ment to pop­u­la­tion ratios for each year… This analy­sis pro­vides an alter­na­tive com­par­i­son of employ­ment between years, as the influ­ence of change in the under­ly­ing pop­u­la­tion in each year is removed.

The ABS’s def­i­n­i­tion of employ­ment is not above reproach—including as employed peo­ple who worked a ludi­crous 1 hour in a fort­night (and unpaid at that, if in a fam­i­ly busi­ness or on a farm)—but it lacks the addi­tion­al dis­tor­tion of its unem­ploy­ment def­i­n­i­tion, which clas­si­fies the dis­cour­aged unem­ployed as “not in the work­force”. Curi­ous­ly, the trend to falling unem­ploy­ment in the last 5 months of ABS data isn’t mir­rored in the employ­ment to pop­u­la­tion ratio: though it blipped up in the most recent month, it has been steadi­ly falling since the begin­ning of 2011.

Fig­ure 3 illus­trates this by graph­ing the employ­ment to pop­u­la­tion ratio and unem­ploy­ment togeth­er, and invert­ing the unem­ploy­ment data (putting low unem­ploy­ment at the top and high at the bot­tom).

Fig­ure 3

A smoothed plot makes the trends in both series more obvi­ous: the employ­ment to pop­u­la­tion ratio is still trend­ing down—implying ris­ing unemployment—while the record­ed unem­ploy­ment rate is falling.

Fig­ure 4: The data in Fig­ure 3 smoothed

Roy Mor­gan’s mea­sure of the unem­ploy­ment rate, how­ev­er, is clear­ly increas­ing.

Fig­ure 5

Roy Mor­gan’s esti­mate that 10.3% of the work­force is unem­ployed is now more than twice the ABS’s esti­mate of 5.1%, and the gap between the two is the largest it has ever been.

Fig­ure 6

Part of this huge gap in the Jan­u­ary 2012 fig­ures is undoubt­ed­ly due to the fact that the Roy Mor­gan data is not sea­son­al­ly adjust­ed, and Jan­u­ary nec­es­sar­i­ly involves a huge boost to actu­al unem­ploy­ment as school leavers enter the work­force. But the trend in the gap can’t be explained away, and that gap is now the biggest it has ever been.

Fig­ure 7

So it’s too ear­ly to declare that unem­ploy­ment is falling—especially when that call is based upon data with a dodgy def­i­n­i­tion.

Oh, and that Trea­sury fore­cast shown in Fig­ure 2, of ris­ing unem­ploy­ment from mid-2012—with it return­ing to 5% from the fore­cast low of 4.5%? That’s not a fore­cast: that’s an assump­tion. Built in to the TRYM model—and every oth­er neo­clas­si­cal macro­eco­nom­ic mod­el on the planet—is the assump­tion that the econ­o­my will return to a long run equi­lib­ri­um rate of growth after any short term “shock”. The Trea­sury hap­pened to assume that this long run equi­lib­ri­um includes an unem­ploy­ment rate of 5%.

This assump­tion is a clas­sic exam­ple of the adage that “to assume makes an ASS out of yoU and ME”. Neo­clas­si­cal econ­o­mists have been get­ting away with this sort of behav­iour for decades, because the pub­lic did­n’t chal­lenge them before the Glob­al Finan­cial Cri­sis when the econ­o­my seemed to be doing well. I hope now that, after the cri­sis, the pub­lic will be as crit­i­cal of such assump­tions as Roy Mor­gan has been of the ABS’s dicky def­i­n­i­tion of unem­ploy­ment.

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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.