May Labour Force: youth disproportionately impacted by softening conditions
Employment: +39.7k (from +37.4k). Unemployment Rate: 4.0% (from 4.1%). Participation Rate: 66.8% (from 66.8%).
In May, the level of employment rose by +39.7k (+0.3%). That was slightly lower than Westpac’s forecast for a +45k lift, but above the market median for a +30k increase. Underlying this result is a disproportionate softening in conditions faced by those aged between 15 and 24, who have experienced an almost 1 percentage point increase in their underemployment rate over the past two months.
Recall in April, the lift in employment was supressed by underlying shifts in seasonal behaviours. Over recent years, during school holidays months (such as April), there has been a larger proportion of individuals who reported that they were not currently employed but that they had a job they were due to start in the following month. Given the recency of this dynamic, it is not yet being fully captured by seasonally adjusted estimates. Therefore, as this dynamic ‘unwound’ in May, there were more people than usual that entered employment. This provides some explanation behind the above trend print for employment, with a rate of around +35k/mth needed to keep up with population growth.
Outside of these month-to-month dynamics, it remains clear that the labour market – in an aggregate sense – is becoming progressively less tight. Growth in employment eased from 2.9%yr in April to 2.6%yr in May (three-month average basis), marking a continued but gradual slowdown from earlier strength (6.4%yr in Oct-22), to still be above the 2.0%yr to 2.5%yr ‘norm’ observed in the years prior to the pandemic.
It is also worth highlighting here, that growth in employment has been keeping pace with growth in the working age population. At 64.1%, the employment-to-population ratio is not materially different from what was observed at various instances over last year. Having just come out of the tightest labour market in around fifty years – and with many key sectors still reporting skilled labour shortages – businesses remain eager to expand their workforce and their capacity. As this dynamic continues to unfold, average hours worked will remain a key lever of input adjustment in response changes in demand conditions (as discussed in more detail below).
Unemployment Rate
As alluded to above, there was a larger-than-usual group of individuals who were not working (i.e. unemployed or not in the labour force) in April but had a job lined up in the next month. This offers a partial explanation of the constructive results observed across both labour force participation (as those not in the labour forced moved into employment) and in unemployment (as those who were unemployed moved in employment).
In May, the participation rate printed 66.8%, holding flat from April (upwardly revised from 66.7% to 66.8%). That implied a solid +30.5k increase in the size of the labour force. At the same time, there was also a decline in the level of unemployment, down –9.2k, seeing the unemployment rate fall from 4.1% to 4.0%. The latest results offer a similar perspective on current labour market conditions. On a three-month average basis, the unemployment rate is ticking higher, but is doing so gradually – from 3.6% in May 2023 to 4.0% in May 2024.
Hours Worked
The total number of hours worked declined –0.5% in May, to be 0.6% higher in annual terms. In part, this soft outcome was driven by a larger than average share of employed persons working fewer hours due to illness (4.2% in May 2024 vs. 3.5% pre pandemic average)
Looking through some of this volatility, growth in the number of employed persons continues to outpace growth in hours worked. In trend terms, employment has grown by 2.7% over the past year, while hours worked has grown by just 0.9% over the same period. In normal times, these two labour market indicators move closely together. Instead, we have seen businesses respond to the slowdown in the economy by pulling back on hours worked rather than laying off employees.
Robust employment growth, coupled with soft hours worked outcomes, implies that the average number of hours worked has declined. This is indeed what we have observed, with the average number of hours worked falling by 1.7% over the past year (in trend terms), to now be in line with pre pandemic levels.
The change in the number of hours worked over May differed across the states. Declines were recorded in Tasmania (–4.9%), Queensland (–2.0%), South Australia (–0.3%), and NSW (–0.2%). Hours worked increased in WA (+0.5%) and were flat in Victoria.
Potential Labour Supply
The bounce back in international students and immigrants returning to Australia when borders reopened was larger than anyone expected. As a result, the working age population grew at a record pace for most of last year. This now looks to have peaked, in the month of September 2023 when looking at the annual growth rate of around 3.1%, compared with 2.9% over the year to May 2024. The ABS also released population data today which showed that Australia’s population grew by around 650k over 2023, with around 550k of this increased driven by a pickup in net overseas migration.
Despite this, the change in the working age population continues to outpace employment. We expect this will continue to occur going forward. This is consistent with a loosening in labour market conditions – with the unemployment rate drifting higher and the employment to population ratio moving lower.
Other Labour Market Measures
Consistent with the soft hours worked outcome, some other labour market indicators also softened over May.
The underemployment rate, which measures the share of employed workers who are willing and able to work more hours, came in at 6.7% in May, in line with the upwardly revised outcome in April (from the initial estimate of 6.6%).
This aggregate outcome masks some differing trends across cohorts. Cohorts who are disproportionally represented in the non-essential or discretionary parts of the economy (tourism, retail, accommodation, retail, travel and other recreational services) and tend to work more flexibly, have experienced a larger increase in underemployment compared to the economy-wide average. For example, the female underemployment rate has risen from 7.5% in March to 8.2% in May 2024 – the highest since November 2021. Additionally, the underemployment rate for young Australians has lifted from 14.8% in March to 15.7% in May, approaching the 17% recorded before the pandemic.
The underutilisation rate, which combines the unemployment and underemployment rates, remained at 10.7% in May, in line with the upwardly revised outcome in April (from the initial estimate of 10.6%). This was the highest rate since January. Consistent with the underemployment rate, the underutilisation rate has drifted higher in trends terms.
Outlook
In its May Statement on Monetary Policy, the RBA assessed labour market conditions as “easing but remain[ing] tight relative to full employment”. Today’s update is unlikely to materially alter that sentiment. Employment growth, while slowing from its peak, has managed to keep pace with population growth and remain slightly firmer than the pre-pandemic ‘norm’. In this context, tightness in the labour market is fading. Crucially, changes in average hours works remains the key lever of input adjustment for employers in the face of soft demand. This dynamic will be key moving into the second half of the year, where we anticipate demand conditions to begin improving.
Additionally, more disconcerting developments around youth labour market conditions bare close monitoring, as this may provide an early signal of further easing in broader labour market conditions ahead. The extent to which this may be the case also depends on the sectoral breakdown, particularly the contrast between industries that provide essential services such as health care and social services, versus those that are more exposed to the discretionary spending slowdown. Timely information on this front will be received next week.
Ryan Wells, Economist, ph (61–2) 9178 2063
Pat Bustamante, Senior Economist, ph (61) 468 571 786
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