July Labour Force: participation surge points to strong supply
Employment: +58.2k (from +52.3k). Unemployment Rate: 4.2% (from 4.1%). Participation Rate: 67.1% (from 66.9%).
In July, the level of employment increased by +58.2k (0.4%), firmer than both the Westpac and consensus forecast of +20k. This marks a continuation of an impressive run of employment gains over the last few months that has seen annual growth in the three-month average rising back to 2.9%yr in July from 2.6%yr in May.
One of the main surprises in today’s data was actually in relation to labour supply. The participation rate – which measures the proportion of individuals that are either in work or actively looking for work – managed to reach a new cycle high of 67.1% in July (67.14% to two decimal places), the highest since WWI. As Westpac Chief Economist Luci Ellis and Senior Economist Pat Bustamante noted yesterday, one of the more puzzling elements of the RBA’s revised forecasts is the assertion that aggregate supply is lower than previously thought. Today’s update, which highlights the apparent strength of labour supply, further complicates this narrative.
The combination of strong growth in the working age population and rising participation have been key drivers of employment’s strength since the reopening from COVID-19. Over the year to June 2023, gains in the labour force and employment broadly matched at around 445k each, resulting in a steady unemployment rate near cycle lows. Since then, the increase in labour supply started to outstrip employment gains – cumulatively, the labour force has expanded by over 1 million since June 2022, while employment has risen by 890k.
The dynamic of labour supply outstripping demand was also present in July, seeing the unemployment rate move up from 4.1% in June to 4.2% in July. It should be emphasised that a lift in the unemployment rate as a consequence of the participation rate surging to a fresh high has a less concerning complexion than an increase in the unemployment rate associated with the onset of reductions in the level of employment (i.e. firing). An important nuance here is that experiences across the economy are varied – with industries that are under more pressure seeing employment stall or decline (retail, manufacturing, construction) while others remain buoyant – but on balance, the labour market – in aggregate – remains in robust health.
Businesses’ appetite for labour has certainly cooled since last year, from being well in excess of supply to now tracking in line population growth. We had anticipated working age population growth to slow to around 2.5%yr by the end of this year, and for this slowdown in the growth pace to begin crystalising in H2 2024. However, today’s results suggest the pace of population growth remains stronger than we expected, still at 2.9%yr in July and on track to hold at 2.8%yr by September.
It is important to note how population estimates feed into monthly changes in employment. In the Labour Force Survey (LFS), the ABS attempts to measure key labour market ratios within its survey sample – including the employment-to-population ratio – from which it ‘scales’ up said results to the population level and backs out an implied level change in employment. The effect is that the implied changes in employment are also ‘scaled’ up when the working age population is estimated to be growing at a very fast pace, as it has done so for much of the past year.
Growth in the total number of hours worked printed 0.4% in July, following a 0.3% increase in June. Highlighting some of the noise in the hours worked data, the ABS reports that there continues to be a higher-than-normal incidence of sick leave versus pre-pandemic averages, though we are also seeing fewer people report that they are working fewer hours for other reasons. Today’s data suggests that total hours worked increased by 1.5% in Q2. Admittedly, this is a fairly surprising turnaround, implying a firmer result for economic activity over the quarter and/or a disappointing deterioration in labour productivity.
The underemployment rate, which measures the share of employed workers who are willing and able to work more hours, moderated from 6.4% in June to 6.3% in July, the lowest result since April 2023. Consequently, the underutilisation rate, which combines unemployment and underemployment, rose by just 0.04ppt, enough to round it up to 10.6% in July. Meanwhile, the youth unemployment rate moved higher from 9.5% in June to 9.8% in July, the highest so far in the cycle but still well below the pre-pandemic average of around 12%.
On balance, today’s results are generally constructive for the RBA, especially with respect to the measures of labour market slack. The turnaround in hours (which might be incorporating some noise) has seen the underemployment rate ease back over the last few months. While the unemployment rate did tick higher, that was largely a consequence of a surge in labour force participation to a record high, suggesting that the economy’s underlying capacity might actually be in a healthier state than currently assumed. Overall, these results speak to labour market resilience rather than weakness – a welcome signal for policymakers that have been desperately trying to orchestrate a ‘soft landing’ for the economy.
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