November Labour Force: Christmas comes early?
Employment: +35.6k (from +12.1k). Unemployment Rate: 3.9% (from 4.1%). Participation Rate: 67.0% (from 67.1%).
The November Labour Force Survey (LFS) delivered some notable surprises, which on face value could be seen as indicative of a retightening in conditions. However, we caution that these results rely on some curious developments around labour supply and gross flows within the labour market. We saw something similar in late 2023 that proved to be a ‘head fake’, with shifting seasonality also presenting as an issue. There is a risk of an unwind in December, emphasising the need to contextualise these results within the multi-month trend. We assess this as remaining broadly consistent with a ‘normalisation’ in labour market conditions, as opposed to either an outright weakening (as some suggested for October) or a renewed strengthening (as some may suggest for November). That said, the last six months of data does confirm that the labour market remains somewhat tight, suggesting that this ‘normalisation’ process has been slow-going.
In November, the level of employment increased by +35.6k (0.2%), above both Westpac’s forecast of +20k and the market consensus forecast of +25k. The current pace of employment growth is easing back from a burst of strength over Q3, the three-month annualised pace slowing from 4.4%yr in September to 3.0%yr currently. The monthly gain in employment slightly outstripped population growth, driving a modest increase in the employment-to-population ratio, enough to round up to 64.4% (from 64.33% to 64.36%).
Typically, increases in employment are usually a mixture already-known unemployed persons (job seekers) moving into employment, and new participants in the labour market (who were not active job seekers the month prior) moving into employment. What was most interesting about November’s lift in employment is that it was almost entirely drawn from the unemployed segment of the labour market, as the ABS noted in their media release: “In November, we saw a higher than usual number of people moving into employment who were unemployed and waiting to start work in October.”
Indeed, there was a large decline in the level of unemployment in November, down –27k (–4.3%). Falls of this magnitude are fairly uncommon, implying that the gross flows between various categories within the labour market – employed, unemployed, and those not actively participating in the labour market – are behaving differently than normal.
Why was this the case? The main candidate is softer labour supply. The participation rate dipped lower, from 67.1% to 67.0%, implying a measly +8.6k increase in the size of the labour force – the smallest increase recorded all year. In essence, there were very few new entrants in November, meaning employers could only satiate their labour demand via already-existing job seekers who were categorised as unemployed in October.
As a result, the unemployment rate fell sharply lower in November, from 4.1% to 3.9%, beating all expectations. Highlighting the sensitivity of unemployment to labour supply, if instead the participation rate had held flat from October – as per the consensus forecast – the unemployment rate would have held flat at 4.1%. We anticipate the participation rate will continue to fall moving into next year, but the pace and scale at which this occurs will need to be closely monitored, as it has clear implications for the likely path of the unemployment rate.
As we flagged last month, the months leading into year-end have exhibited a greater degree of volatility in recent years, driven by shifting seasonal patterns since the reopening from the pandemic. Amid this volatility, it is important to place the latest results in the context of multi-month trends – this is certainly how the RBA approaches its analysis to this set of labour market data.
In doing so, we view the general trend as being broadly consistent continued but gradual ‘normalisation’ of labour market conditions from earlier strength. This is mainly captured by the easing in employment growth and average hours worked returning to broadly around long-run trends. However, it is notable that the various measures of underutilisation have not softened in the way we would normally expect – the three-month average unemployment rate has been broadly unchanged for six months, while similar measures of underemployment and youth unemployment are at their lowest since late last year – suggesting the labour market remains somewhat tight.
That said, the extent to which this can be interpreted as posing upside risks to inflation (and hence the interest rate outlook) is limited in our view. This is corroborated by clear evidence of wages growth decelerating from its peak, even with the unemployment rate trending down since July, suggesting the labour market is closer to balance than what the RBA’s November forecasts might imply, raises the possibility that the NAIRU could be below 4% rather than the 4½% estimate by the RBA.
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