May Labour Force Preview
April’s labour market data surprised materially to the downside, possibly due to extra holiday-related weakness tied to the survey’s timing over Easter. We therefore expect a bounce-back in May, though the underlying trend is looking a bit softer.
- The April Labour Force Survey (LFS) surprised materially to the downside across most fronts, namely a decline in employment (–18.6k) and a jump in the unemployment rate to a post-pandemic high of 4.5%.
- Much of this weakness might be due to an ‘abnormal seasonality’ – this year’s April LFS ran over the full Easter long weekend, and so it may have captured a bit more Easter holiday-related softness in the raw data that was not fully removed by seasonal adjustment. There may also be some genuine weakness laying underneath this source of noise.
- For the May LFS, we have pencilled in a bounce-back in employment of +45k as holiday-related softness unwinds. With the participation rate ticking back up to 66.8%, we expect the unemployment rate will fall from 4.5% to 4.4%.
- While this forecast for employment looks strong on the surface, this would only amount to an average monthly gain of around +13k/mth over April and May, which is a clear step down from the +30k/mth pace that emerged in the first few months of this year.
- We expect the May LFS to show that the brief stint of firming employment growth near the start of the year is fading, and that there are early signs of a genuine re-softening in the labour market emerging. But if April’s decline was driven entirely by Easter/noise, there could be some upside risk to our forecast for May.
Recap of the April LFS
The April LFS surprised materially to the downside across most fronts. Employment fell by 18.6k in the month, against expectations for a modest increase. This decline halted the nascent uptrend that had been forming for employment growth, with the three-month average pace ticking down from 1.6%yr to 1.5%yr and the employment-to-population ratio falling 0.2ppts to 63.7%. The most eye-catching result was a significant jump in the unemployment rate from 4.3% to 4.5%, the highest since the ‘delta’ COVID-19 outbreak in late-2021.
We emphasised most in the above paragraph because other parts of the data surprised in the other direction. Despite a –0.1% fall in employment, monthly hours worked in managed to bounce 0.8% higher. In a similar vein, the underemployment rate – which captures people looking to work more hours – dipped to 5.8%.
Why was employment so much weaker than expected?
As we noted in our recap, the weakness in employment might be related to an ‘abnormal seasonality’ in the April LFS. Recall that each survey is based on a two-week reference period within the month. Historically, it is relatively uncommon for April’s reference weeks to run over the full Easter long weekend (Good Friday and Easter Monday). Over the 49–year history of the LFS, 23 years (47%) have captured one public holiday, 15 years (31%) have captured none, while 11 years (22%) have captured both.
This year was one of those more uncommon years where the survey’s reference weeks ran over the full Easter long weekend. While the ABS notes that they control for Easter in their seasonal adjustment, in the context of shifting seasonal trends, it is possible that a bit more holiday-related softness is still being captured in the raw data – beyond the ‘average’ Easter – that is not fully removed by seasonal adjustment.
When this has happened in recent years of this ‘double overlap’, we have tended to see weaker employment in April, followed by a rebound in May. Of those who are still employed, we also tend to see more of them work fewer or zero hours. We saw the start of that pattern once again, although interestingly, April’s fall was much larger this time around, as seen in the chart below.
This could ultimately just be noise, unrelated to the timing of the survey, but this may also indicate that there is some genuine weakness laying underneath. This will ultimately be confirmed with the May reading – we think a bounce-back is likely as the noise unwinds, the size of which will give us a better idea of the underlying trend.
But why was monthly hours worked so strong?
There are two main contenders: (1) the monthly hours worked measure was not impacted by the Easter seasonality; and (2) there have been shifts in leave-taking behaviour in recent years.
On the first point, unlike the employment statistics which relate only to the specific two-week reference period that the survey focuses on, the monthly hours worked is designed to be a true monthly measure. In effect, monthly hours worked is a combination of the hours worked recorded in the reference period of the survey, plus imputations for hours worked for the rest of the month not directly covered by the survey. In doing this process, the ABS accounts for the effect of public holidays on hours worked, regardless of whether they landed within the reference weeks or outside of the reference weeks.
If there is some residual seasonality being captured in the employment statistics, the monthly hours worked measure may provide a clearer steer on actual labour demand in the month.
On the second point, the ABS have noted in the past that there has been some changes in leave-taking behaviour in the years since the pandemic, even after accounting for the seasonality with holiday-timing, stating that “there was a much lower-than-usual number of people took leave around the Easter holidays, which contributed to a substantial increase in the seasonally adjusted hours worked.”
As we discussed in a follow-up note, it is equally important to recognise that the bounce in hours worked in the month not only reflects strong labour demand, but also strong labour supply. Households facing higher mortgage costs and broader cost-of-living pressures are seeking to offset weaker real incomes by supplying additional labour – either by entering the workforce, increasing hours in their current job, or taking on secondary employment.
Employers may have some capacity to offer those hours at this early stage. However, as the shock from elevated inflation and higher interest rates continues to weigh on consumer demand, we may start to see employers be less willing to offer additional hours to workers who want them. A key difference from the 2022–24 episode this time around will be that the ‘care economy’ is not ramping up in the same way. Workers might therefore find it harder to get the extra hours they seek, with the result being a more visible increase in labour market slack and softer wages growth..
What are we expecting for May?
For May, we have pencilled in a bounce-back in employment of +45k as the Easter-related abnormal seasonality fades. With the participation rate ticking back up to 66.8%, we expect the unemployment rate will fall from 4.5% to 4.4%.
While this forecast for employment looks strong on the surface, this would only amount to an average monthly gain of around +13k/mth over April and May, which is a clear step down from the +30k/mth pace that emerged in the first few months of this year, when the recovery was initially starting to take shape. Even a +45k in April would still see employment growth continue to slow on a three-month average basis. Therefore, we expect the May LFS to show that the brief stint of firming employment growth near the start of the year is fading, and that there are early signs of a genuine re-softening in the labour market emerging. But if April’s decline was driven entirely by Easter/noise, there could be some upside risk to our forecast for May.
As a sidenote, there still appears to be some residual bias in the ABS’ population projections that are feeding into the estimates of employment. Regular rebenchmarking to official population estimates will take place in the May LFS, so we could see larger-than-usual revisions to employment figures. Ratio measures, like the employment-to-population ratio, are not impacted by this, so it will be important to keep an eye on it in the May LFS too.
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