June Labour Force Preview
Forward-looking business survey measures point to sluggish employment growth ahead. Rising underemployment also suggests that slack is building more broadly across the labour market.
- The May LFS gave us a clearer read on the underlying trend now that recent sources of noise have faded. With employment growth effectively stalling over April and May, we think some genuine weakness is starting to form.
- For June, we have pencilled in a lift in employment of 15k, with the participation rate steady at 66.7% and the unemployment rate remaining at 4.4%. Forward-looking business survey measures point to sluggish employment growth ahead.
- The ABS noted a “systems error” in the initial release of the May LFS leading to the incorrect underemployment data being published. The corrected figures materially change the interpretation of the recent trend from broadly sideways to rising materially.
- New unofficial underemployment measures have also lifted notably over recent months, well ahead of and by far more than the official underemployment rate. The longer these trends persist, the stronger the case that slack is building more broadly across the labour market..
Looking through the noise in recent data
The May LFS was in line with our forecasts: employment bounced back +40.3k while the unemployment rate edged down from 4.5% to 4.4%. We had previously flagged two major sources of noise: (1) large downward revisions to earlier employment estimates following re-benchmarking to new population estimates; and (2) the unwind of an ‘abnormal seasonality’ linked to the April survey being conducted over the Easter long weekend.
May’s data gave us a clearer read on the underlying trend now that these sources of noise have faded – and in our view, genuine weakness appears to be forming. After expanding around +26k/mth in Q1, employment growth effectively stalled over April and May. On a three-month average basis, employment is growing well below the pace of the working-age population (1.1%yr versus 1.8%yr), leaving the employment-to-population ratio around 0.7ppts below its recent historical high. Since the participation rate has held up a bit better – only 0.4ppts off its peak and averaging about 66.7% so far this year – the unemployment rate has continued to grind higher.
The brief recovery around the start of the year has well and truly faded. Higher inflation and recent interest rate rises will still take time to fully work its way through to the economy and the labour market, but for now, the labour market is looking weaker than it did earlier in the year..
What are we expecting for June?
We have pencilled in a lift in employment of 15k, but with the participation rate steady at 66.7%, we think the unemployment rate will also remain at 4.4% (though we have it rounding up at two decimal places). While the contemporaneous relationship between the LFS and other partial indicators is patchy at best, the nudge lower in job ads and softness in the monthly business surveys give little reason to expect a significant upside surprise.
More importantly, forward-looking business survey measures point to sluggish employment growth ahead. NAB’s Q2 business survey reported a sizeable decline in year-ahead employment expectations, the –9pt fall being the largest since the pandemic. This series is typically more stable than monthly and quarterly measures of current employment and near-term employment expectations, and may be a more useful guide to medium-term shifts in hiring. Ordinarily, a decline of this size would signal more sustained weakness to come. While there are some questions around the timing of the quarterly survey, which was in the field when uncertainty around the Middle East conflict was particularly high, this sort of volatility usually has much less impact on year-ahead employment plans than current employment or near-term employment expectations. In any case, given the re-escalation in tensions in recent weeks, these concerns might not have fully faded.
We remain comfortable with our view that slow employment growth will see a further rise in unemployment over the rest of the year. This also reflects labour force participation holding up better than employment, a notion supported by the recent rise in underemployment discussed below.
Notable revision to the May LFS
One-and-a-half weeks after publishing the May LFS, the ABS issued a notice identifying an error in the underemployment data. The ABS later clarified this as a “systems error”, meaning the originally published underemployment data was incorrect. It has since issued revised estimates and difference is quite stark.
Recall that underemployment largely refers to part-time workers wanting more hours, along with a smaller group of full-time workers who worked part-time hours during the survey period. May’s underemployment rate was revised up ½ppt from 6.1% to 6.6%, the highest since August 2024.
Recent months were also revised up to a lesser extent, changing the interpretation of the recent trend from broadly sideways to rising materially. As noted below, supplementary unofficial measures of underemployment suggest the large rise in May is more than noise.
The lift in underemployment likely reflects a mix of both demand-side and supply-side factors. As noted above, employment growth and business surveys suggest labour demand is softening. At the same time, high inflation and rising interest rates are likely inducing more workers to search for additional hours of work to offset cost-of-living pressures. Both sets of factors could be driving increased labour market slack and may be a pointer to higher measured unemployment down the track.
Primer on the 'u-series'
The ABS is expanding its suite of underutilisation statistics into a broader group of measures dubbed the ‘u-series’ that may provide more insights into labour market slack. The headline unemployment and underemployment rates currently reported in the LFS are based on specific criteria around an individual’s availability and their efforts to search for work or additional hours. But many individuals that are notionally unemployed or underemployed may fall just outside of those definitions – for example, because they searched for work passively rather than actively, or because they are available within four weeks but not the last week.
The ‘u-series’ expands these availability and search criteria to measure broader groups of underutilised workers. For now, the measures remain ‘unofficial’ while the new collection model is rolled out. The ABS expects the ‘u-series’ to become the official headline estimates of underutilisation by mid-2027.
Longer time series will be needed before we can properly assess these measures. Once that history is provided, we will publish a note explaining the differences between the measures in more detail and how we intend to incorporate them into our own analysis.
Unofficial underemployment measures also point to growing slack
There are four ‘u-series’ underemployment measures, labelled UD-1 through to UD-4. The narrowest measure is UD-1, with each successive grouping loosening the criteria in some way to capture a larger group of underemployed persons, with UD-4 being the broadest. Specifically, from narrowest to broadest, the definitions are:
- UD-1: Prefers and actively looked for more hours, available last week.
- UD-2: Prefers and looked (active or passive) for more hours, available within 4 weeks.
- UD-3: Prefers more hours, available last week (regardless if looked).
- UD-4: Prefers more hours, available within 4 weeks (regardless if looked).
Over the past few months, some of these ‘u-series’ measures of underemployment have lifted notably, well ahead of and by far more than the official underemployment rate, as seen in the chart below. Since February, the ‘broadest’ measure (UD-4) has risen 0.6ppts, whereas the ‘narrowest’ measure (UD-1) has posted a larger increase of 0.9ppts. This not only tells us that there has been an increase in total underemployment in the broadest sense, but there has also been shift within the underemployed – more are now currently available and are more actively searching for more hours.
Given the unofficial and provisional nature of this data, we would not want to overemphasise these readings while the ABS is still rolling out changes to the LFS. But the longer these trends persist across both official and unofficial data, the stronger the case that slack is building more broadly across the labour market
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