How can jobs and joblessness both be going up?

Despite more than two years of higher interest rates, meant to slow down spending and activity in the economy, unemployment in Australia remains unusually low.

The nation’s chief number-crunchers, the Australian Bureau of Statistics (ABS), said there were 16,000 more people employed in October, while the number of unemployed climbed by 8000. The unemployment rate stayed at 4.1 per cent for the third month in a row – still very low by the standards of the past 50 years as well as earlier slowdowns.

You might think when employment rises, unemployment has to fall by the same amount – and vice versa. But here’s the thing: they can both rise or fall at the same time.

Low unemployment rate is one of the signs of an economy running hot.Credit: Matt Davidson

How is this possible? Because there’s a third factor: the proportion of people who choose to be in the labour force – either by having a job or actively looking for one. If someone is looking for work and doesn’t have any, it means they’re unemployed, but they’re still counted as part of the labour force.

Usually, more people start seeking a job if the economy and the jobs market are both thriving. Why? Because they believe there’s a better chance of finding a job. By the same logic, if the economy is slowing and the jobs market is worsening, people are less likely to even try searching for a job. The labour force can also grow if the population blossoms, but generally, the better the economy and jobs market, the more people will choose to “participate” in the labour force, helping to fatten it up.

So if the Reserve Bank has pumped the brakes on the economy, and consumer spending is still weak, how has the participation rate increased?

Partly, it’s because overall spending in the economy – including spending by the government – is fuelling demand and keeping it above the level the economy can supply without pushing its limited resources, and therefore price pressures. It’s a good thing that people who want a job still have a good chance of finding one, but the relatively low unemployment rate will discourage the bank from starting to cut interest rates too soon.

That’s because a low unemployment rate is one of the signs of an economy running hot, and therefore at risk of facing inflationary pressures. The bank will be worried demand for goods and services hasn’t weakened enough, and that it might even start soaring. That would throw a spanner in the works for their crusade against inflation.

Our measure of unemployment ignores the people who have had to settle for a part-time job when they’d much rather have a full-time job.

But what exactly is unemployment? It’s measured as the proportion of unemployed people in the labour force. Or, put another way: the proportion of unemployed people out of all the employed and unemployed people in the economy.

Then there’s the participation rate, which we can calculate by looking at all our “working age” people (in Australia, this is everyone over the age of 15 – including those who, really, are probably too old to work) and the proportion who are in the labour force (working or looking for a job). In most other places, working age is defined as those aged 15 to 64.

If more working-age people decide to start looking for work, it’s possible to have both more people unemployed (the jobseekers who don’t find a job) and more people employed (those who do), as well as a higher participation rate: more working age people, well, working – or looking for a job.

We can also look at the split between full-time and part-time workers. If there are more full-time workers, that’s a sign of a strong labour market. A growing share of part-time workers, meanwhile, is usually a warning that the market for labour is weakening. Over the past year, the share of part-time workers has fallen from about 42 per cent to 31 per cent. More people, and a greater proportion, are working full-time than they were a year ago.

Part-time jobs aren’t necessarily worse than full-time jobs. For some people – such as students, semi-retired people and parents of young children – a part-time job aligns perfectly with their life stage or preferences. It’s only a problem for those who want a full-time job but can only find a part-time one.

Anyone who does at least an hour of work every week is counted as employed. That’s been the case for decades and conforms with the international statistics conventions set down by the United Nations International Labour Organisation in Geneva.

Michele Bullock and Andrew Hauser have committed to balancing inflation and unemployment.Credit: Alex Ellinghausen

But it does mean we tend to understate the full extent of joblessness. Our measure of unemployment ignores the people who have had to settle for a part-time job when they’d much rather have a full-time job. This is especially the case as part-time employment has risen since the 1960s.

It’s why the bureau has, in recent decades, been calculating the rate of underemployment: the proportion of people in the labour force who have been working, but would have preferred to work more hours a week than they were able to find.

By adding together the underemployment rate and the unemployment rate, we get the underutilisation rate. This gives us a broader measure of unemployment and the health of our labour market. In October, the underutilisation rate was 10.4 per cent: a touch higher than at the same time last year.

How do we know all these numbers? The ABS conducts a monthly survey. It has a very big sample of households across Australia – usually about 26,000 – and someone from each of these households is asked about the labour force status of each person over the age of 15 under their roof.

The survey sample is split into eight groups, with each group staying in the survey for eight months. One group rotates out every month and is replaced by a new group rotating in. The ABS collects the information through trained interviewers who survey households either face to face or over the phone, and sometimes via an online self-completion form, asking about 70 questions.

While these measures aren’t perfect, and can be confusing, they act as a thermometer for our jobs market. There’s no doubt the pulse is weakening, but so far, there’s enough sign of strength to keep most of us from getting worked up.

Ross Gittins unpacks the economy in an exclusive subscriber-only newsletter. Sign up to receive it every Tuesday evening.