This chart explains why Australian unemployment hasn't fallen much despite booming jobs growth

Noel Vasquez/GC Images
  • Australian employment grew by 420,700 in the 12 months to February.
  • Over the same period, the size of Australia’s workforce grew by 406,700.
  • This has slowed progress in lowering unemployment, contributing to ongoing weakness in wage pressures.

Australian employment surged by 420,700 in the 12 months to March, close to the highest level on record for a comparable period of time.

Under normal circumstances, such a scenario would normally lead to a steep decline in unemployment.

The only problem is that it hasn’t.

According to the ABS, Australia’s unemployment rate currently sits at 5.6% in seasonally adjusted terms, down just 0.2 percentage points on the level reported in February 2017.

Even with employment growing in each of the past three months, extending the streak of job creation to a record-breaking 17 months, unemployment has actually risen since November, increasing by 0.2 percentage points.

So what gives?

Why, with near-record hiring over the past year, is unemployment still sitting in the mid-5% region?

This chart from Morgan Stanley helps explain why.

Source: Morgan Stanley

It shows Australia’s unemployment rate, coloured in grey, overlaid against annual employment growth and Australia’s labour force participation rate, simply the percentage of Australians of working age who are either in or actively seeking work.

Helping to explain why unemployment hasn’t fallen further despite booming employment growth, the percentage of working age Australians in the labour force has also risen sharply, jumping by 406,700 over the past two months in seasonally adjusted terms.

With employment growing 420,700 over the same period, it’s meant that the total number of unemployed Australians has fallen by only 14,000 since February last year.

Supply of labour has nearly kept pace with demand, in other words.

As Morgan Stanley explains, the sharp lift in labour force participation has been driven by two distinct factors — a lift in immigration and stronger job market conditions encouraging those not previously in the labour market to actively look for work.

[The increase has been] due to a strong increase in labour supply, as migration boosts the size of the population — 250,000 in the year to June 2017 — and more people, especially females and retirement-aged, returning to or not leaving the workforce.

“This has seen both the unemployment and underemployment rates tick up to 5.6% and 8.4% respectively as of February.”

And with increasing numbers of workers entering the labour market, Morgan Stanley says this has contributed to ongoing weakness in worker wages, keeping unemployment above the 5% level many believe it will need to fall to before wage pressures begin to build.

“[This] leaves the prospect of an increase in wage growth looking unlikely in the near future,” it says.

“Despite strong jobs growth, wage pressure in the labour market remains minimal.”

NOW READ: Economists think Australia’s jobs boom continued in March

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