Here's what Westpac thinks is driving Australian unemployment up, and why it's unlikely to fall this year

WAKIL KOHSAR/AFP/Getty Images
  • Australia has created over 330,000 jobs in the past year. However, the number of unemployed Australians is now higher than a year ago, currently standing at 741,000.
  • Rather than being driven by more women entering the workforce, Westpac says the increase has been driven by slower employment growth among men.
  • It sees Australia’s unemployment holding around current levels for the remainder of the year, with upside risks.

Australia created over 330,000 jobs in the past year, including 22,600 in April.

However, even with that solid increase, the number of unemployed Australians is now higher than a year ago, currently standing at 741,000.

At 5.6%, Australia’s unemployment rate is now clearly trending higher, and moving further away from the point where wage pressures are expected to lift.

While others, including the Reserve Bank of Australia (RBA) and federal government, think that unemployment will gradually decline over the quarters ahead, helped by continued strength in hiring, not everyone agrees.

Morgan Stanley, for one, thinks that rather than decline, Australia’s unemployment rate will rise to 5.8% in the period ahead, keeping wage and inflationary pressures muted and household spending soft, leading to a slowdown in the Australian economy.

As such, it doesn’t see the RBA lifting interest rates until the second half of 2019 at the earliest.

Justin Smirk, senior economist at Westpac, shares a similar view to Morgan Stanley, suggesting that rather than declining in the second half of the year, Australia’s unemployment will likely remain around current levels, with risks tilted to the upside.

“We are expecting the unemployment rate to hold around 5.5%-5.6% till end 2018,” he says.

“And even if employment outperforms expectations, rising participation is likely to prevent fall in unemployment.

“In fact, it is possible that the unemployment could rise with our forecasts for employment due to a rise in participation.”

Westpac Bank

Australia’s labour force participation rate, measuring the percentage of working age Australians either in employment or who are actively seeking work, currently sits at 65.6%, above the 65% level it sat one year ago.

That reflects that Australia’s labour force — the amount of Australians either in employment or who are unemployed but looking for work — has risen dramatically over the past year, increasing by 341,900, more than the 332,100 lift in employment.

That explains why unemployment, at 741,000, is now at the highest level since March last year despite strong employment growth, increasing by around 20,000 over the past year.

Smirk says the increase in the size of Australia’s labour market has largely been driven by more women entering the workforce, outpacing a smaller increase for men.

“The gains in female participation has been significantly greater than that for males,” he says. “The female labour force grew 204,400 in the year to April compared to just 137,500 for males.”

Westpac Bank

However, despite the surge in women entering the labour force, rather than contributing to the recent lift in unemployment, it’s been slower employment growth among men that has led to the latest increase.

“The recent rise in unemployment is more about lack of employment for men rather than too many women entering the workforce,” Smirk says.

“As employment stalled in 2018 participation, and thus growth the labour force, also eased, particularly for females.

“The male labour force grew 91,400 in six months versus a 58,000 rise in employment while the female labour force is up 97,300 versus 93,600 in employment.”

So male employment has failed to keep pace with the increase in the number of men in the labour force.

Should growth in the size of the labour force continue to remain around the same pace as employment, Smirk says that should keep Australian unemployment stuck in the mid-5% region in the second half of the year.

Westpac Bank

“This dynamic relationship, particularly by females, is behind our expectation that the unemployment rate will hold around current levels despite our forecast for employment growth to recover to an around a trend pace,” he says.

“It also means that if employment disappoints expectations, it is unlikely there will be a surge in unemployment as declining participation will be an offset as long as the weakness in employment is more about female employment rather than male employment.

“If moderating employment is driven by employment losses in construction, manufacturing and transport — sectors rich in male employment — then we may see a meaningful rise in unemployment.”

Given the view that unemployment is likely to remain steady with risks tiled to the upside, Smirk says a much-anticipated acceleration in Australian wage growth — seen by many as a prerequisite to help boost inflationary pressures — is unlikely to arrive anytime soon.

“Given the recent rise in participation, we are confident the unemployment is likely to be around 5.5%-5.6% to end 2008 which will lead to an easing in the labour gap to around a neutral setting,” he says, referring to Westpac modelling on the outlook for Australian wage pressures.

“Some commentators have noted the recent improvement in the labour hard to find questions from the various business surveys.

“We caution that this is not clear signal we are on the cusp of a wage acceleration.

“Even with a flat unemployment rate from here, the labour gap is set to ease to a more neutral setting and this should see a easing in how hard it is to find labour.”

That goes someway to explaining why Westpac doesn’t expect the RBA to lift its official cash rate until 2020 at the earliest, later than financial markets and current consensus from economists.

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