CBA: Australia's jobs report is stronger than it looks

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Australia’s jobs report for June, released on Thursday, was its usual volatile self.

Behind the headline increase in employment of 7,900 was a huge divergence between full-time and part-time hiring. Full time employment surged higher, jumping by 38,400, offsetting a 30,500 decline in part time workers.

With a small lift in labour market participation, the increase in employment was not enough to prevent the unemployment rate ticking up to 5.8% from 5.7% in May.

Could have been better but it could have been worse was the prevailing theme expressed by markets in the immediate aftermath of the release, particularly given concerns that still surround seasonal adjustments by the ABS.

Well, perhaps the headline figures — a small increase in employment and a lift in unemployment — actually understated the strength of the June report.

Gareth Aird, senior economist at the Commonwealth Bank, believes it did.

Here’s a snippet from a research note released by Aird following the June report explaining why (our emphasis in bold):

Each month the ABS surveys about 26,000 households for the labour force release. One-eighth of the group, about 3,250 homes, leave the survey each month and a new 3,250 household are ‘rotated’ in. This has the potential to cause big volatility in the numbers because on any given month the employment status of the new households rotated in could be quite different from those rotated out. We were expecting a soft headline number today because the group being ‘rotated out’ had a much higher employment to population ratio than then the average of the sample. That is, the odds lay with the incoming group having a lower employment to population ratio than the group going out.

The ABS stated that the group being ‘rotated’ in for the June employment report had a lower employment to population ratio than the group it replaced (63.1% vs 63.6%). They also went on to add that the proportion of full-time workers was also lower for the group being rotated in compared with the group being rotated out.

In other words, the net impact of group rotation in June was a negative for both the level of employment and the number of full-time workers. Yet despite this, the overall level of employment lifted in June and the number of full-time workers rose.

Had it not been for the survey rotation, the June result could have been even stronger, in other words.

“To us, that suggests a stronger underlying pulse of job creation than today’s headline numbers imply,” says Aird.

In a separate report received following the June release, Tapas Strickland, an economist at the National Australia Bank, notes that survey rotation effects are likely to impact the upcoming July jobs report too.

“Rotation effects may also be significant in next month’s report (reported by the ABS as being able to “lead to a decrease in employment”), though are not expected to be as significant as they had the potential to be this month,” he says. “They will again act to bias the employment reading lower and the unemployment rate higher.”

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