Australia’s labour market has been on a tear in recent months, adding 141,100 jobs in the three months to May, the fastest pace of hiring since November 2004.
In unison with strength in other alternate labour market indicators such as job ads, internet vacancies, PMI reports and the National Australia’s Bank’s monthly business survey, it has helped to bolster confidence that labour market conditions are strengthening, and fast.
However, there is still some doubt as to whether the recent hiring spree actually reflects what has been happening on the ground.
As anyone who had been following the ABS jobs report closely over the past few years can attest, it tends to be a little wild, particularly the seasonally adjusted data series.
It’s been accused of both understating and overstating employment growth in the past, and, despite the strength seen in other indicators — something that should help to bolster confidence that labour market conditions are improving — lingering doubts remain over its accuracy.
After years of wild monthly swings, the scepticism is understandably hard to shake among some investors and analysts.
In order to determine whether the recent strength in the ABS data is merely a mirage or indeed the start of strengthening trend, economists at the National Australia Bank (NAB) have been peeling away the layers of the jobs report, looking at the factors that have driven the recent acceleration in employment growth.
And its assessment?
In its opinion, the strength in the data is probably not too far off what’s been happening on the ground.
“Our conclusion is mostly yes,” economists at the bank wrote on Monday.
“We dissected employment growth into its sample components to gauge whether recent growth has been ‘real’ or not, (and) we found that most of the jobs growth over the past three months has been driven by the common sample and not from sample rotation effects as had occurred in the past during months of strong employment gains.”
As a reminder, the ABS jobs survey is derived from eight sample groups that are interviewed over an eight-month period. An incoming sample group enters the survey each month, replacing the group that has been in the survey for the longest period.
In the past, incoming groups with a higher proportion of employed workers than the group they replaced often led to enormous jobs growth being reported, but not on this occasion. Based on the NAB’s assessment, the employment growth has come from within the existing sample groups, adding to confidence that hiring is truly accelerating.
“The improvement seen in the labour market of late has likely had a large element of reality to it, with sample rotation effects not the culprit behind recent jobs growth,” it says.
This chart from the NAB shows what has been driving the recent surge in employment growth. The impact of the incoming sample rotation is shown in blue, with the common sample shown in red and grey. The unmatched sample are those who answered in the latest survey but not in the survey before, while the matched survey are those who participated in both surveys.
However, before you start cracking the champagne in anticipation of finding a new job or asking your boss for a pay rise, the NAB did sound a note of caution, suggesting that some of the improvement may have been driven by improved response rates from those groups already in the survey.
As the chart above shows, a lot of the employment growth in the past two months came courtesy of unmatched survey respondents.
“A large chunk of the jobs growth has also come from changes within the common sample response rates,” the NAB says.
“While this unmatched change in the common sample is likely more reflective of the actual level of employment in the labour market, it is not necessarily reflective of actual employment growth and should be read more as a correction to prior weak months when individuals failed to respond to the labour market survey.
“That overall suggests the pace of employment growth will slow in the months ahead.”
So previous lacklustre jobs growth may have been driven by lower response rates, and with those response rates now improving, the trend has been reversed, leading to some of the spectacular gains seen in the past few months.
While the NAB says that will likely lead to slower jobs growth in the months ahead, it says that an industry breakdown of recent employment growth suggests it is broad-based with employment growing in industries that account for 74% of employment, helping to bolster the view that, much like the lead indicators on the labour market, conditions are getting stronger.
Based on what it’s seeing in its Australian business confidence survey, the NAB believes trend employment growth is probably around 20,000 per month, below the 25,000 level that’s been reported by the ABS.
Although lower, the NAB says that level of growth “should still be sufficient to keep the unemployment rate broadly stable at around 5.5-5.75% for the period ahead”.