Does Australia have more unemployment than the USA?

As was widely reported a couple of weeks ago, the latest round of labour statistics from the Bureau showed another increase in the unemployment rate. As we predicted, the rise was partly attributable to a change in reporting methodology, which was evident in the comparable increase in the participation rate (see our previous post for an explanation of this). Of course, undoubtedly, the statistic increase is also part of a continuing real increase in unemployment. Methodological changes aside, unemployment is on the up in Australia, and with our macroeconomic settings remaining unchanged, we can probably expect it to keep climbing a bit further yet.

One point that was not mentioned in the coverage of the July labour figures is that they bring the unemployment rate above that of the United States for the first time since before the global financial crash. On face value, this is a pretty sad state of affairs: despite coasting through the downturn, while unemployment ballooned across the Pacific, we have become complacent and seen joblessness creep up on us.

Unemployment rate, Australia and USA, 2004-2014

But, while rising unemployment in Australia is a genuine concern, the recovery in America is not quite as fantastic as the headline unemployment rate might have you believe.

As we've noted previously, the unemployment rate has significant limitations in expressing what is going on in the labour market. It is only a measure of those who are looking for work (expressed as a proportion of the entire labour force), and so excludes those who have given up looking for work.

If we look at America's participation rate over the same period, we can see that less and less people are participating in the labour force. That is, less of their working-age population are working or looking for work. Basically, people are giving up looking for work, and are no longer factored into the unemployment rate. This is a terrible problem for the US economy, because it's a sign of entrenched long-term unemployment.

Participation rate, Australia and USA, 2004-2014

If we look at the employment to population ratio, we start to get a clearer picture of what is going on in America. This figure cuts out the impacts of fluctuations in the size of the labour force, so gives us a good idea of the proportions of people who are employed and unemployed. This rate plunged after the financial crash and, apart from recent months of growth, has never really recovered. There is a slight overall increase, but nothing nearly as strong as the "recovery" shown in the unemployment rate.

Employment to populuation ratio, Australia and USA, 2004-2014

And as for Australia, the complacency of policy-makers is seen in full light. We have slowly rising unmployment at the same time as declining participation, perhaps not as extreme as in America, but enough that we should start to see some shifts in macro policy.