Unemployment and Participation

Tomorrow the ABS will release the latest labour force numbers, bringing us up to July. We may see more growth in the unemployment rate, if only due to some methodological changes in how labour force participants are counted.

The labour force, as quantified by the ABS, includes all those who are employed part-time or full-time and all those who are looking for part-time or full-time work. The unemployment rate is the proportion of the labour force who are looking for work. It does not include everyone who is unemployed, only those who are actively looking for a job.

The participation rate is simply the proportion of the working age population who are in the labour force (that is, employed or looking for work).

As we noted last month, the labour force numbers over the past year have been somewhat perplexing, because rising unemployment has been accompanied by decreasing participation.

One possible reason for this is that more and more unemployed people are giving up on looking for work, and are therefore no longer in the "labour force". As a result, these people would no longer be included in the unemployment rate (because it only includes those actively looking for work). On the flip-side, the decrease in the participation rate can’t be explained by unemployed people finding jobs, because they would still be counted as part of the labour force, and the participation rate would not change.

The two graphs below show how this works. Let’s assume that the decrease in the participation rate is due to unemployed people giving up on finding work. The participation rate at June 2013 was 65.1 per cent. The first graph shows what the size of the labour force would look like if that rate was sustained through to June this year, compared with what the actual size has been with the participation rate fluctuating. Essentially, the gap between represents all of those people who have given up looking for work and so are not counted as unemployed.

Labour force, with constant and actual participation rate

So what would happen if these people remained in the labour force and were counted as unemployed? The below graph shows how this would affect the unemployment rate. Clearly, it would be higher.

Unemployment rate, with constant participation rate and actual

Tomorrow the ABS will report the labour statistics with some methodological changes that may increase the size of the counted labour force.

ABS adding two new categories of activities that indicate a person is looking for work: 'had an interview with an employer for work' and 'taken steps to purchase or start your own business'. This will have a positive effect on the size of the labour force, as explained by the ABS:

It is anticipated that the inclusion of the two new 'active' job search steps (attending an interview and steps to buy or establish a business) would slightly increase the number of people counted as unemployed (who may be considered not in the labour force under the current questionnaire depending on the person's other job search activities).

However, other changes may have a negative effect on the labour force, as explained below.

two steps which are currently 'active' steps will no longer be considered sufficient for a person to be classified as actively looking for work. These are 'checked notice boards' and 'been registered with Centrelink as a jobseeker'.

All in all, it is difficult to say how it will affect the rates. We will see tomorrow.