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Employment: the great bellwether for economic conditions

Much like the Micawber Principle, distilled from the ever-indebted Wilkins Macawber in Charles Dickens’ novel David Copperfield, if you have a job and barely sufficient income, the result is happiness, but if you don’t have a job and are indebted, the result is misery.* In short, our personal economic conditions are largely defined by our employment status.

Thus, if we have a job, employment data is not something we will track too closely. Nevertheless, it is an important lead indicator of the state of play in the broader economy.

Right now, the key data is inflation and the speed at which it returns to the RBA target band. The monthly CPI is discussed elsewhere in this edition of Stats Count and confirms inflation is on track for a return to a land where happiness might be attained. In terms of managing risks, the key point to note is services inflation is now the major driver of the inflation experience.

Why is that important to note?

Because services are mainly delivered by people and the services sectors are routinely more employment dense than other sectors of the economy. The tightness in the labour market post COVID has been feeding into the upward pressure on inflation.

A small increase in the unemployment rate to 4.1% in January 2024, from historic lows, can be seen as positive for inflationary pressure (but not so good for those who will sympathise with friend Micawber and who are among the extra 22,330 people who have joined the unemployment queue).

Also reflecting some easing of tight labour market conditions, the underutilisation rate which combines the unemployment and underemployment rates, rose 0.3 percentage points to 10.7%. This was 1.4 percentage points higher than its recent low of 9.3 per cent in November 2022, but 3.2 percentage points lower than before the pandemic.

Overall therefore, the economy is using the labour available to it more efficiently than pre-pandemic. The ratio of employment to working age population (unemployment rate) is always the main focus.

However, the other labour market efficiency measure is the extent to which the time of the employed is being fully deployed in work (underemployment rate). In some respects, this measure is more important, because it is conceivable many people could be in jobs but receiving no working hours, as occurred during the pandemic.

As a result of the limitations of the headline labour market efficiency measures, we turn our attention to the irrefutable guide to what’s happening in the labour market: hours worked. Seasonally adjusted monthly hours worked fell by 2.5 per cent in January 2024.

It is important to put this in context, with the ABS commenting:

“January is a popular month for people to take annual leave. Compared with January surveys before the pandemic, we again saw a higher proportion of employed people working no hours because they were on leave. We have seen a similar pattern in recent January surveys, which may point to further changes in labour market dynamics around the summer holiday period,”

However, as can be seen in the above graph the fall in hours worked in January continues the general slowing since mid-2023.

Other data sources can also shed some light on conditions in the labour market. The quarterly job vacancy rate data when combined with the unemployment rate provides a good indication how tight the labour market remains.

The most recent data shows the ratio of vacancies to unemployment declining to 0.68 in the December quarter of 2023, down from a peak of 0.92 in the September quarter of 2022. As can be observed, this also tracks the NAB quarterly business conditions survey, which in December had 79.9% of survey respondents indicating labour was a constraint on output. That was down from a peak of 90.5% in the September quarter of 2022.

It is notable that a ratio of 1.0 would mean for every job vacancy there was only one possible candidate. The smaller the ratio, the greater the number of possible candidates for every job vacancy.

The RBA has now entered this public discussion on the level of spare capacity in the economy as part of the recently agreed changes with the government on the conduct on monetary policy. In the recent Statement on Monetary Policy in February 2024, the RBA published a new section, with a detailed assessment of full employment and potential output.

A comprehensive list of full employment indicators all point to some easing of labour market conditions.

As can be seen in the above chart, the orange dots representing outcomes in October 2022 were generally at the tightest end of the spectrum. The blue dots represent current outcomes and show all indicators easing.

The RBA statement noted:

“The easing in conditions is most evident in job ads and employment intentions, which tend to be leading indicators. Overall, most indicators appear ‘tight’ relative to historical norms (with the historical range given for each indicator by the span of the graph). But there is nevertheless a degree of uncertainty around this assessment, which is likely to increase as the economy moves closer to balance.”

This ‘easing of conditions’ should see the supply side of the economy continue to improve and reinforce the trend reduction in inflation discussed elsewhere in this edition of Stats Count.

The trick for the nation’s econocrats is to ensure there is a soft landing. Our society will not tolerate too many Micawbers entering the penury of the modern debtor’s prison that is being trapped in a loveless mortgage, with insufficient income to stave off an unwelcome end in the poor house.

* Actually, what Micawber specifically said was:

“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.”

DICKENS, C, (1860) ‘The Personal History, Adventures, Experience and Observation of David Copperfield the Younger of Blunderstone Rookery’

Posted Date: March 13, 2024

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