Australia’s unemployment rate is worse than it looks: why workforce participation is falling

Australia’s unemployment rate, released yesterday, is worse than it looks.

Sure, unemployment is steady at 5.8%.

If you count by jobs, December saw 31,000 full-time jobs lost and just 9000 part-time jobs created.

The reason unemployment is steady is because the number of Australians either in the workforce or looking for work dropped by 0.2% to 64.6%, its lowest level since 2005. Without that drop, Australia’s unemployment rate would be 6.0%.

Australia’s participation rate, the number of Australians aged 15 and over either looking for work or in the workforce in some capacity, has been dropping for close to a decade. That could be because jobseekers are getting discouraged and just ‘giving up’, joining the ranks of what are commonly called the hidden unemployed, or it could be because people are choosing to do things other than work.

And while some decline in our participation rate is unavoidable because of our ageing population, some of it points to wasted potential, Bank of America Merrill Lynch chief economist Saul Eslake tells SmartCompany.

He says the participation rate peaked during the financial crisis, but has since been on the decline.

There are a few reasons for this.

“The first is the impact of demographic change. More people are in older age groups where workforce participation has traditionally been lower.”

However, he says, this has been offset by a dramatic rise in the number of people aged 60 and over who remain the workforce. Ten years ago, the participation rate among those 60 and over was 15%. Now, it’s almost 26%.

This is partly due to better healthcare and life expectancy, and partly due to a greater number of women in that age group having worked all their life, and choosing to keep doing so after 60, while their mothers and grandmothers would have retired far earlier.

Eslake isn’t particularly concerned by these two changes. He is, however, concerned by the third cause of participation rate decline – the decrease in the number of young people in the workforce.

“The biggest source in the fall in participation is what’s happening to young people,” he says.

“The participation rate among 15-24 year olds peaked at around 75.7% in late 2002.That’s fallen to 68% last year. That’s a very substantial decline.

“Some of those younger people are staying in the education system for longer. Provided they’re learning a useful skill, that’s no bad thing. But there is a significant proportion of young people – and a growing proportion – that are neither in education nor in employment. And that is very concerning.”

Young people not working or studying is bad for them, and bad for society, Eslake says. And because people who’ve been unemployed for a long time struggle to find work because of it, it could decrease the participation rate in the future.

It’s too early to tell whether yesterday’s participation rate was driven by these long-term trends or not, as the breakdown of the data by age groups won’t be released until next week.

But one thing’s already clear – a falling participation rate isn’t a good sign.

“Had it not been for a fall in the participation rate between November and December, the unemployment rate would have been 6%,” Eslake says. “And if the participation rate had stayed at 2009-2011 average, yesterday’s release would have said the unemployment rate was 7.1%.”