Unemployment benefits show labour market holding up during Delta
The Delta outbreak has seen a big decline in hours worked, a fall in employment and a lower unemployment rate. The Delta outbreak has seen a large hit to activity in Q3 given Australia’s two largest states have been locked down. The hit to the labour market has been largely felt in a substantial decline in total hours worked, which have dropped by about 6% over June to August, with September data due Thursday.
Employment has fallen by much less, down about 1% over the same period, with many of the workers who have lost hours of work receiving a Commonwealth disaster payment (about 2 million workers, or 16% of total employment, have received at least one disaster payment during the latest outbreak).
Surprisingly, the number of unemployed workers has fallen by about 12%, as many people who have lost their job have been classified as temporarily having left the workforce because they do not meet the official definition of unemployment (that is, they have either been unable to actively look for work and/or unable to start a new job because they are locked down).
The number of unemployment benefit recipients has also continued to fall over recent months, pointing to limited scarring to date from the Delta outbreak. While total hours worked show the clearest impact of the Delta outbreak and the official unemployment rate looks to be distorted by definitional issues related to the lockdowns, the number of people receiving unemployment benefits has also fallen over recent months, albeit at a slower rate.
The number of people on welfare provides an alternative perspective on unemployment and its ongoing decline suggests that the distortion of the official measure of unemployment may not be as great as widely thought. That is, on our seasonal adjustment, the number of welfare recipients fell by about 4% in June, 3% in July, 2% in August and 2% in September (the September data are as at the 24th). This contrasts with the initial COVID outbreak early last year, when the number of recipients almost doubled over three months.
The falls are surprising considering that, like last year, the government has suspended the “mutual obligation” test in locked-down areas, where recipients are normally required to actively look for work. This means that an unemployment rate based on welfare recipients has dropped from 8.2% immediately prior to the Delta outbreak to 7.6% in August, pointing to little sustained damage from Delta, at least to date.
This would be welcome news for the RBA as it broadly matches the fall in the official unemployment rate over the same period, which has declined from 5.1% to 4.5%. The message of limited scarring is encouraging and is consistent with less damage to firms’ hiring intentions from Delta, with the 10% decline in job vacancies to date only a fraction of the 40%-plus collapse last year (note, though, that some of the decline in unemployment and the related resilience of job vacancies will probably be unwound next year when migration resumes because the exodus of non-residents in early 2020 forced some companies to rely more on the local work force).
Even with the recent decline, the number of welfare recipients is much higher than pre-pandemic levels, pointing to substantial slack in the labour market. Mindful that the number of people of unemployment benefits has its own drawbacks as a proxy for unemployment, the 1.1mn number of recipients of welfare in September is still well above its pre-COVID level of 0.8mn. Put another way, the current unemployment rate based on welfare recipients of 7.6% is significantly higher than its pre-pandemic level of 5.8%, suggesting that there is still substantial slack in the labour market.
Such an interpretation is consistent with continued subdued growth in wages and inflation, contrasting with a literal read of the current official unemployment rate, which at 4.5% is below its pre-pandemic level of 5%.
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Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...