Answer to faster interest rate cuts is right under RBA’s nose: ‘Hidden unemployed’

Australia’s unemployment rate has risen ever-so-slightly, the Australian Bureau of Statistics tells us, lifting from 3.7 per cent in February 2024 to 3.8 per cent in March.

This gentle cooling of the labour market is just what the Reserve Bank of Australia (RBA) wants. But what if the unemployment rate isn’t giving us the full story right now?

There’s an important clue in some data released by online job marketplace SEEK. They release a bunch of fascinating pieces of data on the labour market and one of the most interesting ones is the number of applications per job advertisement. As you can see from the next chart, that figure has soared.

The actual number of job applications per job ad is a trade secret so the movement of the red line is what matters. What is important is the rate of applications per ad has nearly tripled since 2022. That speaks of a country very eager to find work.

And yet the blue line, the unemployment rate, has not risen. What’s going on here?

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One possible story is each person who is looking for a job is applying for more jobs now.

That would cause the red line to spike. But there’s no apparent reason why that would happen, certainly not for it to triple.

There’s a better explanation and it has to do with how the ABS measures unemployment.

Jobseekers going under the radar

The official Labour Force statistics measure unemployment using a survey. The survey goes out to a group of people every month. But the group of people it goes to is not a random bunch every month. Instead they try to survey some of the same people each time. They survey eight groups of people, and each group is in the survey for eight months before dropping out.

Here's what the ABS says.

“The Labour Force Survey sample can be thought of as comprising eight sub-samples (rotation groups), with each sub-sample remaining in the survey for eight months, and one group "rotating out" each month and being replaced by a new group "rotating in". As seven-eighths of the sample are common from one month to the next, changes in the estimates reflect real changes in the labour market, rather than changes in the sample.”

I want to emphasise that this is good statistical practice and I’m not one of these conspiracists who thinks the ABS is trying to hide things. They follow the standards set down the international labour organisation so we can compare across countries with confidence.

BUT.

Australia’s situation is unusual right now.

Our population has been booming very recently.

We’ve added hundreds of thousands of Australians in the last few months alone.

Usually our migration rates are pretty stable so the fact the ABS doesn’t get a fresh random sample each month doesn’t matter too much. People are usually coming and going.

But at the moment the ABS is sampling, in part, people who were here months ago. And that means they are missing some of the people who just got here.

This is just a chart of arrivals. If you chart arrivals net of departures the rise looks even stronger because students are coming but not going home. Those people, especially students, are looking for work.

They’re hitting websites like SEEK and spamming job ads with applications.

Which means there’s a big population of people out there looking for work that the ABS is not aware of.

What does this have to do with interest rates?

How does the statistical bureau even find a newly arrived student who is living in a hostel and trying to line up a place to live? I bet they can’t. And what’s more, newly arrived migrants are probably a group less willing to respond to surveys than the remainder of the population.

The situation is therefore that there is likely to be some hidden underemployment at the moment.

Not widespread but concentrated in a certain population. Over time, some of those students will find jobs, and also over time the ABS will find them.

When that happens we can expect the official unemployment rate to rise a little.

In the meantime, in some areas - especially Melbourne, Sydney and areas where students tend to live – the job market might not have low unemployment at all.

The era of seeing a sign in the window of your local café desperate for someone to work there? That time is probably over.

And what’s more it could mean that the RBA is able to lower interest rates sooner than the unemployment rate alone would suggest.

At the moment interest rate cuts aren’t fully priced in until next year, and maybe not even then. But if there is a hidden group of unemployed people in the economy then the RBA might get a surprise that lets them cut rates sooner than expected.

Your mortgage payment goes down and your local cafe finds it easy to get staff?

That sounds very attractive to some demographics. Of course, if your rent goes up and there’s someone competing for your job at the café, you probably see it differently.