‘Effective’ unemployment rate explains the apparent QLD paradox

Posted on February 10, 2021 by Pete Faulkner - COVID-19, Jobs, QLD, Uncategorized

We have been highlighting for some time the fact that the Queensland labour market has benefitted from the positive health outcomes in the State (see here for the most recent December data) with both employment and hours worked per capita up since March. Back in November we discussed one of the reasons for the apparent paradox that a supposedly strong labour market still resulted in a relatively high unemployment rate in QLD; that paradox continues to exist with Queensland’s unemployment rate in December (7.5%) the highest in the nation.

Our post in November (see here) discussed the calculation of the ‘effective unemployment rate’ which adjusts for the impact of changes in participation since the effects of COVID were felt in March and for the increased number of people counted as employed who were working zero hours (boosted by JobKeeper). As the JobKeeper scheme is now close to its end (at least in its current form) and the participation levels across the nation returning to a more ‘normal’ situation we decided to take one last look at the effective unemployment rate.

The adjustment is done by including those working zero hours (who are currently counted as employed by the Labour Force Survey) as unemployed. Additionally the labour force is estimated as it would have been had the participation rate as at March 2020 been current now. The difference between that assumed labour force and the actual labour force is calculated. In Australia, where the participation rate initially fell sharply, this was a reduction in the labour force. The ‘effective unemployment rate’ assumes those who had left the labour force would instead also have been counted as unemployed. More recently, as the participation rate increased above the March level, the reverse would be true.

We see that the Australian March unemployment rate of 5.2% (which would already have been 5.8% had we included zero hour workers) was based on a participation rate of 65.9. Since then, as the number of zero hours workers increased sharply and the labour force fell sharply, the ‘effective unemployment rate’ got as high as 15.3% in April before starting to decline. It now sits at 6.7%; or 1.5 ppts above the official unemployment rate in March and just 0.1 ppts above the official rate today.

When we consider the Queensland data we see that the March unemployment rate of 5.6% (which would have been 6.1% if we had included zero hour workers) with a participation rate of 65.5. Since then the ‘effective rate’ peaked at 15.7% in May but has now sharply declined as the participation rate moves above where it sat in March (and the labour force adjustment therefore subtracts people from the count of those unemployed). In December we see that Queensland’s ‘effective unemployment rate’ is only 6.2%; well below the national ‘effective rate’, only 0.6 ppts above its official level in March and 1.3 ppts below the State’s official rate.

What this suggests is that the official unemployment rate in Queensland is as high as it is not because of a particularly weak labour market, but rather because the better health outcomes, and far less need for lock-downs, have resulted in a strong participation response. Participation has also increased across the nation but the scale of the increase in Queensland has acted to more dramatically work against further falls in the unemployment rate. The increase in participation at the national level has added 103,000 to the labour force in the past 2 months while in Queensland we have seen the labour force increase 129,000 in the past 4 months and by nearly 70,000 in just the last 2. With such large numbers entering the labour force, even with healthy employment growth, the official unemployment rate has struggled to fall.

On this same basis of calculation the NSW ‘effective rate’ in Dec was 6.5% (up 1.6 ppts from March and similar to the official rate of 6.4%) and Victoria was 7.5% (up about 2.3 ppts from March and still about 1.0 ppts above the official rate of 6.5%).

We can also see that, with the small current exception of Victoria, the distorting effects of the JobKeeper payments has been largely unwound with the actual and ‘effective’ unemployment rates converging with most states’ effective rates close to 6.5%.