Australian market watchers were caught out by a shock rise in unemployment when the August employment figures were released. What are the future trends for jobs growth?
The job hunt ... never fun, but the situation may not be as dire as we think. Source: News Limited
LAST week's horror jobs report should serve as reminder of just how much statistics are like sausages: no one wants to see how they're made.
But a little knowledge goes a long way to explain the shock finding that the nation's jobless rate has surged to a 12-year high of 6.4 per cent.
Of course, journalists jumped at the opportunity to decry a crumbling economy and investors took flight — increasing bets on an interest-rate cut by Christmas to a one in three chance.
But, likely, it's not as bad as all that. Let me explain.
There is a tendency to treat official data about the economy as Moses-like, somehow etched in stone and handed down from the mount.
But in reality, all economic data are simply the result of surveys conducted by public servants at the Australian Bureau of Statistics.
And being humans, they're not infallible.
The unemployment line ... ABS statistics may have played a part in our perceptions. Source: News Limited
Turns out, the Bureau's statistical slaves implemented several important changes to the way that it surveys people every month about their job status.
There's no conspiracy here. But the changes do cast doubt on the severity of the jobless surge.
Monthly jobs figures are compiled through a survey by the Bureau of a sample of about 26,000 households every month. Every month, the head of those households receives a phone call from the Bureau to answer a set of questions designed to determine the employment status of all the people of working age living under that roof: whether they're employed (worked at least one hour in the past month), unemployed (available for, actively looking for, but unable to find work) or, if they're neither of those, simply "not in the labour force".
The results are then scaled up to represented the entire population and estimates of the national jobless rate deduced.
To avoid only surveying the same 26,000 households every time, households are moved in and out of the survey so that they only participate for eight months in a row. So every month, one eighth of the sample disappears and is replaced.
Sometimes, the people who join are vastly different to the people who leave, and this opens up a margin of error due to "sample rotation".
More significantly for last month's report in particular, however, is the fact the Bureau changed the criteria it applies to see if a person meets the test to be "actively searching for work". Only people who are "actively", rather than "passively", looking for work get defined as unemployed.
Examples of active search include writing or telephoning an employer for work, answering a job ad, registering with a job search agency, or contacting friends or relatives to find work.
You only need to meet one of the criteria to qualify for active search.
The job interview ... now a criteria for 'seeking work' according to the ABS. Source: ThinkStock
Last month, in line with international best practice, the Bureau introduced two new criteria to qualify for active search, and dropped two others.
The two it dropped were: registering with Centrelink as a job seeker and checking noticeboards for jobs. Basically, if that's all you're doing, you're not trying hard enough and you're deemed "not in the labour force".
The two criteria it added were: actually attending an interview for a job or taking steps to start up your own business — essentially taking steps to become self-employed. The later could include registering an Australian Business Number, seeking funding or obtaining premises or equipment.
Somewhat crudely, the Bureau has assumed that the two criteria it dropped would cancel out the two it added — having no impact on the unemployment estimate.
More likely, the new criteria captured more people as actively looking for work — and therefore qualifying as unemployed. Many Australians contemplate starting their own small business.
There was a simple way the ABS could have tested the impact of this change. It could have run the survey asking questions about all the criteria — the old and new — and then producing a set of results under the old and new definitions of "active search".
But it didn't bother, saying this would have been "expensive and complex".
So excuse me if I find the Bureau's assurances there was "no evidence" the survey changes affected the jobs numbers a little less than reassuring. It simply didn't collect the evidence needed to prove either way.
A more likely story is that Australia's jobs market, while soft, did not deteriorate as quickly as the numbers suggest.
Sure, the economy's hardly booming and economists had expected the jobless rate to rise. But the jump in one month from 6 per cent to 6.4 per cent is deeply unusual.
The monthly surge in the jobless queue — up nearly 45,000 people — was more like something you'd see in the middle of a recession. It jars with other reports suggesting a gradual pick-up in job vacancies, consumer confidence, housing construction and business investment.
Those looking for a kneejerk interest rate cut from the Reserve Bank before Christmas will be disappointed.
The Reserve will be treating last month's jobs report with more than a pinch of salt.
Which is the best way to serve sausages, really.
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