Jobless fall no reason to raise rates

By Mark Wooden

The Australian Financial Review,
21 January 2010, p. 47

Does a falling unemployment rate justify an interest rate rise? Last Thursday saw the delivery of another encouraging unemployment number just 5.5 per cent (after seasonal adjustment).

It now seems clear that the unemployment rate peaked during the middle of last year at 5.8 per cent, well short of official forecasts, and that the trend is clearly downwards.

In terms of unemployment the Great Recession has, in Australia, at least, been a bit of a fizzer. The magnitude of this latest recession has not even come close to matching the severity of the recessions of the early 90s and 80s, let alone the 1930s.

As a result, commentators are talking up the possibility of the Reserve Bank of Australia lifting interest rates at its next meeting. This presumably is based on the assumption that falling unemployment signals a tightening labour market and hence the likelihood of rising wage pressures.

But unemployment rates only provide a partial picture and other indicators suggest there continues to be considerable room for improvement.
Indeed, as an overall indicator of labour market strength, the unemployment rate is a pretty poor measure. Far more relevant are measures of total hours worked, and data on this suggest a less rosy outlook.

Aggregate monthly hours worked actually fell in December, by 1 million. Though with total hours worked each month summing to more than 1.5 billion, we can call this a negligible change. But the point is that aggregate hours worked did not rise. Further, it is presently at a level not much higher than the level it was at 12 months earlier.

At the same time the population and the workforce continue to grow, meaning hours per head must be declining. During 2009, hours worked per member of the labour force have fallen by 1.8 per cent, and since the recession hit in mid-2008 the rate has fallen 4 per cent.

The reasons for this are twofold: Growth in part-time jobs continues to outpace that in full-time jobs and the average hours worked by full-time workers has been falling.

At least of some of this trend towards shorter hours reflects a labour market that is still relatively weak. In November 2009, there were almost 900,000 workers who were underemployed (mostly part-time workers who want to work more hours). By comparison there were just 664,000 unemployed at the same time.

The underemployment rate underemployed workers as a percentage of the labour force stood at 7.8 per cent and while there are signs this rate may now also have peaked, it has yet to begin declining.

There may be very good reasons for giving serious consideration to raising the official cash rate; the fall in the unemployment, however, should not be one of them. Further, I would go so far as to argue that the improving labour market does not constitute a reason for lifting rates, at least not yet.

Mark Wooden is Professorial Research Fellow and Acting Director, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.