No wonder, when you have a participation rate that’s in free fall. Last month there was a fall by 0.2%, another 0.2%, it is now at 64.5%. What that indicates is that people have stopped looking for work. – Shadow minister for employment and workplace relations, Brendan O'Connor, doorstop interview, October 20, 2016.
When the Australian Bureau of Statistics (ABS) released the September Labour Force Survey data, shadow minister for employment and workplace relations Brendan O'Connor said the labour market participation rate was in “free fall” and that “people have stopped looking for work”.
Is that right?
Checking the source
The labour force participation rate is the number of people in the labour force (either employed or looking for work) expressed as a percentage of the civilian population aged 15 years and over.
When asked for a source to support his assertion, a spokesman for Brendan O'Connor told The Conversation:
Australian Bureau of Statistics
You’ll see in the screen grab (figure 1), which is sourced from the ABS (Table 1, Participation rate – seasonally adjusted), that the participation rate did indeed fall from 64.9% in July 2016, to 64.7% in August 2016 and then to 64.5% in September.
You can read the spokesman’s full response here.
Did the labour force participation rate fall by 0.2% (points) in the last two periods?
That depends on whether you’re using the trend data or the seasonally adjusted data. Trend estimates smooth out volatility in the seasonally adjusted estimates and are preferred by the ABS and many economists and statisticians.
O’Connor instead uses the monthly seasonally adjusted values. These figures do show a decrease by 0.2 points in each of the last two periods - July to August and August to September. But seasonally adjusted values are more volatile than trend estimates – as shown by the figure below.
Labour force participation rate – trend and seasonally adjusted, 2006-2016Author provided
According to the latest ABS trend data the labour force participation rate fell by less than 0.1 points, but remained unchanged compared to the previous period when rounding out the numbers.
So O'Connor correctly quoted the seasonally adjusted data - but a better indicator to use is trend data, which reveals the labour force participation rate remained broadly unchanged compared to the previous period.
Is the labour force participation rate in ‘free fall’?
The overall labour force participation rate has been decreasing since around 2010 but this is not necessarily a sign that the job market is tanking.
The labour force participation rate is influenced by two main factors:
- the behaviour of people and their willingness, ability or necessity to be in the labour force, and
- the composition of the civilian population.
We know two things that are having an impact here. The economy is not doing as well as it was during the mining boom, and Australia’s population is ageing.
Taking a longer term view, let’s look at the impact the ageing population is having on the overall labour force participation rate.
The overall labour force participation rate is made up of the participation rates of different working age groups.
Since the early 1980s the participation rate of the oldest group – people aged 55+ – has been increasing. But the youth labour participation rate has been dropping off as more young people stay on at school.
The participation rate of the prime working age groups (24-54 years) has been gradually increasing and converging.
Labour force participation rate – Age groups, 1981 - 2016 Author provided
At the same time, the population has also been changing. Older age groups now take up a much larger share of the population than ever before. The 55+ age group now accounts for around one-third of the adult population, whereas 35 years ago it constituted one-quarter.
Population Composition – 1981 and 2016 Author provided
Here’s where it gets slightly complicated.
We know the 55+ age group now makes up a much greater share of the labour force and overall population than before. And we know this group has a lower participation rate than other age groups - which is pulling down the overall rate.
But within that context, the 55+ age group’s labour participation rate is gradually rising. It is, in fact, entirely possible for the overall participation rate to fall even if the participation rate of all age groups were simultaneously rising.
The chart below shows that between 2010 and 2016, the labour force participation rate decreased by 0.4 of a percentage point. But most of the decline (67%) was due to demographic shifts in the Australian population.
Contribution of changes in labour force participation rate – behaviour and population drivers
Authors: Rebecca Cassells, Associate Professor, Bankwest Curtin Economics Centre, Curtin University