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Feature Article: Labour force characteristics during recent economic downturns

Introduction

The most recent economic downturn was the fifth main period of slowing or declining economic growth in Australia's recent history. In the last 30 years, two severe and protracted major economic recessions occurred during the early stages of both the 1980s and 1990s, with a short economic downturn between them in the mid 1980s. A fourth downturn occurred during the early part of the 2000s, followed by the most recent in late 2008 to early 2009, triggered by the global financial crisis. These latter two were both mild in length and severity in Australia.

Economic downturns are typically characterised by falling employment, rising unemployment, and a decrease in the participation rate. However, there are a number of other statistical measures that can be useful in observing changes to Australia's labour force characteristics during these marked declines in economic activity, particularly in the most recent downturns where the rise in unemployment was not as severe as in the past.

There are a number of key measures that the Australian Bureau of Statistics produces that are used to assist in understanding such movements in the labour market and are available on a monthly or quarterly basis from the Labour Force Survey. These measures are:

• labour force, the total number of employed and unemployed;
• aggregate monthly hours worked;
• employment to population ratio, those employed as a proportion of the civilian population;
• unemployment rate, those unemployed as a proportion of the labour force;
• participation rate, the labour force as a proportion of the civilian population;
• underemployment rate, those underemployed as as a proportion of the labour force; and
• labour force underutilisation rate, those unemployed and underemployed as a proportion of the labour force.

Employment

The ABS releases the count of the number of people employed each month in the measure, total employed persons. The number of employed persons in Australia has generally risen since the last major economic downturn in the early 1990s. Since 1978, the largest fall in employment occurred at this time, between June 1990 and December 1992, falling from 7,910,800 employed persons to 7,637,300, a decrease in employment of 273,500 persons (3.5%). For graphs in this article, the shaded areas indicate quarters where the percentage change in Gross Domestic Product (GDP - Chain Volume measure, Trend) was less than or equal to +0.2%, indicating the periods of slowing or declining economic growth. Source: Australian National Accounts: National Income, Expenditure and Product (cat. no. 5206.0). All graphs end at November 2010, to coincide with the latest available data.




Each month, the results of the Labour Force Survey are benchmarked to the latest civilian population estimates. As the population increases, there is a corresponding upward influence on the level estimates of Australia's labour force characteristics, such as the number of people employed. Each new estimate of the number of employed persons in a month will have a component of this population increase, plus or minus the relative changes in Australia's employment characteristics. These relative movements in employment are often disguised by the general upward movement of population growth. The employment estimates are best used as a point in time level measure (that is, the level of employment at a particular moment in time) rather than for tracking month-to-month movements in employment.

Employment to Population Ratio

The ratio of the number of employed persons to the civilian population, termed the employment to population ratio, is a measure that removes the influence of population growth from the level estimates, revealing the underlying month-to-month movements in the employed proportion of the civilian population. This measure allows for better comparability of Australia's employment characteristics across time.

The two largest declines in the employment to population ratio occurred during the early 1980s and 1990s. Between July 1981 and June 1983, the employment to population ratio fell 3.5 percentage points, from 57.7% to 54.2%, and between December 1989 and February 1993 it fell 4.0 percentage points, from 59.8% to 55.7%.

The third largest fall occurred during the most recent downturn where the employment to population ratio decreased 1.3 percentage points, from the highest recorded rate of 62.8% in May 2008, to 61.6% in August 2009. During the same period, this decrease was not reflected in the measure of total employed persons, due to the effects of population growth. Interestingly, the lowest point of this recent downturn still remained higher than any point during all of the prior economic cycles (between February 1978 and April 2006).

Aggregate Monthly Hours Worked

An alternative measure of the employment characteristics of Australia is the series Aggregate monthly hours worked. Rather than measuring the number of people employed, this measures the total number of hours worked in a given month by all employed Australians. Similar to the employed persons estimates, it is influenced by the growing population of Australia, but it is more responsive to increases in underutilisation, as increases in unemployment and underemployment (discussed later in the article) will have a negative influence on the total number of hours worked in a particular month.

During each of the main economic downturns, there was a corresponding fall in aggregate monthly hours worked. During both the 1980s and 1990s recessions, hours worked dropped by 47 million hours; from 975 million hours in September 1981 to 928 million hours in April 1983 (4.8% decrease) and from 1,175 million hours in June 1990 to 1,128 million hours in October 1992 (4.0% decrease). Both of these are the largest declines in aggregate hours worked in the last 30 years.

During the mid-1980s downturn, hours worked only fell by 0.3 million hours (less than 0.1%) between September and November 1986, but the impact was reflected in a slower than usual growth rate between April 1986 and February 1987. In the early 2000s, hours worked fell by 14 million hours (1.1% decrease); from 1,329 million in Feb 2000 to 1,315 million in November 2001. In the most recent downturn, aggregate monthly hours worked dropped from 1,566 million hours in July 2008 to 1,535 million hours in June 2009, a decrease of 32 million hours (2.0%). Since then, aggregate monthly hours worked has grown to 1,602 million hours in November 2010.

In the recent economic downturn, precipitated by the global financial crisis, there is a marked difference in the trend behaviour of the total employed persons series compared to the aggregate monthly hours worked series. Employed persons remained relatively flat during the crisis, whereas hours worked instead showed a noticeable decline, which indicates that while people generally did not lose their jobs as a result of the downturn, they did suffer a reduction in their hours worked. This highlights the importance of comparing multiple labour force characteristics when considering the effects of economic downturns on the Australian population.

Unemployment

The ABS releases the count of the number of people unemployed each month in the measure, total unemployed persons. Similar to employment, estimates of unemployed persons are also affected by the rise in Australia's population and are best used as point in time level measures.

The number of unemployed persons has risen after each of the five main economic downturns. The largest increase was between November 1989 and December 1992, rising 443,200 persons, almost doubling (93.3% increase) from 474,800 to 918,000, the highest recorded level of unemployment since 1978. The number of unemployed persons during the two most recent downturns peaked at similar levels; 682,100 persons in October 2001 and 673,400 persons in August 2009.

Unemployment Rate

The unemployment rate removes the effect of population growth by expressing the number of unemployed persons as a percentage of the labour force. This is the best measure for tracking Australia's unemployment proportionally from month to month.

From the trend estimates of unemployment rate, the 1980s and 1990s economic downturns both peaked at similar levels; 10.3% in June 1983 and 10.7% in September 1992, although the 1990s economic downturn remained around this level for longer. Between these record highs, the mid-1980's downturn saw a localised peak of 8.1% in November 1986.

During the early 2000s, the unemployment rate rose to 7.0% in October 2001 and in the most recent downturn peaked at 5.8% in August 2009, which is only 0.2 percentage points higher than the lowest unemployment rate recorded during previous economic cycles.

Interestingly, when comparing the last two economic downturns, the latest 2009 peak unemployment rate (5.8%) was less severe than the previous peak in 2001 (7.0%), whereas in the total unemployed persons series, the last two economic downturns peaked at similar levels. This highlights the importance of removing the effects of population growth in order to make more informed comparisons between different time periods.

Since the participation rate of males is higher than females (shown later in the article), the effect of economic downturns on the male unemployment rate is more pronounced. The largest rise in the male unemployment rate was 6.2 percentage points during the 1990s recession (5.3% in October 1989 to 11.5% in December 1992) compared with the largest female unemployment rate rise of 3.7 percentage points during the same downturn (6.3% in October 1989 to 9.9% October 1993).

The female unemployment rate was higher than the male rate during the early and mid- 1980s downturns. During the 1990s recession, the male unemployment rate overtook the female rate in October 1990 and remained higher through both the recovery and the milder early 2000 downturn. From July 2003 onwards, the female unemployment rate was generally higher than the male rate, excluding a brief period between February 2009 and February 2010 during the most recent downturn, where the male unemployment rate exhibited a sharp increase before subsiding during the remainder of 2010.

Labour Force

The labour force is a measure of the total number of people in Australia that are willing and able to work at a given point in time; that is, it includes the total number of persons employed together with the total number of persons unemployed for a given collection month. Similar to the total number of employed and unemployed persons, the labour force measure is affected by the rise in Australia's population, and the estimates are best used as point in time level measures.

Since February 1978, the labour force has risen from 6,425,400 people to 12,022,900 people in November 2010. The trend behaviour of the series seems to be generally unaffected by economic downturns, so it is again important to compare this with other labour force measures, particularly the participation rate, when investigating changes to the labour force with respect to the economy.

Participation Rate

The participation rate is a proportional measure of the labour force in regards to the total civilian population in Australia. This allows for comparability of the relative size of the labour force across time, revealing changes to the proportion of Australians who are actively participating in Australia's economy.

The largest falls in the participation rate occurred during the early 1980s and 1990s economic downturns; falling 1.1 percentage points from 61.5% in July 1980 to 60.4% in December 1983 and 1.5 percentage points from 63.9% in July 1990 to 62.4% in April 1993. The lowest point of the 1990s economic downturn (62.4%) did not fall below the highest point just prior to the 1980s economic downturn (61.5% in July 1980). The mid 1980's downturn saw no significant falls in participation rate, but the impact is reflected in the relatively flat growth rate for the period April 1986 to December 1987.

After recovering to 63.8% in November 1995 following the 1990s economic downturn, the participation rate oscillated around a relatively steady level through the early 2000s downturn, before trending up to reach 65.6% in April 2008. The participation rate remained relatively steady during the latest economic downturn, with a fall of only 0.3 percentage points to 65.3% in April 2010, but has since recovered to a record high 65.9% in November 2010.

Participation in the last 5 years has been at the highest level ever in the last 30 years.

The participation rate by sex reveals significant variance over the past 30 years, but has been gradually converging over time.

The male participation rates have been consistently higher than female; however, there has been a gradual decline from 79.4% in February 1978 to 72.9% (a decrease of 6.5 percentage points) in November 2010, whereas the female participation rate has generally increased from 43.5% to 59.2% (an increase of 15.7 percentage points) over the same period.

The increase in female participation has offset the decline in male participation, and, in the last 5 years, the overall participation rate of the Australian population has been higher than in any preceding period.

Underemployment Rate

The underemployment rate is similar to the unemployment rate, but instead of measuring Australia's unemployment characteristics, it measures the proportion of the labour force that are currently employed, but are willing and able to work more hours. It highlights people in the labour force who are not unemployed, and so are not captured in the unemployment rate, but are dissatisfied with their current working arrangements and would like to work more hours. This is sometimes referred to as the 'hidden' potential in the labour force.

For example, during an economic downturn, a portion of the labour force lose their job, become unemployed and contribute to a rising unemployment rate. Another portion of the labour force might not lose their jobs, but their working arrangements might change so that they are working fewer hours. If they are dissatisfied with this loss in hours and are available to work more, they are classed as underemployed, and contribute to a rising underemployment rate.

The trend estimate of the underemployment rate increased during each of the five main economic downturns. The early and mid- 1980's downturns peaked at similar levels of underemployment; 4.0% in May 1983 and 4.1% in August 1987 respectively. The largest increase was between May 1988 and August 1992, increasing from 3.6% to 7.0%. Underemployment then largely remained around this level between August 1992 and November 2004, with a brief increase to 7.4% in November 2001, coinciding with the early 2000s downturn. The trend estimate recorded its longest prolonged period of decline between February 2002 and May 2008, falling to 5.9%, before rising to a record high during the global financial crisis of 7.9% in August 2009. Since then, underemployment has fallen to 7.2% in August 2010 and remained steady until November 2010.

Labour Force Underutilisation Rate

The labour force underutilisation rate combines the unemployment rate and the underemployment rate into a single measure of the proportion of the labour force that is willing and able to do more work. It includes people who are not currently working and want to start, and those who are currently working but want to and can work more hours. It is regarded as a more complete measure of the proportion of the labour force that has the potential to be utilised more in Australia's economy. During an economic downturn, the underutilisation rate will capture both rises in unemployment and rises in underemployment.

The lowest level of underutilisation in the last 30 years was 8.4% in May 1981. During the early 1980s economic downturn, underutilisation rose to 14.2% in May 1983 and then recovered to a low of 9.9% in August 1989, interrupted by a relatively small rise to 12.2% in February 1987 during the mid-1980s downturn. The following 1990s downturn resulted in an increase of 8.1 percentage points to reach a peak of 18.1% from August 1989 to November 1992; the highest recorded underutilisation rate in the last 30 years. The underutilisation rate then generally recovered between November 1992 and May 2008, with a brief rise to 14.2% in August 2001 during the early 2000s downturn. From a low of 10.0% in May 2008, the underutilisation rate increased to 13.7% in August 2009 during the global financial crisis, before recovering to 12.4% in November 2010.

The female underutilisation rate has been consistently higher than the male rate over the last 30 years, with a high of 19.7% during the 1990s recession in August 1993. This is a different result to the unemployment rate statistics, where, during the same recession, the male unemployment rate was higher. Higher female underutilisation is due to consistently higher levels in underemployment of females. During the recent downturn. the male underutilisation rate rose to 12.2% and female underutilisation rose to 15.4%, both in August 2009.

Conclusion

There are a number of key labour force measures available from the Labour Force Survey. Some of these measures are influenced by changes in the underlying civilian population. Therefore, it is important to consider the full range of measures to form a comprehensive picture of the labour market, particularly during times of economic decline.

Further information

For any queries regarding these measures or any other queries regarding the Labour Force Survey estimates contact Labour Force Estimates on Canberra 02 6252 6525, or via email at labourforce@abs.gov.au.