Fisher investments Australia reviews the unemployment rate’s shortcomings

The unemployment rate is one of the most scrutinised economic indicators in financial publications Fisher Investments Australia reviews. But it has its limits—and being aware of them is useful for investors.

Measuring unemployment is more complex than tabulating the percentage of the population without a job. The Australian Bureau of Statistics (ABS), similar to other national statistics agencies, defines unemployment as when someone is willing and able to work but does not have a paid job.[i] The unemployment rate reflects the percentage of people in the labour force who are unemployed.[ii] To calculate this, the ABS surveys around 50,000 people (aged 15 years and older) each month about their labour status.[iii] Respondents fall into one of three categories: employed (those with a paid job and who work one hour or more in a week), unemployed (those not in a paid job, but who are actively looking for work) and not in the labour force (those without a paid job and who aren’t looking for work, e.g., retirees, students, etc.).[iv]

These calculation nuances aside, there are issues with popular interpretations of the unemployment rate that Fisher Investments Australia reviews. For example, a rising unemployment rate doesn’t automatically reflect trouble in the labour market. An increase in labour force participation—which may reflect more people actively searching for a job—could cause the unemployment rate to climb even as hiring increases. The unemployment rate also isn’t indicative of where the economy is headed since jobs follow, rather than lead, growth.

Consider a hypothetical business owner who invests a lot of money and time into recruiting and training her employees. If economic conditions turn sour, she likely doesn’t want to let her staff go immediately. She knows her business will need employees when things pick up and doesn’t want to have to swallow those high up-front costs if she can avoid it. She also thinks her workers are great and doesn’t want to risk losing them to a competitor if she has to let them go. So to keep her staff intact, this business owner may reduce discretionary or growth-related spending and focus on essentials to keep operations humming. Laying off workers tends to be a last resort. Likewise, when business conditions start to improve, she probably won’t start adding staff right away. New employees are a big investment, so she will make do with her remaining staff and add only when they can’t keep up with customer demand.

That is conceptual, but real-world evidence—that Fisher Investments Australia reviews—backs it up. Consider how the unemployment rate aligns with recessions historically. (Exhibit 1) Australia’s unemployment rate remained well above pre-recession levels even after the downturn ended. Unemployment could also keep rising after the new economic expansion had begun.

Exhibit 1: Australia’s Unemployment Rate Since 1978