Did you scoff whenever you heard the unemployment fee fell final month?
I would not blame you.
Not solely did it fall, it fell to a 13-year low.
And it occurred throughout a pandemic the place 60 per cent of the inhabitants is now underneath some form of lockdown.
It would not make sense.
When belief in our establishments is already eroding, a falling unemployment fee on this setting has in all probability exacerbated individuals’s cynicism.
However l need to shine mild on the numbers for you.
Australia’s statisticians aren’t attempting to trick you. It was a by-product of a statistical mannequin that may go haywire throughout uncommon financial shocks (like lockdowns).
I am going to present you why it occurred.
However I’ve one other purpose.
I need to depart you with the instruments to know why a decline within the unemployment fee could be a dangerous factor.
And subsequent time you hear a politician speaking in regards to the unemployment fee, I would like you to have the ability to see by means of the numbers to the deeper actuality.
It depends on a easy idea
For those who’re like me, and you have by no means felt naturally comfy with numbers, your eyes may glaze over whenever you see numbers on a web page.
So l need to discuss numbers in a different way.
This train could be very easy. I promise it will not get extra difficult than the fundamentals.
Take a look on the picture beneath.
I will present you how one can specific the scale of the small rectangle as a proportion of the large rectangle.
You will want this to know how the unemployment fee works.
Think about doing this operation in your calculator.
You’re taking the small rectangle, divide it by the large rectangle, then press equals, then multiply it by 100.
That is it.
That is the method you want to memorise:
“Take the small rectangle, divide it by the large rectangle, press equals, then occasions it by 100.”
Now let’s do it with numbers.
See the picture beneath. I’ve assigned numbers to the rectangles this time.
The dimensions of the big rectangle is 200, and the scale of the small rectangle sitting inside the large rectangle is 10.
Keep in mind the method?
Take the small rectangle (10), divide it by the large rectangle (200), press equals (which provides you 0.05), then occasions it by 100.
Your reply might be 5 per cent.
That is it.
That is expressing the small quantity (10) as a proportion of the big quantity (200).
The small rectangle is value 5 per cent of the large rectangle.
Subsequent step: the unemployment fee
When officers from the Bureau of Statistics speak in regards to the “unemployment fee”, they’re utilizing the identical calculation because the one above.
They simply assign completely different names to the rectangles.
Here is how the ABS works out the unemployment fee.
It grabs the small rectangle (the variety of formally unemployed individuals) and divides it by the large rectangle (the variety of individuals within the labour drive).
So let’s do it with numbers.
For example there are 700,000 formally unemployed individuals, and 13,500,000 individuals within the labour drive.
To get the unemployment fee:
You’re taking the small rectangle (700,000 unemployed individuals), divide it by the large rectangle (13,500,000 individuals within the labour drive), press equals (which provides you 0.0518), then occasions it by 100.
Your reply is 5.2 per cent (rounded up).
And that is your unemployment fee.
The unemployment fee is just expressing the variety of unemployed individuals as a proportion of the labour drive.
So when there are 700,000 unemployed individuals, and there are 13.5 million individuals within the labour drive, the unemployment fee is 5.2 per cent.
This step is essential
We’re as much as the ultimate stage.
This part will put you on the trail to changing into a magician.
I need to present you what occurs to the unemployment fee when the scale of these two rectangles modifications.
That is the important thing to understanding why Australia’s unemployment fee fell to 4.6 per cent last month, to a 13-year low, though jobs have been being destroyed across the nation.
The unemployment fee will both improve or lower relying on how these two rectangles are rising or shrinking in relation to one another.
For instance, if the (unemployed individuals) will increase whereas the (labour drive) stays the identical measurement, the unemployment fee will improve.
Why? As a result of as a proportion of the labour drive, the variety of unemployed individuals has elevated.
Or take a distinct instance.
If the (unemployed individuals) shrinks whereas the (labour drive) will increase, the unemployment fee will fall.
Why? As a result of as a proportion of the labour drive, the variety of unemployed individuals has decreased.
There are many combos you possibly can experiment with that may present the unemployment fee rising or falling underneath wildly completely different circumstances.
Beneath are simply among the situations.
It highlights why it is essential to know the explanations behind any motion within the unemployment fee, somewhat than simply caring if the unemployment fee went up or down.
What occurred to the unemployment fee in July?
In line with the ABS, the unemployment fee fell noticeably final month.
However here is why — and it is not good.
For those who have a look at the desk above, the ultimate situation is what occurred to our labour market.
The variety of unemployed individuals declined, and the variety of individuals within the labour drive additionally declined.
Each teams shrank.
However for the reason that variety of unemployed individuals declined at a quicker tempo than the decline within the labour drive, the unemployment fee went down.
It was a state of affairs the place a declining unemployment fee was a nasty factor.
Why? Two causes.
Firstly, a shrinking labour drive is just not an indication of a wholesome financial system. You need your labour drive to be rising, not shrinking.
Secondly, the decline within the variety of formally unemployed individuals was not factor both.
The variety of individuals thought of formally unemployed fell final month not as a result of they discovered jobs, however as a result of they dropped out of the labour drive fully.
To be thought of formally unemployed, you must be actively on the lookout for work and in a position to begin work promptly, however the lockdowns in Better Sydney have been making it extraordinarily troublesome for individuals to search for new jobs and begin new jobs, as a result of their motion was severely restricted.
So the labour drive shrank, and the variety of formally unemployed individuals declined as a result of they could not actively take part.
And that is why the unemployment fee fell considerably.
It was a really uncommon state of affairs.
And that is simply the beginning of it.
The ABS’s labour drive survey was taken between July 4 and July 17, so the July unemployment fee solely captured the state of the labour market within the first half of July, which was five-to-six weeks in the past.
Lots of financial destruction has occurred since then.
Anyway, I am going to depart you with a two-minute video of my rationalization of why the unemployment fee fell final month.
It offers with the identical ideas however in a dynamic method.
Preserve it in thoughts subsequent time you hear a politician speaking in regards to the unemployment fee.
Hopefully you will see by means of their numbers a bit higher.