Participation rate is just as important as Unemployment rate, if not more
Todays better than expected unemployment rate, showing an increase from 5.1% to 5.2%, is far better than what was expected, although the true impact of Covid-19 will not be felt until the April unemployment rates are announced.
However, I believe we need to also focus on the participation rate, just as much as the unemployment rate.
For those that do not know, the unemployment rate is calculated by a sample of 50,000 phone calls per month. If you worked for at least 1 hour in the week you were called, then you are classed as employed. Those who have not worked, but are looking are classed as unemployed. The participation rate is calculated by excluding those who are not working, and were not looking for work, which can be for a number of reasons.
Consequently, with Covid-19, a large number of people will now not be working, and more than likely not even looking for work, as there are so few jobs available. These people will not be classed as unemployed.
At present we have 13million working and 718,000 unemployed, with a participation rate of 66%, consequently, there are potentially 19 million people who could be working, or unemployed, but 34% are not working and not looking for work.
So, if next month, another 400,000 people are unemployed, buy not looking, this will not increase the unemployment rate, but will reduce the participation rate, so this a key factor when analysing the true unemployment status. Indeed, at present, people are not required to look for work, so the participation rate will reduce greatly, but the unemployment rate may not increase as much as expected.
The snapshot taken to calculate the unemployment rate is approximately 0.3% of those able to work, which is classed as anyone over the age of 15. So it is a very small snapshot, but this system has been used for many years, so we are at least comparing apples with apples.
Prior to the Covid-19 outbreak, the UK for instance had a similar unemployment of around 5%, but with a much higher participation rate of 74%, so clearly, their economy was in a much better position than Australia.
Yes, we can be pleased that the unemployment rate is not ballooning out of control, but we also need to closely monitor the participation rate as that will give an even clearer indication of the true situation.