Sorry to tell you, QTC, but the labour market is not a lagging indicator

I’m glad Queensland Treasury Corporation (QTC) remains optimistic about the economic outlook, even after last week’s discouraging labour force data, but I’m afraid one reason behind its optimism is unfounded. In its Weekly Market and Economics Review sent out via email this afternoon, QTC notes:

Employment fell by a surprising 3,700 in January, with full-time employment falling by 7,100. The unemployment rate rose from 5.85 per cent to 5.98 per cent—a ten-year high—while the participation rate was steady at 64.5 per cent. The only encouraging element of the labour force report was that hours worked rose strongly in the month and are rising steadily in trend terms, which may be a positive sign for future employment. While the labour market is clearly soft, it is worth remembering that it is a lagging economic indicator. [emphasis added]

Unfortunately, it’s incorrect to say the labour market is a lagging indicator, as explained in the US context in an excellent article by Henry Blodget in 2009:

Employment is NOT a lagging indicator

While the unemployment rate can be a lagging indicator, for reasons well explained by Blodget, employment is clearly a coincident indicator, and changes in employment tell us something about current economic conditions. This is why economic commentators typically pay close attention to employment growth in the ABS’s labour force data.

QTC appears to have misunderstood the information conveyed by recent labour force data, and it may have downplayed the significance of the fall in employment in its assessment of current economic conditions and the future outlook.

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9 Responses to Sorry to tell you, QTC, but the labour market is not a lagging indicator

  1. Katrina Drake says:

    They may still be correct. It might be that for QTC employment is a lagging economic indicator – or in other words there jobs might be next to go !

  2. Katrina Drake says:

    They may still be correct. It might be that for QTC employment is a lagging economic indicator – or in other words their jobs might be next to go ! ( Sorry just had to correct my grammar. )

  3. Good point Gene and an interesting article. We should note that one of the few metrics identified as leading is hours worked…and these are on a reasonable uptrend at present (as noted by QTC). I tend to agree with the tone of the QTC commentary although they could perhaps improve it by rewriting to “While the labour market is clearly soft, it is worth remembering that the unemployment rate is a lagging economic indicator.” Looking forward to that drink later this week.

  4. Jim says:

    Gene

    I’m no labour market economist, but the data seems to send two conflicting messages and we need to sit on the fence a bit (nothing unusual there foe economists…… but on the other hand…..).

    Total employed is down, full time employment is down even further, and the participation rate is unchanged. Doesn’t this mean a net shift from full time jobs to part time jobs? I fail to see how this is a reasons for optimism.

    The total number of hours worked increased, despite the net shift from full time to part time employment. This is encouraging as it probably indicates that more of the part timers (i.e. on less than 35 hours a week) are now working a few more hours (and perhaps some of the full timers are doing significant overtime, but demand is still insufficient for business to actually hire new people). I think the hours worked is probably a leading indicator.

    I think what we are really seeing is the continuation of the restructure in the labour market (more part timers, more casuals etc). The headline unemployment rate (those able and looking for work who didn’t work for at least an hour) is becoming pretty misleading as a primary indicators of the labour market.

    The more useful metrics are probably the participation rate (indicates actual jobs, or at least a desire to work) as a supply side indicator, and average hours worked per person (a measure of actual labour utilisation) as the demand side indicator.

  5. Gene Tunny says:

    Jim, thanks for your comment. Yes, hours worked can be a leading indicator. I agree the data are difficult to understand at the moment, and we’ll have to wait a few more months to have a better sense of what’s going on.

  6. Will says:

    As a former QTC economist, I have to say I’m not convinced. I’m not sure how it works in the US, but eyeballing a graph of Oz employment growth and Oz GDP growth suggests that employment lags by between 3-6 months, particularly at the turning points.

    This is at least plausible, as employers would wait until conditions have improved before hiring new staff. Haven’t done the research or the statistical analysis, but I have a doubt.

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