Negative immigration is behind Australia’s low unemployment

Over recent weeks, some economists have tried to argue that Australia’s plummeting jobless rate has been driven purely by stimulus and has little to do with the closure of Australia’s international border to immigration.

Yesterday’s ABS labour market release for January yet again proved them wrong.

To recap, Australia’s unemployment rate remained at 4.2% – its lowest level since August 2008, whereas Australia’s underemployment rate rose by 0.1% to be tracking fractionally above its November 2008 level (hit last month):

While stimulus certainly prevented the economy from sliding into a deep recession, it has merely filled the hole left by COVID lockdowns/restrictions and has failed to put the economy on a higher trajectory. This is illustrated clearly by the fact that employment growth is tracking well below the pre-COVID trend:

The collapse in the unemployment and underemployment rates have have also not been driven by people giving up looking for work. Australia’s participation rate in January (63.4%) was higher than in February 2020 before the pandemic commenced (62.5%):

The employment-to-population ratio has also risen to its highest level on record:

Thus, the only explanation for why Australia’s unemployment/underemployment rates have fallen so heavily is because labour supply has stopped growing, thanks to the sharp fall in immigration.

As shown in the next chart, Australia’s civilian population aged over 16 has gone from growing strongly (circa 25,000 people a month pre-pandemic) to treading water:

Had immigration continued at its pre-COVID level, Australia’s civilian population aged over 16 would be roughly 480,000 larger than it is currently. In turn, both unemployment and underemployment would be significantly higher and the employment to population ratio would be much lower (due to an increase in the denominator).

As noted yesterday by Bill Mitchell – Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE) at the University of Newcastle:

The Australian labour market is now larger than it was in February 2020. But it is still a long way from where it would have been if it had have continued to expand at the previous trend…

The flat population growth as external borders remain largely closed (or there is a slow take-up of international travel opportunities from foreign tourists) has helped keep the unemployment rate low as employment growth slows dramatically…

It is sometimes useful to examine the Employment-to-Population ratio (%) because the underlying population estimates (denominator) are less cyclical and subject to variation than the labour force estimates…

The denominator (population) is clearly providing favourable pressures due to the slower population growth as a result of the lack of immigration arising from the external border closures.

This is forcing employers to search harder for workers already in Australia rather than discriminate against the unemployed…

The following graph shows Australia’s working age population (Over 15 year olds) from January 2015 to January 2022.

With the external border still largely closed, immigration has shrunk to virtually zero and the impact is very clear.

This flattening out has forced employers to work harder to get workers and is one of the reasons unemployment is falling quite quickly, given the circumstances.

The Federal government is now working against the workers by offering enticements for people to come on foreign visas to increase the labour supply under the guise of worker shortages.

Next week, I will provide detailed analysis of these trends to refute the claim that many economists are now making that the border closures have not helped reduce the unemployment rate. I am still calibrating some simulations and they will be ready Monday I hope.

Independent economist Saul Eslake noted similar last year when he said “the longer our borders remain closed to international migrants, the easier it is for the targets for unemployment to be achieved”.

The same forces are benefiting Australia’s youth labour market.

While the number of youth jobs has flatlined over the pandemic:

Youth unemployment has fallen to its lowest level since June 2008 (9.0%), despite rising participation over the pandemic:

The reason why is obvious: the 15-24 civilian population has shrunk by 168,000 over the pandemic as temporary migrants have gone home:

In turn, more jobs have been made available for young Australians.

Any economist claiming that the collapse in Australia’s unemployment and underemployment rates have little to do with the sharp reversal in immigration is either lying or stupid. The proof is in the data and it is undeniable.