Monday 28 September 2015 by Craig Swanger Opinion

Australia’s underemployment rate at 8.4%

Australia’s “Unemployment Rate” understates the real challenge ahead for the Australian economy. The percentage of the labour force that is currently “underemployed” is at its highest level on record. This is the figure that the RBA will be targeting, not unemployment, because that’s their job maintaining full employment. Until they achieve full employment,  they will hold rates at much lower levels than they have in the past

Keyboard job search

Australia’s headline unemployment rate is 6.2%. This is below its long term average of about 7%, and so using this unemployment rate alone we could mount a case that the Australian economy is in good health, and that the RBA should be biased toward increasing rates or at least holding them. 

But this measure of unemployment is deeply flawed. It includes people that want full-time work but can only get part-time work, or those that work part-time but aren’t getting as many hours as they want. 

The better measure of the health of an economy is the “underemployment rate”. Those readers that have attended our economic seminars or webinars recently may recall that in the US they call this the “U-6” unemployment rate, as opposed to their headline unemployment rate which is called “U-3”. In Australia we have the headline “unemployment rate” and we separately measure “underemployed persons”. Australia’s underemployment rate is at its highest level on record. A massive 8.4% of the labour force is working part-time and wants more hours (note that this excludes people that are part-time and happy with their hours).

If we add unemployment to underemployment, to give underutilised labour the figure is a massive 14.3%, the highest level since the 1990s “recession we had to have”, and higher than the early 1980s recession.  

 Australia's unemployment rate fails to tell the full picturegraph
Source: FIIG Securities, RBA

Why is this relevant? Central banks, like the RBA in Australia, are responsible for maximising employment while keeping inflation in their target range. In the RBA’s case, the target inflation range is 2-3% per annum and inflation is below this range at present at 1.7% pa (1.5% pa excluding volatile items such as petrol). As long as inflation is not at risk of exceeding the 3% pa upper end of the range, the RBA’s key objective must be employment growth and therefore they must keep rates lower.

The key misunderstanding about the RBA is that their role not to minimise the unemployment rate; it is to maintain full employment, while keeping inflation in the target range.  Full employment means that the labour pool is fully utilised and therefore doesn’t have some of its labour pool working less than they want to. Imagine for example that you run a business with 100 employees. Fifty of those employees are working at full capacity but the other 50 are idle for 2-3 hours a day because you haven’t got enough equipment to keep them working. You will act to get the workforce back to full utilisation one way or another. The Australian economy is just a much larger version of this business, and the RBA’s job is manage that economy with the tools at their disposal, namely interest rates.

This is the core argument for reducing interest rates further. The Australian economy has large pools of underutilised labour. There is an argument to suggest that these people have the wrong skills, but the RBA’s job is not to create jobs in the right sectors; in these economic conditions their job is to lower interest rates to create the conditions to encourage businesses to invest more overall.  If jobs are created in sectors without available labour, inflation will be higher as wages rise and then the RBA will be forced to increase rates again.  But failing an inflationary lift, the RBA will continue to keep rates lower until this underutilised labour pool is employed fully.

So with full employment so far from reality and Australia’s economy in major need of an injection of investment to create new jobs, rates will be lower for longer. There are two possible paths for this outcome, and both of them lead to the Australian 5 year and 10 year bond yields being much lower than current levels. The first path is that the RBA lowers rates slightly, say to 1.5% pa, and then leaves them there until either inflation or employment is higher.  The second path is a more dramatic fall to 1.0% pa in an attempt to lower the AUD to below 60 US cents and create jobs, then increase rates but only enough to hold off inflation.

Both paths lead to the conclusion that the long term rates in Australia will decline as the market adjusts to the new reality for the Australian economy. For those holding long term bonds, this will mean they are earning higher yields than otherwise available in the market.  For those relying upon bank deposit interest, this is bad news. The headlines in Australia’s media suggests that the market is slowly coming to this realisation and so pricing on bonds will lift over the next 12 months to lower rates toward a more realistic outlook in which cash rates are between 1.5% and 2.5% for at least the next five years if not ten or more, bringing the ten year bond yield down from its current 2.69% pa to between 1.75% pa and 2.25% pa.


The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or  distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.