By Wayne Cole
SYDNEY, Nov 7 (Reuters) - Australia's October jobs report proved another disappointment on Thursday, stirring fears that unemployment was sure to spike higher at some point.
Yet there are good reasons to believe the fears are overblown and it's all thanks to the 'baby boomer' generation heading into retirement.
There is no doubt employment is soft, with just 1,100 net new jobs created in October giving annual growth of a pedestrian 0.8 percent. The latter is well below population growth of 1.8 percent, suggesting the jobless rate should be steadily rising.
Yet the unemployment rate held at 5.7 percent, a level it has hovered around for eight months now and one most other rich-world countries would dearly welcome.
This surprisingly steady performance has largely been due to a sharp drop in the participation rate -- the percentage of the adult population in work or actively looking for it. In October this was at 64.8 percent, the lowest in seven years and down from a peak of 66.0 percent in 2010.
It has often been assumed this drop has been caused by disillusioned job seekers giving up and leaving the workforce, meaning the labour market was a lot weaker than the unemployment rate alone would suggest.
It was also assumed that the fall in participation would be temporary and when it rose again, so would the jobless rate.
However, once broken down by age group it is clear that much
of the drop is due to structural changes in demographics and thus not a true sign of economic weakness.
In particular, the baby boomers -- those born in the population spike after World War Two -- are getting older and starting to retire in ever greater numbers.
'Much of the fall in the participation rate is structural, driven by ageing demographics; rather than cyclical, due to 'discouraged workers' amid weak demand story,' says Scott Haslem, chief economist at UBS.
So great has been the shift that the Australian Treasury estimates it accounted for 80 percent of the drop in the participation rate since 2010.
THE WEALTH EFFECT
The share of the adult population over 65 has risen by over 2 percentage points in the past decade to reach 18 percent, and that age group naturally has a much lower participation rate of just 12 percent.
The share of the population aged 60 to 64 has also expanded, and again their lower participation rate of 53 percent tends to drag down the total.
The bulge is all the greater as many retirement plans were delayed by the global financial crisis, which hammered asset markets and pension funds.
As asset markets have recovered strongly in the last couple of years, boosting household wealth by around A$800 billion in the process, the boomers have felt more confident about retiring, so pushing down participation even further.
'Currently, the biggest single influence on the participation rate is the ageing of the population,' says Gareth Aird, an economist at Commonwealth Bank of Australia. 'This is structural.'
Neither is this a trend that will reverse any time soon, suggesting the jobless rate is unlikely to rise nearly as much as some have feared.
'We think the unemployment rate is likely to peak at around 6 percent,' said Aird.
If so, that would be a big boon to consumer confidence and one less reason for the Reserve Bank of Australia (RBA) to add further stimulus to the economy.
That could be one reason why interest rate markets barely reacted to Thursday's report. Interbank futures were at most a single tick higher and still implied no more than a one-in-five chance of another cut in the 2.5 percent cash rate.
(Reporting by Wayne Cole; Editing by John Mair) Keywords: AUSTRALIA ECONOMY/
(Wayne.Cole@thomsonreuters.com)(612 9373 1813)(Reuters Messaging: email@example.com)
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