How can Sydney shut up shop in July and the national unemployment show an unexpected fall to a twelve-year low 4.6% in July from 4.9% in June? Moreover, how can it be that New South Wales showed one of the biggest falls in unemployment rate in July, down by 0.9 percentage points to 4.5%!

Why the July unemployment rate was so low comes down not to economic strength but to the answers to two key questions asked in the labour force survey. Did you work in the survey period and if not did you actively look for work?

As businesses shut their doors in the Greater Sydney lockdown, many workers were retained either as businesses went “takeaway, click and collect, or online” or in anticipation of resumption of business beyond lockdown. But businesses could not retain many of their workers and a large number were laid off.

Those who lost their jobs and were respondents to the ABS’ monthly Labour Force Survey, it matters how they answered first the question about whether they worked in the survey period. If the answer was no, the response to the second question about whether they were looking for work comes into play and determines whether they were unemployed. Answer yes, they were unemployed. Answer no, they were no longer in the labour force and so were not counted as unemployed.

The main reason why many might have answered no to the question about actively seeking work is that there is not much point seeking work when few businesses are hiring during lockdown and when mobility is restricted meaning it is not possible to travel to where work may be available. When lockdown restrictions are eased, however, those not actively seeking work are likely to start actively seeking work and return to the labour force and ranks of the unemployed.

In the July Labour Force survey, many would have provided a double no response meaning they were not working or actively looking for work in the survey period. They were not part of the labour force and were not considered to be unemployed.

In July the proportion of people of working age who were in the labour force (the participation rate) fell nationally to 66.0% from 66.2% in June. In New South Wales the fall in the participation rate was much greater, from 65.9% in June to 64.9% in July. That one percentage point reduction in participation rate in New South Wales is the reason why the state lost jobs in July but also experienced a fall in its unemployment rate. The state labour force contracted much more than state employment.

It is conceivable that a falling participation rate may again prevent deterioration in the unemployment rate next month when the August numbers are reported, a period when Sydney and Melbourne were both in lockdown. But the low unemployment rate is an illusion of economic strength.

Other details in the July labour force report provide better indication of the weakening economy. Monthly paid hours worked fell by three million hours, or 0.2% in July. The underemployment rate (the proportion of workers seeking more hours of work than they were offered) lifted from 7.9% in June to 8.3% in July.

Also, what the falling participation gives in terms of keeping the unemployment rate low during lockdown and economic downturn it will take when lockdowns ease and discouraged workers re-enter the labour force – when they start answering yes to the question in the labour force survey about whether they actively looked for work in the survey period.

When freedom of sorts returns to New South Wales and Victoria at 70% vaccination rate say in October/November it is likely that the unemployment rate will rise for a period while the recovering economy absorbs the rise in the labour force. As a result, the national unemployment rate could be sticky around 5% during the first half of 2022 as the economy recovers.

Labour supply in 2022 will be boosted by workers returning to the labour force after their exit in the second half of 2021. Additional labour supply may extend slow-paced wage growth.

Another surprise in the Australian data releases last week was lower-than-expected wage growth in Q2 2021, +0.4% q-o-q, +1.7% y-o-y. Despite business comments in surveys during Q2 of greater difficulty obtaining labour, there was no evidence of any upward pressure on wages in the official data.

The lockdowns and economic downturn in Q3 will reduce pressure on wages and the increased supply of labour in Q4 and the first half of 2022 could keep wage growth around 0.4% a quarter or lower through 2022. Annual wage growth may not lift above 2% y-o-y until 2023 and the RBA’s 3% y-o-y target may not be reached before late 2023.

The timeframe for when the RBA may need to hike the cash rate is ever moving because of the unpredictability of the pandemic and its economic consequences. The extended lockdown measures announced in New South Wales and Victoria over the past week mean a sharp GDP fall in Q3 and possibly another negative quarter in Q4. The negative labour market and lower wage growth consequences mean no RBA rate hikes in 2022 and 2023 and reversal soon of the decision to start tapering regular bond buying activities in September.