2014 y12 chapter 8_cd

Chapter 8

Table 8.1: The Australian Labour Force 2006-07 to 2012-13

Full Time Part Time Unemployed Labour Force Employed Persons Employed Persons Persons

2006-07 7,393,300 2,941,200 489,000 10,823,500

2007-08 7,664,600 3,051,100 473,800 11,189,500

2008-09 7,611,800 3,150,600 662,900 11,425,300

2009-10 7,880,000 3,353,100 607,000 11,840,100

2010-11 8,082,100 3,373,000 591,000 12,046,100

2011-12 8,065,500 3,435,000 631,300 12,131,800

2012-13 8,139,900 3,520,100 706,900 12,366,900Source: ABS (2013), Labour Force, Catalogue 6202.0, July.

THE MEASUREMENT OF UNEMPLOYMENT

Achieving full employment in the labour market is a major macroeconomic objective of the Australian government. After the 1990-91 recession the unemployment rate peaked at 11.2% in 1992. However by 2007-08 it had fallen to an historic low of 4.2%, after seventeen years (from 1991 to 2008) of consecutive economic growth. In 2008-09 the impact of the Global Financial Crisis led to the unemployment rate rising to 5.8% but a recovery in economic activity in 2010-11 helped to lower unemployment to 5.2% by 2012. However in 2013 it had risen to 5.7% of the labour force as economic growth slowed due to lower global growth and the peak in mining investment had been reached. Unemployment is measured as the percentage of the Australian labour force classified as unemployed. The Australian labour force refers to all persons of working age (i.e. between 15 and 64 years old) who are either employed in full time or part time work, or are unemployed, but registered as actively looking for work (refer to Table 8.1). The labour force is calculated by using the following equation:

Total Australian Labour Force = Employed (part time + full time) + Unemployed

The Australian Bureau of Statistics (ABS) uses the following definitions to determine the persons who are counted as part of the Australian labour force or workforce during its monthly labour force survey:

The employed include persons aged 15 years and over who during the ABS reference week worked for at least one hour per week for pay, profit, commission or payment in kind in a job, business or on a farm; or worked for one hour or more without pay in a family business or on a farm; or were employees who had a job but were not at work because they were on paid leave, on a shift arrangement, on strike or locked out, or on workers compensation.

Employers or own account workers (i.e. the self employed) who had a job, business or farm.

The unemployed include persons 15 years and over who were not employed during the reference week, but had actively looked for full time or part time work and were available for work, or were waiting to start a new job at any time in the four weeks up to the end of the reference week.

Unemployment

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Tim Riley Publications Pty Ltd Year 12 Economics 2014

Chapter 8: Unemployment Tim Riley Publications Pty Ltd192

Year 12 Economics 2014 Tim Riley Publications Pty Ltd

Table 8.2: Australian Labour Force Participation Rates 2004-05 to 2012-13

Year Persons Males Females Labour force Civilian Population Aged 15+ years

2004-05 64.0 71.8 56.3 10,366,900 16,227,300

2005-06 64.4 71.7 57.1 10,591,400 16,441,400

2006-07 64.8 72.2 57.6 10,823,500 16,696,800

2007-08 65.3 72.5 58.2 11,189,500 17,139,800

2008-09 65.3 72.1 58.7 11,425,300 17,504,400

2009-10 65.4 72.4 58.6 11,840,100 18,099,700

2010-11 65.6 72.2 59.1 12,046,100 18,370,900

2011-12 65.2 71.8 58.9 12,131,800 18,595,500

2012-13 65.2 71.7 58.8 12,366,900 18,976,200

Source: ABS (2013), Labour Force, Catalogue 6202.0, July and Australian Demographic Statistics, Cat. 3101, Dec.

Those persons who are not classified as part of the Australian workforce include the following categories: Children under 15 years of age.

Full time non working students above 15 years of age who are engaged in full time study.

Unemployed persons who are not actively seeking either full time or part time employment.

As shown in Table 8.1, in 2012-13, the Australian labour force totalled 12,366,900 persons, of which 8,139,900 or 65.8% were employed full time; 3,520,100 or 28.4% were employed part time; and 706,900 or 5.7% were classified as unemployed. The size of Australias labour force is determined by the following four specific factors: the size and growth rate of the population; net migration; the age distribution of the population; and the participation rate of the working age population:

1. The size of the Australian population in 2012-13 was approximately 22,906,400 persons. The civilian population over 15 years of age was 18,976,200 in 2012-13, but only 12,366,900 were counted as part of the labour force (refer to Table 8.2). This meant that the participation rate in 2012-13 was 65.2%. Population growth (394,200 in 2012-13) is influenced by the rate of natural increase and net migration. The population growth rate (1.8% in 2012-13) is equal to the sum of the rate of natural increase (158,300 in 2012-13) plus net migration (235,900 in 2012-13) i.e.

Population Growth Rate (% ) = Natural Increase (% ) + Net Migration (% )

2. The level of net migration adds to the skills base and size of the Australian labour force. The level of net migration in 2010-11 was 108,100, less than half the migrant intake in 2008-09. This was due to a reduction in the migration intake by the Australian government after the Global Financial Crisis in 2008-09 which led to higher unemployment in the Australian economy. However the migrant intake had increased to 235,900 in 2012-13 as the economic recovery strengthened.

3. The age distribution of the population has an effect on the potential size of the labour force because more people in the 15 years to 64 years age group, as a proportion of the total population, will increase the potential pool of workers. In 2012-13, there were 15,198,320 people in the 15 to 64 year age group, representing some 66.3% of the total Australian population of 22,906,400.

4. The participation rate of the working age population (15 to 64 years) refers to the percentage of the working age population actually in the labour force (either employed full or part time or unemployed but actively looking for work). The equation for the participation rate is as follows:



___ Work Force 100 12,366,900 100 Participation Rate = Working Age Population x 1 = 18,976,200 x 1 = 65.2%

In 2012-13 the participation rate was 65.2% down from 65.6% in 2010-11 (see Table 8.2). The participation rate varies with the level of economic activity, rising during booms (e.g. from 63.5% in 2003-04 to 65.3% in 2007-08 and 2008-09) when more jobs are available. It tends to fall during recessions or periods of low growth when unemployment rises and job vacancies fall (e.g. from 65.6% in 2010-11 to 65.2% in 2011-12). Two groups that have an impact on the participation rate are young people looking for their first job (such as students and school leavers) and women with young children returning to the labour force. The participation rate for males is higher than for females but the participation rate for females has tended to increase over time (e.g. from 55.6% in 2003-04 to 59.1% in 2010-11) whereas the participation rate for males has tended to remain relatively stable at around 72%. Participation rates for males, females and persons were relatively stable during the period of weaker labour demand associated with the Global Financial Crisis in 2008-09, but declined slightly in 2012-13 because of slower growth in the Australian economy.

Unemployment refers to people who are willing and able to work, actively seeking work, but are unable to find suitable employment. In Australia, unemployment is measured by a monthly Australian Bureau of Statistics (ABS) telephone survey of the labour force. To be counted as unemployed by the ABS labour force survey, a person must be available for work and fall into one of the two following categories:

1. Had actively looked for full time or part time work at any time in the four weeks up to the end of the reference week and were available for work in the reference week; or

2. Were waiting to start a new job within four weeks from the end of the reference week and could have started in the reference week if the job had been available then.

The unemployment rate is calculated as a percentage of the labour force, which includes all persons employed (i.e. full time plus part time workers), plus all unemployed persons i.e.

Total Number Unemployed 100 Unemployment Rate = Labour force (Employed + Unemployed) x 1

In 2012-13 there were 8,139,900 persons employed full time, 3,520,100 persons employed part time, and 706,900 persons classified as unemployed. This gave a total labour force of 12,366,900 persons. The unemployment rate calculated by the ABS in July 2013 was therefore 5.7% i.e.

Unemployment Rate for July 2013 = 706,900 100 12,366,900 x 1 = 5.7%

RECENT TRENDS IN UNEMPLOYMENTThe level and rate of unemployment remained high in Australia after the 1970s, when stagflation (simultaneous high levels of inflation and unemployment with low economic growth) caused by the energy crisis led to a rise in the unemployment rate from 2% in the 1960s to over 6% by the end of the 1970s. In the 1980s unemployment rose to 8% of the labour force and after the early 1990s recession, it reached 11% of the Australian labour force, with much of the rise in the unemployment rate accounted for by the rise in the unemployment rate for male full time workers in manufacturing.

The unemployment rate peaked at 11% in 1992 and then fell slowly, reaching 7.4% in 1998-99. In 2007-08 the unemployment rate was 4.2%, its lowest level in over 30 years (see Table 8.3). Much of the fall in the unemployment rate between 1999 and 2008 was due to high rates of sustainable economic growth, averaging over 3% per annum in this period. Figure 8.1 shows the gradual fall in the unemployment rate between 2001-02 and 2007-08, mainly because of consistently high rates of sustainable economic growth in Australia and structural reforms in the labour market.



Table 8.3: The Australian Unemployment Rate 2006-07 to 2012-13

Labour Force Unemployed Unemployment Long Term Unemployed Real GDP Persons Persons Rate (%) (% of Total Unemployed) %r pa

2006-07 10,823,500 489,000 4.5% 16.9% 3.3%

2007-08 11,189,500 473,800 4.2% 14.2% 3.7%

2008-09 11,425,300 662,900 5.8% 15.7% 1.3%

2009-10 11,840,100 607,000 5.1% 18.7% 2.3%

2010-11 12,046,100 591,000 4.9% 19.5% 1.9%

2011-12 12,131,800 631,300 5.2% 18.7% 3.4%

2012-13 12,366,900 706,900 5.7% 18.6% 3.0%

Source: ABS (2013), Labour Force, Catalogue 6202.0, July and Catalogue 6291.0.55.001.

In 2008-09 the Global Financial Crisis and recession had a major impact on the Australian labour market, with unemployment rising from 4.2% in 2007-08 to 5.8% in 2008-09 due to the low rate of economic growth of 1.3% (refer to Table 8.3). In 2008-09 many employers cut hours of work and switched workers from full time to part time work. There were also major retrenchments in industries affected by the GFC such as mining, manufacturing and finance. However with economic growth of 2.3% in 2009-10 the unemployment rate fell back to 5.1% and to 4.9% in 2010-11. An uneven pattern of growth and structural change in 2011-12 led to retrenchments in industries such as car manufacturing, steel, retailing, building and construction and the unemployment rate rose to 5.2%. In 2012-13 a lower rate of economic growth of 3% led to the unemployment rate increasing to 5.7%.

Another trend in unemployment in Australia is the high incidence of long term unemployment (i.e. persons unemployed for more than 12 months) and the increasing duration of unemployment. Long term unemployment rose from 14.2% to 19.5% of the total number unemployed between 2007-08 and 2010-11 before falling back to 18.6% in 2012-13 as shown in Table 8.3. The average duration of unemployment was around 56.3 weeks. The major reasons for being unemployed between 2009-10 and 2011-12 are shown in Table 8.4. The reasons for unemployment in 2011-12 included the following:

Loss of job or being made redundant accounted for 35.7% of the total unemployed;

Leaving a job accounted for 23.3% of the total unemployed;

Figure 8.1: Australias Unemployment Rate 2000-01 to 2012-13

0

1

2

3

4

5

6

7

8

% of Workforce

12-1311-1210-1109-1008-907-806-705-604-503-402-301-200-1

% of Workforce

Source: ABS (2013), Labour Force, Catalogue 6202.0, July.



Table 8.4: Unemployed Persons in Australia - Reason for Leaving Last Job 2009-12

Reasons for Unemployment Percentage of Unemployed

Job Job Never Former Job Job Never Former Loser Leaver Worked Worker Loser Leaver Worked Worker

2009-10 242,000 161,500 124,000 90,500 39.2% 26.1% 20.1% 14.6%

2010-11 215,300 143,200 128,300 117,400 35.6% 23.7% 21.2% 19.4%

2011-12 225,400 146,900 141,200 117,400 35.7% 23.3% 22.4% 18.6%

Source: ABS (2012), Australian Economic Indicators, Catalogue 1350.0, July.

Table 8.5: Unemployment Rate by Sex and Age Group 2006-2013 (annual average %)

Males Looking for Full Time Work Females Looking for Full Time Work 15-19 years 20+ years 15-19 years 20+ years

2006-07 17.1 3.5 22.5 4.6

2007-08 15.4 3.1 21.2 4.0

2008-09 24.1 5.4 29.2 5.6

2009-10 22.1 4.2 27.6 5.1

2010-11 19.6 3.9 24.3 5.3

2011-12 21.7 3.9 26.0 5.4

2012-13 23.2 5.4 29.6 6.2

Source: ABS (2012), Australian Economic Indicators, Cat. No. 1350.0, July and (2013) Labour Force, Cat. 6202.0.

Never having worked (looking for a first job) accounted for 22.4% of the total unemployed; and

Being a former worker (re-entering the labour force) accounted for 18.6% of the total unemployed.

There was an increase in the percentage of job losers between 2007-08 and 2008-09 because of the impact of the Global Financial Crisis. However the percentage of job leavers fell as workers placed more emphasis on job security. The percentages of first time workers and former workers fell in 2008-09 as some workers gave up looking for jobs as the labour market weakened due to the GFC. But jobs growth occurred between 2009-10 and 2010-11 due to economic recovery, and there was a decline in job losses. In 2011-12 an increase in job losses occurred due to the uneven pattern of growth in the Australian economy and the negative impact of the high value of the Australian dollar on the competitiveness of manufacturing firms such as Toyota, Holden, Ford and Blue Scope Steel which retrenched workers.

Unemployment rates according to sex and age between 2006-07 and 2012-13 are shown in Table 8.5. The unemployment rate for young (15 to 19 years) males and females looking for full time work was four to five times the rate for males and females over twenty years of age. Young males (15-19 years) had an unemployment rate of 23.2% in 2012-13 compared to 5.4% for males 20 years and over. The corresponding unemployment rates for females were 29.6% and 6.2%. Young people therefore experience more difficulty in securing employment because of a lack of skills, training and experience. This leads to high rates of youth unemployment for 15-19 year olds seeking their first job.

The distribution of unemployment between Australian states changed between 2006 and 2008 as the labour market reached full employment. Most states recorded falls in their unemployment rates in 2008 (see Table 8.6), with the lowest unemployment rates in the resource rich states of Western Australia (3%) and Queensland (3.8%) which had strong labour demand due to the global resources boom.



Table 8.6: Unemployment Rates by State 2008 to 2013

NSW VIC QLD SA WA TAS Australia

- September 2008 4.9% 4.4% 3.8% 5.8% 3.0% 3.8% 4.3%

- June 2009 6.4% 6.0% 5.5% 5.4% 5.2% 4.6% 5.8%

- July 2010 5.4% 5.4% 5.5% 5.3% 4.1% 6.5% 5.3%

- July 2011 5.2% 4.9% 5.4% 5.2% 4.1% 5.3% 4.9%

- June 2012 5.1% 5.3% 5.1% 5.9% 3.6% 7.0% 5.2%

- June 2013 5.4% 5.7% 5.9% 7.1% 4.6% 8.2% 5.7% Source: ABS (2013), Labour Force, Australia, Catalogue 6202.0, July.

All states had strong employment growth in 2008 and the national unemployment rate fell to 4.3% (see Table 8.6). The global resources boom and rising terms of trade led to a reallocation of the economys resources (such as labour and capital), away from the non resource rich states of NSW, Victoria and South Australia, to the resource rich states of Western Australia and Queensland, where mining accounts for a large proportion of their state product. They recorded higher economic and employment growth and lower unemployment rates than non resource rich states between 2003 and 2008.

The impact of the Global Financial Crisis and recession in 2008 led to negative employment growth and rising unemployment rates in all states in 2009, with the national unemployment rate increasing from 4.3% in 2008 to 5.8% (see Table 8.6). Large rises in unemployment in Western Australia and Queensland reflected a contraction in mining output, whilst in the larger states of NSW and Victoria it was caused by a fall in employment in manufacturing and the financial sector. State unemployment rates generally fell in 2010-11 due to a national economic recovery, but rose again between 2012 and 2013 with lower economic growth and a re-balancing of growth away from the resources sector.

REVIEW QUESTIONSMEASUREMENT AND RECENT TRENDS IN UNEMPLOYMENT

1. What is meant by the labour force? How is the size of the labour force measured by the ABS? Which groups are included and not included in the Australian labour force?

2. Refer to Table 8.1 and discuss the changes in the composition of the Australian labour force between 2006-07 and 2012-13.

3. Discuss the four main factors influencing the size of the Australian labour force.

4. What is the participation rate and how is it measured? What factors influence the participation rate? Refer to Table 8.2 and compare the trends for male and female participation rates between 2004-05 and 2012-13.

5. What is unemployment? How is it defined and measured by the ABS? What has been the trend in the Australian unemployment rate in the 1970s, 1980s, 1990s and 2000s?

6. Discuss recent trends in long term unemployment and the main reasons for unemployment.

7. Discuss the reasons for the higher rates of unemployment experienced by young people.

8. Account for the trends in the unemployment rates of the states between 2008 and 2013. Discuss the impact of the Global Financial Crisis and recession on the labour market in 2008-09.



THE TYPES OF UNEMPLOYMENT1. Cyclical unemployment is caused by a contraction in economic activity or aggregate demand. A fall in aggregate demand reduces the derived demand for labour. Cyclical unemployment is also known as involuntary unemployment as workers are laid off as a result of a fall in the demand for labour, not because they lose the incentive to work. Cyclical unemployment rises in a recession as spending and GDP growth fall, causing employers to lay off some existing workers and cease hiring new workers. Cyclical unemployment rose in 2008-09 in Australia because of the GFC and the lower rate of growth.

2. Structural unemployment results from a mismatch between the labour skills of employees and the job vacancies offered by employers. Structural change in manufacturing for example, may lead to the introduction of new technology making some jobs obsolete, whilst new jobs may be created in expanding industries such as mining and services. It takes time for workers to acquire new skills and relocate before they can fill the vacancies offered by employers. Another factor leading to structural unemployment in Australia are microeconomic reforms in industry such as tariff cuts in manufacturing and reforms to Public Trading Enterprises in the 1990s and 2000s, which have led to the restructuring of workforces in these industries. Between 2010 and 2013 the high value of the Australian dollar led to structural unemployment in manufacturing (e.g. the car industry) because of a loss of competitiveness.

3. Frictional unemployment is caused by people moving between jobs or experiencing changing economic circumstances. Examples of frictional unemployment include young people leaving school to find jobs; people searching for better paid career jobs; women leaving and re-entering the workforce after rearing children; or people leaving a failed business to join a new industry. Frictional unemployment is caused by the search times needed for workers to find jobs and for firms to find employees. There is often an imperfect flow of information between job seekers and employers in the labour market.

4. Seasonal unemployment is part of frictional unemployment but may be categorised separately since specific industries or occupations are characterised by seasonal work which may lead to unemployment. Examples might include workers employed during farm harvest times or people working Summer jobs such as in Christmas retailing, or Winter jobs in the snowfields such as ski lift operators or instructors.

5. Underemployment refers to persons working part time who want to work more hours or switch to full time employment, and persons employed full time who have been switched to part time hours. The ABS calculated the underemployment rate (i.e. the number of underemployed workers as a percentage of the labour force) in 2012-13 as 7.2%. The ABS also calculated the labour underutilisation rate (the unemployment rate of 5.7% plus the underemployment rate of 7.2%) as 12.9% in 2012-13.

6. Hidden or disguised unemployment refers to people who may not be counted as part of ABS unemployment statistics because they have given up looking for work or receive income support from a spouse, partner or parent and are not eligible for Job Search Allowance. The hidden unemployed refer to persons such as married women with children, who would work if suitable jobs were available and they could find affordable child care facilities. Some of the hidden unemployed may also be discouraged workers who have given up looking for work because labour market conditions have deteriorated.

7. Long term unemployment refers to those persons who are unemployed for over 12 months. This may be due to a lack of skills, training, education or the motivation to find and secure suitable employment opportunities in the labour market. Hard core unemployment is a term used to refer to those people in the labour force who experience chronic periods of unemployment or long term unemployment. These workers may face particular personal difficulties (such as physical, mental or emotional problems; a criminal record; health problems such as drug or alcohol abuse; or attitude problems based on a poor motivation to seek work or a poor physical appearance) in finding and holding suitable jobs.

8. Regional unemployment occurs when a major industry such as steel, TCF or PMV in a particular geographic region reduces its demand for labour causing widespread unemployment. This is the case in manufacturing regions undergoing large scale structural change and adjustment such as major industrial regions in Australia like Port Kembla, Wollongong, Newcastle, Whyalla and Geelong.



Figure 8.2: The Keynesian Deflationary or Unemployment Gap

AS

AD

Ye Yf Income

Expenditure

ab

0

} deflationary gap

Figure 8.3: The AD/AS Deflationary or Unemployment Gap

}

Price Level

ASAD

Real GDPreal GDP2

real GDP1

AD

AD1

AD1

AS

0

a b

deflationary gap

THE CAUSES OF UNEMPLOYMENTThe major cause of cyclical unemployment is a deficiency in aggregate demand (AD = C + I + G + X M). Cyclical changes in domestic and international economic activity may lead to changes in the demand for labour. Since the demand for labour is derived from the demand for final output, any decline in aggregate demand may lead to a rise in cyclical unemployment. For example, the Global Financial Crisis and recession in late 2008 led to a fall in aggregate spending and economic activity in Australia in 2008-09. After a lag of some six months, following negative growth in GDP of -0.5% in the December quarter 2008, unemployment rose from 4.2% to 5.8% of the labour force by mid 2009.

Similarly a severe contraction in aggregate spending and economic activity occurred in 1990-91 following interest rate rises by the Reserve Bank in 1989-90. This led to a severe recession in Australia, which was compounded by a world recession in 1990-91 which reduced export demand. The unemployment rate rose from under 8% of the Australian labour force in 1989-90 to over 11% by 1992.

A theoretical explanation for cyclical or involuntary unemployment was put forward by John Maynard Keynes in his General Theory of Employment, Interest and Money in 1936. In Figure 8.2, the equilibrium level of national income is Ye, determined by the intersection of the aggregate demand (AD) and aggregate supply (AS) curves. Keynes argued that the equilibrium level of national income in an economy may not necessarily coincide with the full employment level of income, denoted by Yf in Figure 8.2. If total spending was insufficient to guarantee full employment of the economys resources, a deflationary gap or unemployment gap of ab would arise, causing cyclical unemployment to increase.

Another model used to show how cyclical unemployment arises is the aggregate demand and aggregate supply model. In Figure 8.3, the economys price level is measured on the vertical axis and real GDP on the horizontal axis. Aggregate demand (AD) slopes downwards to the right as more output is demanded at lower price levels, whereas the aggregate supply curve slopes upwards to the right until it reaches the full employment level of GDP at real GDP1, where supply or capacity constraints are encountered and the aggregate supply curve becomes vertical. If the initial equilibrium level of income is at real GDP1 where AD equals AS, there is full employment of the economys resources. If AD shifts to the left to AD1, a new equilibrium level of real GDP is established below full employment at real GDP2. A deflationary or unemployment gap of ab results, causing unemployment to rise in the economy.

Structural changes in consumption and production can cause the level of structural unemployment to rise. For example, the introduction of new labour saving technology in primary and secondary industries has led to a fall in employment in these industries. Uncompetitive industries such as textiles, clothing



Figure 8.4: The Effect of Wage Expectations on Employment

W1

W

unemployment

SL

SL DL

DL

Wage Rate

Quantity of LabourQ L1 Q L20

Q L

minimum oraward wage

and footwear, steel and passenger motor vehicles have also been forced to reduce their workforces because of tariff and quota cuts introduced by the government in 1988, 1991, 2000, 2005 and 2010. Although some industries have contracted in manufacturing, new industries have been established and others have expanded, creating new employment opportunities in the services sector. In the 1990s there was also widespread reform of Public Trading Enterprises through deregulation and privatisation, which led to an increase in workforce downsizing and the retrenchment of some labour in affected industries.

An important factor that may cause unemployment is the role of wage expectations in pushing up the price of labour relative to capital. Rapid rises in real wage costs will reduce the demand for labour and provide employers with the incentive to substitute capital for labour, causing a rise in what is known as voluntary unemployment or wage induced unemployment. For example, if trade unions have large bargaining power and win large wage increases, which may be inconsistent with industrys capacity to pay or productivity levels, businesses may cut wage costs by making some labour redundant.

This is illustrated in Figure 8.4 where the demand for labour (DL) in a competitive labour market is a negative function of the wage rate and slopes downwards from left to right. The supply of labour (SL) is a positive function of the wage rate and slopes upwards from left to right. If a minimum award wage (or Modern Award) of W1 is established above the market equilibrium wage rate of W by wage fixing tribunals or trade union bargaining power raising wages above equilibrium, unemployment of QL1QL2 will occur since the demand for labour (QL1) is less than the supply of labour (QL2) at wage rate W1.

Australian governments have tried to control wages growth through a system of enterprise wage bargaining in the labour market. This has led to less reliance by workers on adjustments to the safety net of the National Minimum Wage and Modern Awards set by the Fair Work Commission and state industrial tribunals for wage increases. With the introduction of enterprise bargaining in 1991 as a wage fixing principle, and the spread of enterprise agreements in the labour market in the 1990s and 2000s, the percentage of workers reliant on arbitrated awards for pay rises fell from 67% of employees in 1990 to around 15.2% by 2013. This has helped to link wage increases to improvements in productivity that reflect individual enterprise and industry conditions. As a result, employers demand for labour increased and this is one factor that led to a permanent lowering of unemployment in Australia in the late 1990s and early to mid 2000s. The Howard governments labour market reforms in the Workplace Relations Amendment Act (WorkChoices) in 2006 sought to shift more workers away from awards to individual agreements, arguing that this would stimulate employment and reduce unemployment.



Figure 8.5: The Natural Rate of Unemployment

Real Wage

W

D

LF

SL

0QL

L

DL

Q Q of LN

E U

Figure 8.6: The LRPC and the NAIRU

Inflation %

Unemployment %

LRPC LRPC

NAIRU NAIRU

A

BC3%

0%6%

6%

5%

1

SRPC

SRPC

1

1

The labour market is very dynamic with many factors influencing the flow of information between job seekers and potential employers. A lack of efficiency in the labour market in matching labour skills with the jobs available can influence the level of frictional unemployment. Rigidities in the labour market like government regulations (e.g. superannuation, taxation, workers compensation, unfair dismissals legislation and award conditions) can also reduce the hiring intentions (through higher on costs of labour) of employers, causing unemployment. Also if workers do not have access to education and training they will be less skilled and in lower demand by employers for the jobs available. Unemployment can therefore be caused by high on costs of labour and a lack of skills, education and training.

Successive Australian governments have addressed the issue of improving the education, training and skills of the labour force by implementing labour market programmes such as Building Australias Future Workforce (2011), the Job Compact, the Job Network, the National Education Framework and A Plan for Australian Jobs (2013). The National Training Authority was formed to increase apprenticeships for young people and an Alternative Pathways Programme established to address skills shortages in 2013.

The Non Accelerating Inflation Rate of Unemployment (NAIRU)Full employment is where the quantity of labour demanded equals the quantity of labour supplied. The unemployment rate at full employment is called the natural rate of unemployment. The natural rate of unemployment fluctuates because of changes in the levels of frictional and structural unemployment in the labour market. Some workers will be unemployed because they are in between jobs, and others because they lack the skills necessary for the jobs available. In Australia, empirical research by Treasury (2011) estimates the natural rate of unemployment at between 5% and 6% of the Australian workforce.

Figure 8.5 illustrates the concept of the natural rate of unemployment. The real wage rate is measured on the vertical axis and the quantity of labour on the horizontal axis. The demand for labour (DL) is a negative function of the real wage rate and the supply of labour (SL) is a positive function of the real wage rate. The labour force is denoted by the vertical line LF. Full employment is where equilibrium (E) occurs in the labour market at real wage W and labour quantity QL. The distance EU (QN - QL) is equivalent to the natural rate of unemployment. Some workers are unemployed (due to frictional and structural factors) because they are unable to find work at the equilibrium real wage rate of W.

Monetarist economists such as Milton Friedman used the natural rate of unemployment in the 1970s to develop a concept called the non accelerating inflation rate of unemployment (NAIRU). This refers to a rate of unemployment that is consistent with a constant inflation rate or no change in the inflation rate. Figure 8.6 illustrates the Short Run Phillips Curve (SRPC) which shows the short run tradeoff between the rates of inflation and unemployment. For example an economy may have 6% inflation and



5% unemployment in the short run (point A) or 3% inflation and 6% unemployment (point B) on SRPC. At point A it may be possible for the government to reduce inflation to 3% but at the cost of a rise in the unemployment rate from 5% to 6%. At point B it may be possible for the government to reduce unemployment from 6% to 5% but at the cost of a rise in the inflation rate from 3% to 6%.The Long Run Phillips Curve (LRPC) shows that there is no tradeoff between inflation and unemployment in the long run, with the economys NAIRU equal to the natural rate of unemployment of 6%. The NAIRU is the lowest unemployment rate which can be sustained without an increase in inflation. Reducing the NAIRU from LRPC (6%) to LRPC1 (5%) involves the use of supply side policies by the government such as labour market reforms and improvements in productivity. If these policies are successful in the short run, the SRPC would shift from SRPC to SRPC1. In the long run the LRPC would shift from LRPC to LRPC1 and lower the NAIRU from 6% to 5% at point C, without any change in the inflation rate at 3%.

The Main Groups Affected by UnemploymentThe incidence of unemployment varies between demographic and skill groups in the labour force. Young and less educated labour force participants, recent immigrants and persons whose last job was in blue collar occupations account for disproportionately high shares of unemployment. However all groups (i.e. males and females aged 15 to 64 years) experienced increases in their rates of unemployment over the period from the 1970s to 1990s. However this trend reversed in the 2000s with strong employment growth and a reduction in the level and rate of unemployment up to mid 2008 before the GFC.Teenagers (15 -19 years) experience the highest rates of unemployment. For males in 2012-13 the rate was 23.2% and for females it was 29.6% (see Table 8.5 on page 195). Teenagers experience difficulty in securing their first job because of a lack of experience, education, training and skills. For workers over 20 years, the rate of unemployment in 2012-13 for males was 5.4% and 6.2% for females. For workers between 25 and 44 years, the rate of unemployment was 4.9% in 2012-13. However for workers between 45 and 54 years, the percentage of long term unemployed was 30% in 2012-13, reflecting the difficulty of older workers finding full time or part time work if they have been made redundant or retrenched due to industrial restructuring or reforms to industries such as car manufacturing.

Workers with low levels of educational attainment tend to experience higher rates of unemployment than those with higher levels of educational qualifications. For males and females who had not completed high school, the rates of unemployment were around 16.3% and 14.6% respectively in the 1990s and 2000s. In contrast, for workers who had degrees, diplomas, a vocational qualification or had completed high school, the rate of unemployment varied between 6% and 8.5% in the 1990s and 2000s. Unemployment also affects workers according to their occupation. Workers in semi-skilled or unskilled occupations (e.g. labourers and factory workers) had unemployment rates of 7% to 10% in the 1990s and 2000s, compared to rates of 1% to 5% for managers, professionals and trades persons.Unemployment rates tend to be higher in industries affected by high rates of structural change like manufacturing, building and construction and trades. These industries had the highest rates of unemployment in the 1990s and also the highest percentage of long term unemployed. However these rates fell when labour demand rose during the housing and resource booms in the 2000s. Migrants can also experience high rates of unemployment according to their time of arrival. For migrants arriving between 1986 and 1995, their unemployment rate was 12.1% in 1998. This was lower than for migrants arriving after 1995, who experienced a 17% unemployment rate.Aborigines and Torres Strait Islanders also experience high rates of unemployment and long term unemployment. Family status also impacts on rates of unemployment, with sole parents, dependent students and non dependent children having rates of unemployment between 16% and 18% in the 1990s. Unemployment is distributed nationally, but there are variations between the states of Australia. States benefiting from the resources boom over 2005-08 such as Western Australia and Queensland had lower rates of unemployment than states with smaller mining sectors such as NSW and Victoria.



THE EFFECTS OF UNEMPLOYMENTThe primary economic cost of unemployment is the opportunity cost of lost output and income. Real GDP will be lower (as it is below full employment) and national income will be reduced, along with living standards. The unemployed and their families and dependants will suffer economic and social hardship due to a loss of market income and the social stigma attached to being unemployed. Their levels of consumption will necessarily fall and their satisfaction from life will be less than for the employed, as opportunities and choices for spending and recreation are reduced for the unemployed and their dependants. Unemployment may also cause poverty traps because of welfare dependency.Unemployment also causes a loss of human capital as the unemployed will not be contributing their skills and experience to the workforce and will need to undergo re-training to become job ready in their search for new employment opportunities. There is therefore a depreciation in the human capital of the unemployed, and increased duration of unemployment will increase this rate of depreciation.

The most negative feature of the higher unemployment rate resulting from the 1990-91 recession was the rising percentage of long term unemployed, reaching nearly 40% of the total number of unemployed. The longer a person is unemployed, the more difficult it is for them to secure a job because they are less preferred to new workforce entrants by employers for the jobs available. The unemployed are also likely to experience a loss of self esteem and dignity, which reduces their motivation to search for jobs or to undergo re-training and education to increase their skills. A lack of motivation can lead to higher rates of long term unemployment and dependence on government welfare payments for income support.

Other economic costs of unemployment include the increasing taxation burden placed on employed persons in the workforce to finance increased social security spending from the taxation payments they make to the government. The federal government will experience an erosion of its tax base due to unemployment and a rise in cyclical expenditure on social security payments. This could lead to a rise in a budget deficit or a fall in a budget surplus. Unemployment can also lead to a less equal distribution of income as the unemployed will be reliant on income support from government welfare payments, and concentrated disproportionately in the lowest quintile of the distribution of household income.

The social costs of unemployment are difficult to quantify but researchers have linked them to undesirable social trends such as rising crime rates; increased drug and alcohol dependency; health problems for the unemployed; higher suicide rates; the breakdown of family relationships; and a loss of self esteem and human dignity for the unemployed. These social problems may be linked to particular groups of unemployed people such as young people, sole parents, middle aged men from professional or trades backgrounds, workers with ethnic or indigenous backgrounds, migrants and single women.

If the productivity of the workforce is rising over time because of the more efficient use of capital and labour in the workplace, fewer workers will be needed to produce the same output. The American economist, Arthur Okun, formulated a relationship between economic growth, unemployment and productivity which has become known as Okuns Law. Okuns Law suggests that for a government to reduce unemployment, the rate of economic growth needs to exceed the growth in labour productivity plus the growth in the labour force through new entrants. In Australia higher average sustainable economic growth of around 4% between 1996 and 2008 resulted in unemployment falling to 4.2%. However the lower rate of economic growth of 1.3% in 2008-09 due to the Global Financial Crisis and recession led to a rise in the unemployment rate from 4.2% in 2007-08 to 5.8% in 2008-09.

Since 1996 inflation in Australia has been well anchored, with annual inflation averaging 2.5%. At the same time the unemployment rate fell steadily and the economy reached full employment in 2008, with widespread labour shortages and rising inflation and wage pressures. However this situation changed in 2008-09 because of the impact of the Global Financial Crisis and recession, with declining rates of economic growth, rising unemployment and lower inflation. The Australian government used a combination of monetary stimulus (through cuts to interest rates) and fiscal stimulus packages throughout 2008-09 to support aggregate demand and employment in the Australian economy.



POLICIES TO REDUCE UNEMPLOYMENTThe main policies available to the Australian government to reduce unemployment are as follows:

Stimulatory monetary policy through cuts to interest rates;

Expansionary fiscal policy through an increase in government spending and/or cuts in taxes;

Industrial relations policy or wages policy to contain the growth in aggregate wages; and

Microeconomic reform policies to improve the economys resource allocation and productivity.

Promoting Higher Sustainable Economic GrowthIn order to reduce cyclical unemployment, monetary and fiscal policies can be used to offset cyclical downturns in the economy and increasing levels of unemployment that accompany periods of slower economic activity. Fiscal stimulus (i.e. expansionary fiscal policy) and the easing of monetary policy have the potential to stimulate aggregate demand or spending (C+ I + G + X - M), and increase the output of goods and services in the economy. Given that the demand for labour is derived from the demand for goods and services that it is used to produce, higher levels of output will require increased levels of employment, which in turn should lead to a lowering of the level and rate of unemployment.

In 2008-09 as the Global Financial Crisis and recession impacted on major advanced, developing and emerging economies, national governments used a combination of expansionary monetary policy (through cuts to official interest rates) and fiscal stimulus packages (through increased budget deficits) to support aggregate demand and employment. In Australia the cash rate was cut by -4.25% by the Reserve Bank between September 2008 and April 2009, and the Australian government increased the size of the budget deficit to -$53b (or -4.5% of GDP) with new discretionary spending on cash payments to households ($10.4b) and infrastructure projects through the Nation Building and Jobs Plan ($42b).

However experience in economies such as Australia over the last few decades has shown that monetary and fiscal policies are relatively ineffective in terms of reducing structural unemployment. Therefore greater emphasis has been placed on labour market reform policies such as government employment, education and training programmes to help workers to adjust to structural changes in the workplace.

Labour Market ReformsLabour market reform policies are designed to make labour markets more flexible, encourage more competitive work practices and higher levels of labour productivity. This in turn should lead to higher levels of employment as employers have a greater incentive to hire additional workers. Labour market deregulation and the movement towards decentralised wage determination, where firms and employees are able to negotiate wage increases on the basis of improved levels of productivity, has been the central component of Australias recent labour market reform agenda. The continuing process of Awards Modernisation in making awards simpler instruments that do not impede workplace efficiency and employment growth, is another key element of the governments labour market reform agenda.

Labour market reform legislation such as the Workplace Relations Act 1996, incorporated measures designed to curb union powers and weaken unfair dismissal laws. This was viewed by the Howard government as a means of direct intervention in labour markets in order to reduce unemployment. The WorkChoices legislation introduced in March 2006 extended this reform process by further reducing the reliance on awards and placing more emphasis on individual workplace bargaining through:

Creation of the Australian Fair Pay Commission (AFPC) and the Australian Fair Pay and Conditions Standard (AFPCS) which contained only five minimum standards for award adjustments;

Abolition of the No Disadvantage Test applicable to AWAs and Union Collective Agreements;

Reduction of the 20 allowable matters in the award safety net to 16; and

Exemption of businesses with less than 100 employees from unfair dismissals legislation.



These changes further deregulated the industrial relations system, with the government believing that the new reforms would lead to further gains in employment and productivity, and a reduction in the unemployment rate because of greater flexibility in wage and employment setting procedures.

With the election of the Rudd Labor government in 2007, the Workplace Relations Amendment (Transition to Fairness) Act 2008 and the Fair Work Act 2009 were passed to strengthen the safety net of the workplace relations system. This included the introduction of ten National Employment Standards, Modern Awards and annual adjustments to the National Minimum Wage by Fair Work Australia. Emphasis was also placed on collective bargaining, with individual workplace agreements such as AWAs phased out. The negotiation of enterprise agreements were subject to a Better Off Overall Test (BOOT) to ensure that workers under enterprise agreements received better than minimum conditions of employment, and had an incentive to raise productivity to receive higher wages.

Education and TrainingA major reason for unemployment is the lack of education, training and skills of some workers (especially young workers aged 15 to 19 years) demanded by employers for the jobs available. Some of the key Australian government policies for increasing workforce training and education have been the following:

New Apprenticeship Centres to promote the skills formation of apprentices by employers.

Expansion of school based apprenticeship systems to develop apprenticeship skills in schools.

Funding for vocational and school education including the National Education Framework for Schools to raise literacy and numeracy standards.

The Australian National Training Authority was established to improve the skill development of Australian workers through ongoing education, training and development.

Labour market assistance to job seekers is based on the Australian governments Job Services Australia, a national network of private, community and government organisations contracted to assist the unemployed to find jobs. This is supported by Australian Job Search, an Australian government run online job noticeboard.

In the 2008-09 budget the Rudd government established an Education Investment Fund with an initial allocation of $11b to be spent on higher education, vocational education and training facilities. The government also introduced a $5.9b new programme called the Education Revolution, which involved long term reform plans to boost the quality of Australian education and training by:

Improving access to high quality early childhood education and care.

Providing greater flexibility for schools to improve the educational outcomes of students. This included the Digital Education Revolution through the delivery of computers to all Year 9-12 students and the establishment of Trade Training Centres in schools.

Creating a flexible and competitive national vocational training system. This involved expenditure of $1.9b to deliver up to 630,000 additional training places over five years.

In the 2009-10 budget the government introduced the Jobs and Training Compact at a cost of $1.5b over five years in response to the rise in the unemployment rate caused by the impact of the Global Financial Crisis on the Australian labour market. The main measures in the Compact included a Training Supplement Scheme to eligible job seekers to undertake training; training places for persons under 25 who wanted to upskill; employment assistance to workers who became unemployed; and assistance to regions and communities directly affected by the global recession.

In the 2011-12 and 2012-13 budgets, the Building Australias Future Workforce package included $3b of Australian government funding for new skills measures such as apprenticeships, reform of the VET system, and measures to boost the workforce participation of disadvantaged groups. In the 2013-14 budget the government established a $68m Alternative Pathways Program to address skills shortages.



Tax and Welfare ReformsA major change in federal government policy has been to reform the welfare and tax systems to strengthen the incentives and obligations of welfare recipients to seek paid casual, part time or full time work:

The Australians Working Together package (2001), included reforms to help people out of work to return to the labour force through a system of working and training credits. It targeted parents, mature aged people, indigenous people and people with disabilities to seek paid work or training.

In the 2004-05 budget, the government announced its More Help for Families package, tax cuts and incentives for saving for retirement. These measures targeted the elimination of poverty traps where high effective marginal taxation rates (EMTRs) can reduce the incentive for welfare recipients to seek paid work and therefore lowers their labour force participation.

In the 2006-07 budget the federal government committed $60.2m to provide an additional 25,000 child care places to encourage more parents to seek paid work in the labour market.

The federal government has reduced marginal rates of income tax and increased income tax thresholds for low income earners in successive budgets to reduce the incidence of poverty traps.

In the 2008-09 budget the federal government announced cuts in personal income tax designed to provide incentives for individuals, including part time workers to participate in the workforce.

In the 2011-12 budget, as part of the Building Australias Future Workforce package, the Australian government announced measures to encourage participation and incentives in paid work (such as the Low Income Tax Offset) for disadvantaged groups such as young people, single parents, people with a disability, the long term unemployed and people in disadvantaged locations.

In the 2012-13 budget, the federal governments Building Australias Future Workforce skills package contained funding for 50,000 new training places under the National Workforce Development Fund. A National Partnership Agreement on Skills Reform was also signed with the states to strengthen the VET system. Funding was allocated to help mature age workers to up-skill and re-skill; and for child care assistance to increase parents workforce participation.

In the 2013-14 budget support was given to job seekers in the transition to work through an increase in the income free area for Newstart Allowance, and funding for child care.

The Skills ShortageThe skills shortage in Australia is largely a reflection of shortages in the supply of labour in certain occupations (such as trades) and industries (such as mining, building and construction) in relation to the demand for these labour skills. The skills shortage arose in 2006 because of a mismatch between the skills demanded by employers in job vacancies and the skills possessed by job seekers. Therefore Australia was not producing enough skilled workers to meet the demand for many skilled jobs.

The ABS reported in 2005 that 149,500 jobs could not be filled nationwide with a significant proportion of these jobs in the mining boom states of Western Australia and Queensland. There is a geographic imbalance between job availability and the supply of labour, as well as a net shortage of much needed labour skills. The Australian government increased skilled migration between 2001 and 2009 but capped the skilled stream at 115,000 in March 2009 because of the impact of the Global Financial Crisis on the labour market. Places in the skilled stream were reduced by 25,400 in 2009-10. In sum there are two main policies that can be used by the government to address the skills shortage:

1. Increasing labour force participation by retaining older workers with specific skills, and encouraging other groups such as younger workers and females to acquire higher levels of education and training. The governments Building Australias Future Workforce package (2011) addressed these issues.

2. Increasing the supply of skilled labour through an intake of skilled migrants in specific occupations and industries. Immigration overall also increases aggregate demand and hence the derived demand for labour. The intake of skilled migrants can be reviewed to meet economic requirements.



Programmes to Develop Labour SkillsThe skills shortage in the Australian economy is most evident in trades occupations and the Australian government has addressed this shortage by increasing the funding of vocational education and training (VET). The Skills for the Future package in October 2006 committed $837m in new funding to support skills creation in the VET sector, with a COAG agreement for a national approach to apprenticeships, training and skills recognition. The Realising Our Potential package in the 2007 budget increased funding for university, vocational and school education, vital for increasing labour force skills, productivity and participation. In the 2010-11 budget the government invested $661.2m in a new Skills for Sustainable Growth programme. In the 2011-12 and 2012-13 budgets, the Building Australias Future Workforce package included $3b of Australian government funding for new skills measures such as apprenticeships, reform of the VET system, and measures to boost the workforce participation of disadvantaged groups.

The Jobs and Training CompactThe Australian government allocated $1.5b in the 2009-10 budget to assist workers whose job prospects were adversely affected by the global recession. It was expected that the demand for education and training would rise in response to the deteriorating labour market as young people chose to stay at school or undertake further training. Redundant workers were expected to maintain, update or learn new skills to improve their job prospects. The governments Jobs and Training Compact was designed to support young Australians, retrenched workers and local communities to secure future employment, add to their skills or learn new skills required to obtain jobs as the labour market recovered:

A temporary $83m Training Supplement Scheme was introduced to eligible job seekers who undertake training. This would provide a payment of $41.60 per fortnight to eligible job seekers on Newstart Allowance or Parenting Payment who undertake approved training;

A $277m Compact with Young Australians which guaranteed an education or training place for persons under 25 who wanted to upskill or required additional training;

A $438m Compact with Retrenched Workers provided immediate employment assistance through Job Services Australia to workers who became unemployed. Job Services Australia commenced operating in 2009 to provide employment services to more disadvantaged job seekers; and

A Compact with Local Communities provided assistance through a $650m Jobs Fund to regions and communities directly affected by the global recession by funding local job projects.

The governments fiscal and employment stimulus packages were expected to support labour demand and raise the level of GDP in 2009-10. The stimulus measures were estimated by Treasury to reduce the forecast peak unemployment rate by 1.5% in 2010 from 10% to 8.5% as shown in Figure 8.7.

Figure 8.7: The Unemployment Rate Pre-Stimulus and Post Stimulus

Source: Commonwealth of Australia (2009), Budget Strategy and Outlook 2009-10.



REVIEW QUESTIONSTHE TYPES, CAUSES AND EFFECTS OF UNEMPLOYMENT

1. Using examples, distinguish between cyclical, structural, frictional and seasonal unemployment.

2. What is long term unemployment? How does it differ to underemployment and hidden unemployment? How does the ABS calculate the labour force underutilisation rate?

3. Refer to Figures 8.2 and 8.3 and the text and explain how a deficiency in aggregate demand can cause cyclical or involuntary unemployment to occur in the economy.

4. Using examples, explain how structural change in the economy can lead to structural unemployment.

5. Refer to Figure 8.4 and explain how excessive wage expectations might affect unemployment.

6. What is meant by the natural rate of unemployment? Refer to Figure 8.5 and explain how unemployment can arise in the labour market when labour demand equals labour supply.

7. Refer to Figure 8.6 and explain the Non Accelerating Inflation Rate of Unemployment (NAIRU). How can the government try to reduce the Non Accelerating Inflation Rate of Unemployment?

8. Discuss the main groups in society affected by high rates of unemployment and long term unemployment. Why are certain groups more likely to experience unemployment than others?

9. Discuss the economic and social costs of unemployment in the Australian economy.

10. Discuss government policies that can be used to reduce the incidence of cyclical unemployment.

11. Discuss government policies to reduce the incidence of structural and long term unemployment.

12. Discuss the reasons for the skills shortage in Australia and the policies used by the Australian government to address the skills shortage.

13. Discuss the governments use of the Jobs and Training Compact to address the problem of rising unemployment due to the impact of the Global Financial Crisis and recession on the Australian labour market in 2009-10.

14. Define the following terms and add them to a glossary:

apprenticeshipscyclical unemploymenteducation and trainingenterprise bargainingfrictional unemploymentfull time employmenthard core unemploymenthidden unemployment human capitalincidence of unemploymentlabour demandlabour forcelabour market reform

labour skills labour underutilisation ratelong term unemploymentLRPCNAIRU natural rate of unemploymentnet migration Okuns Lawpart time employmentparticipation ratepoverty trapproductivityregional unemployment

retrenchments seasonal unemployment skills shortage SRPC structural changestructural unemploymenttax and welfare reformunderemploymentunemploymentunemployment gapVETwage expectationswelfare dependency



Year Full Time Part Time Unemployed Civilian Population Real GDP Employed Employed Persons Aged 15+ years %r pa Persons Persons 2008-09 7,611,800 3,150,600 662,900 17,504,400 1.3

2009-10 7,880,000 3,353,100 607,000 18,099,700 2.3

2010-11 8,082,100 3,373,000 591,000 18,370,900 1.9

2011-12 8,065,500 3,435,000 631,300 18,595,500 3.4

2012-13 8,139,900 3,520,100 706,900 18,976,200 3.0

Refer to the table above of selected data for the Australian labour force between 2008-09 and 2012-13 and answer the questions below. Marks

1. Calculate the size of the labour force in 2012-13. (1)

2. Calculate the participation rate in 2011-12. (1)

3. Calculate the change in the unemployment rate between 2011-12 and 2012-13. (2)

4. Explain TWO causes of unemployment in the Australian labour market. (2)

5. Explain TWO government policies used to reduce unemployment in Australia. (4)

[CHAPTER 8: SHORT ANSWER QUESTIONS



Unlike most advanced economies, the Australian labour market was remarkably resilient during the Global Financial Crisis (GFC), and following a short period of weakness, has since strengthened. Over the past 18 months employment has grown strongly, the unemployment rate has fallen steadily, and the participation rate has reached record highs. The long term unemployment rate also remains low and continues to decline.

In the lead up to and during the GFC the unemployment rate rose by a total of around 1.6% from 4.2% to 5.8% in Australia, compared with around a 2.75% rise in Canada, a 3.5% rise in New Zealand and a 5.75% rise in the USA. Not only was the increase in Australias unemployment rate relatively modest, but the subsequent recovery has been substantial with the unemployment rate falling to 4.9% as at March 2011, lower than most of the major advanced economies.

[CHAPTER FOCUS ON UNEMPLOYMENT

Unemployment Rates Employment Growth

Source: Commonwealth of Australia (2011), Budget Strategy and Outlook 2011-12.

Explain the main causes of unemployment in Australia and discuss the use of government macroeconomic and microeconomic policies to reduce the rate of unemployment.

[CHAPTER 8: EXTENDED RESPONSE QUESTION

Explain recent trends in Australias unemployment rate and the relationship between changes in economic growth, employment and the unemployment rate.

UNEMPLOYMENT 1. Full employment of the labour force is a major goal of government economic policy.

2. The labour force consists of all persons employed (i.e. both full time and part time employees) plus unemployed persons registered as actively seeking and available for work.

3. According to the Australian Bureau of Statistics (ABS), persons over 15 years who are currently employed for at least one hour per week, plus self employed persons and those unemployed but actively seeking work are included in the Australian labour force.

4. The size of the labour force is determined by factors such as the size and growth of the population; the age distribution of the population; and the participation rate of the working age population.

5. The unemployment rate is calculated as the percentage of the total labour force classified as unemployed. In 2012-13 the unemployment rate in Australia was 5.7% of the labour force.

6. The unemployment rate peaked in the recession of the early 1990s when it was 11% of the labour force. It fell from 11% in 1992 to an historic low of 4.2% in 2007-08, before rising to 5.8% in 2008-09 due to the impact of the Global Financial Crisis and recession.

Unemployment rates tend to be higher for young people 15 to 19 years because they may lack the education, training and experience required by employers compared to older workers. Unemployment rates tend to be lower in mining states such as Queensland and Western Australia compared to states such as NSW and Victoria with lower levels of mining activity.

7. The main types of unemployment are classified as cyclical, structural, frictional, seasonal, underemployment, long term, hidden and regional.

8. Some of the main causes of unemployment include the following:

Adeficiencyinaggregatedemandleadingtoadeflationarygapintheeconomy;

Structuralchangesinproductionandtechnologymaymakesomelabourredundantbecauseofa mismatch between the labour skills demanded and the skills supplied by the labour force; and

Excessivewageexpectationsmayleadtorisingwagecostsforemployersandalowerdemandfor labour, causing employers to substitute capital for labour in production.

9. The natural rate of unemployment is where some workers remain unemployed due to frictional and structural factors in the labour market, eventhough the demand and supply of labour are in equilibrium in the labour market. The Non Accelerating Inflation Rate of Unemployment (NAIRU) is the rate of unemployment that is consistent with a constant or non accelerating inflation rate.

10. Some of the main groups affected by unemployment include young people; workers with low levels of education, skills and training; blue collar workers in manufacturing; migrants from non English speaking backgrounds; and Aborigines and Torres Strait Islanders.

11. The economic effects of unemployment include the opportunity cost of lost output and income of the unemployed and a depreciation of human capital as labour skills are lost. The unemployed also suffer from lower incomes and a loss of self esteem the longer they are unemployed. Other costs may include an increased tax burden on the employed to fund unemployment benefits and a rise in cyclical expenditure by the government on welfare payments to the unemployed.

12. Unemployment also results in social costs to the community as the unemployed may experience health problems; alcohol or drug dependency; and a breakdown in their family relationships. Unemployment has also been linked to rising crime rates and anti-social behaviour by the unemployed as they may become marginalised and detached from mainstream society.

210 Chapter 8: Unemployment Tim Riley Publications Pty Ltd


CHAPTER SUMMARY

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