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Unemployment and the Labour market
Textbook Reference: Chapter 3
Main Concepts
Demand for labour
Supply of labour
Model of labour demand, supply and the real wage
Unemployment – frictional, structural and cyclical
Full employment
Review Questions
Question 1
Go to statistics on the RBA Website at
Using Table G7, summarise (with graphs) the main labour market trends in Australia over
the last 20 years for:
The unemployment rate (column I)
You should be able to describe the trends in the data – and think about reasons for trends.
Eg previous recession in early 1990s – unemployment rate over 10% in 1993. The
unemployment rate fell as the economy entered long period of stable growth in 1990s and
2000s (until 2008). Note relatively modest effect of GFC on unemployment rate.

.(ii) The participation rate (column D) You should think about the following issues: • what might have led to an increasing trend in the participation rate? • Is there any relationship between the unemployment rate and the participation rate (think about discouraged workers) etc….

Do you think there is a greater demand by some groups of workers for part-time employment? . What about worker preferences.(iii) The relative proportions of part-time and full-time workers in total employment (columns E. F & G) Think about the following broad trends: Why might share of PT workers in labour force have risen from about 20% to 30% over time? What might cause firms to offer more jobs on a part-time (or casual) basis rather than as full-time positions? (Lower costs. greater flexibility).

or lower fertility rates? .(iv) Hours worked per worker (column J/column G) Why have average hours worked decreased over the last 20 years? Is it a trade-off between labour and leisure? Is it the increasing level of technology. increasing female participation.

John’s skills are mismatched with existing employment opportunities. Structural. Cyclical. (iv) Janet. (v) Jonathan worked in an automobile manufacturing plant in Adelaide but lost his job when the company decided to close the plant in 2008. Jonathan may have initially lost his job due to a recession so his unemployment might be classified as cyclical. Jan’s unemployment is temporary and associated with a recession. Ian lacks the skills to land a long-term. Structural. before eventually accepting a new job in a firm in the same industry. He has been unemployed since that time but is still searching for employment in automobile manufacturing. Discuss the likely economic and social costs of each form of unemployment. not because work is unavailable. (ii) Jan was made redundant from her job in the real estate industry because the recession reduced the sales of houses. lost her job when the start-up company she was working in went bankrupt. stable job. . Frictional. What is the natural rate of unemployment? In each of the following cases explain which type of unemployment is the best description.Question 2 List three types of unemployment and their causes. The delay in taking a new job arises because Janet is trying to find the best opportunity. However one consequence of the recession in 2008 in Australia has been a large decline in the manufacturing sectors. a software engineer. She interviewed for a position with five firms. When there is no fruit to pick he is unemployed. This is particularly so if he does not have the necessary skills to find employment in other industries. (iii) Ian is an unskilled worker who does seasonal work picking fruit in the Riverina. so that Jonathans unemployment is structural. (i) John lost his job when the aluminium plant in Geelong closed. Structural. so it is likely that the decision of the company to close the Adelaide operations are permanent and hence structural. He has worked in the steel plant since leaving high-school and owns a house in Geelong.

1 explains the determinants of labour demand from the perspective of a firm and hence an increase in the relative price of the firms output would shift labour demand. Labour Supply Curve Positive slope reflects fact that higher real wages are required to induce an increased supply of labour. Position of curve is primarily affected by size of working age population and participation rate. Explain why the demand curve is downward sloping and why the supply curve is upward sloping. Higher real wage will lead to a higher number of hours supplied by existing workers and would also lead to entry into the labour market (higher participation rate) by those whose reservation wage now exceeds the new real wage. since increases in prices of aggregate output would also tend to decrease the real wage. determines the position of the curve.Discussion Questions Question 3 (i) Draw the demand and supply model of the aggregate labour market.1 Labour Demand Curve: The aggregate labour demand curve represents the marginal productivity of workers. since it is optimal for a firm to employ a quantity of labour where the real wage is equal to the marginal product of labour. Since the aggregate labour demand curve represents the marginal productivity of workers. See BOF Section 3. . Since there are diminishing returns to labour. such as technological change. aggregate labour demand is downward sloping. Note that section 3. anything that determines this level of productivity. The same is not necessary for aggregate labour demand. Explain the factors that would cause each of these curves to shift.

. Use the model in part (i) to explain the effect on employment and unemployment if we assume that real wages are fixed. increasing unemployment.(ii) Suppose the government introduces a carbon tax which is a levy on the use of energy by firms. and hence the marginal product of labour decreases. Labour demand shifts leftwards. the price of energy. Labour and other inputs into production are complementary. Other things equal. A sticky or unchanging real wage is plausible if nominal wages are indexed to changes in the price level or inflation. the carbon tax increases the price of one of the inputs into production. decreasing employment and opening up a gap between labour demand and labour supply if the real wage does not adjust.

Unemployment is LD . . Who are the winners and who are the losers? See BOF Section 3. employment falls from the labour market equilibrium L* to the quantity of labour demanded at the minimum wage. Note that the text examines a market for low-skill workers. The winners are those that retain their employment at the higher minimum wage.(iv) Suppose the government introduces a minimum wage. since the higher wage induces entry into the labour market (larger labour force) and a willingness to work more hours. It is not true that only low-skill workers are losers. Use the model to analyse the effect on employment. The quantity of labour supplied increases from L* to Ls. or that cannot find employment at the higher wage. L D. since low-skill workers with protection from labour cartels would benefit from such a policy. since there is an excess supply of labour at the higher wage.1 If the minimum wage is binding. Losers are those that lose their employment due to the higher wage. the labour force. unemployment.Ls. and the quantity of labour demanded.4.