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Chapter 8: Unemployment

Chapter 8
Unemployment
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.
Table 8.1: The Australian Labour Force 2006-07 to 2012-13

Full Time
Employed Persons

Part Time
Employed Persons

Unemployed
Persons

Labour Force

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

12,366,900

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

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Year 12 Economics 2014

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Chapter 8: Unemployment

© 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 Australia’s 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:
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7% i.139. The participation rate varies with the level of economic activity.900 persons classified as unemployed. a person must be available for work and fall into one of the two following categories: 1. plus all unemployed persons i.g.2).e. full time plus part time workers).e.2% down from 65. but declined slightly in 2012-13 because of slower growth in the Australian economy. unemployment is measured by a monthly Australian Bureau of Statistics (ABS) telephone survey of the labour force. 3.1% in 2010-11) whereas the participation rate for males has tended to remain relatively stable at around 72%.5% in 2003-04 to 65.366. The unemployment rate is calculated as a percentage of 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.e.2% in 2011-12).900 persons. females and persons were relatively stable during the period of weaker labour demand associated with the Global Financial Crisis in 2008-09.6% in 2010-11 (see Table 8.900 x 100 1 = 5. 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. but are unable to find suitable employment. Figure 8. The unemployment rate peaked at 11% in 1992 and then fell slowly.g. which includes all persons employed (i.366.900 12. In Australia. its lowest level in over 30 years (see Table 8.366. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 193 . reaching 7. from 63. from 55.900 18. 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.© Tim Riley Publications Pty Ltd Chapter 8: Unemployment ___ Work Force 100 Participation Rate = Working Age Population x 1 = 12.6% in 2003-04 to 59. it reached 11% of the Australian labour force. averaging over 3% per annum in this period. Unemployment refers to people who are willing and able to work.7% RECENT TRENDS IN UNEMPLOYMENT The level and rate of unemployment remained high in Australia after the 1970s.3).976. In the 1980s unemployment rose to 8% of the labour force and after the early 1990s recession. Unemployment Rate for July 2013 = 706.6% in 2010-11 to 65. It tends to fall during recessions or periods of low growth when unemployment rises and job vacancies fall (e.100 persons employed part time.3% in 2007-08 and 2008-09) when more jobs are available.520.200 100 x 1 = 65. Participation rates for males. Unemployment Rate = Total Number Unemployed 100 Labour force (Employed + Unemployed) x 1 In 2012-13 there were 8. 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.2% In 2012-13 the participation rate was 65. and 706.900 persons employed full time. Much of the fall in the unemployment rate between 1999 and 2008 was due to high rates of sustainable economic growth. from 65. or 2.1 shows the gradual fall in the unemployment rate between 2001-02 and 2007-08. In 2007-08 the unemployment rate was 4. The unemployment rate calculated by the ABS in July 2013 was therefore 5. 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. rising during booms (e.4% in 1998-99. actively seeking work.g.2%. This gave a total labour force of 12. 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. To be counted as unemployed by the ABS labour force survey. mainly because of consistently high rates of sustainable economic growth in Australia and structural reforms in the labour market.

2% 14. In 2012-13 a lower rate of economic growth of 3% led to the unemployment rate increasing to 5.366.2% in 2007-08 to 5. steel.2%.0.001. Long term unemployment rose from 14.7% 2008-09 11.9% in 2010-11.2% 18.823.6% in 2012-13 as shown in Table 8.425. Another trend in unemployment in Australia is the high incidence of long term unemployment (i.100 591. Table 8.3 weeks.800 4.500 489.840.000 5.3% of the total unemployed.9% 2011-12 12.2% to 19.7%.189.3% 2010-11 12. persons unemployed for more than 12 months) and the increasing duration of unemployment. retailing.000 4.0% Source: ABS (2013). • Leaving a job accounted for 23.131.2% 3.9% 19.0.1% 18.1: Australia’s Unemployment Rate 2000-01 to 2012-13 % of Workforce 8 7 6 5 4 3 2 1 0 00-1 01-2 02-3 03-4 04-5 05-6 06-7 07-8 08-9 09-10 10-11 11-12 12-13 Source: ABS (2013).300 5. Catalogue 6202. July and Catalogue 6291.5% 16. However with economic growth of 2.3. of Workforce In 2008-09 the Global %Financial Crisis and recession had a major impact on the Australian labour market. Labour Force.0.000 4.100 607.900 5. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd .e.194 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd Figure 8. July.500 473. The average duration of unemployment was around 56.3% 2007-08 11.4.7% of the total unemployed.046.800 631. building and construction and the unemployment rate rose to 5.900 706.7% 3.55.3: The Australian Unemployment Rate 2006-07 to 2012-13 Labour Force Persons Unemployed Unemployment Long Term Unemployed Real GDP Persons Rate (%) (% of Total Unemployed) %r pa 2006-07 10. Catalogue 6202. The major reasons for being unemployed between 2009-10 and 2011-12 are shown in Table 8.3% in 2009-10 the unemployment rate fell back to 5. The reasons for unemployment in 2011-12 included the following: • Loss of job or being made redundant accounted for 35.4% 2012-13 12.5% of the total number unemployed between 2007-08 and 2010-11 before falling back to 18.8% 15. In 2008-09 many employers cut hours of work and switched workers from full time to part time work. An uneven pattern of growth and structural change in 2011-12 led to retrenchments in industries such as car manufacturing.3% (refer to Table 8.900 5.6% 3.7% 1.3% 2009-10 11.5% 1. with unemployment rising from 4.300 662.7% 18.9% 3.3).7% 2. There were also major retrenchments in industries affected by the GFC such as mining.8% in 2008-09 due to the low rate of economic growth of 1.1% and to 4. manufacturing and finance. Labour Force.

However the percentage of job leavers fell as workers placed more emphasis on job security.6). July and (2013) Labour Force.4% 18.2% 26.900 141. 6202. • Never having worked (looking for a first job) accounted for 22.200 117.7 3.5.6 3.0.1 3.4 29. 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.1% 20. Young people therefore experience more difficulty in securing employment because of a lack of skills. 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.5: Unemployment Rate by Sex and Age Group 2006-2013 (annual average %) Males Looking for Full Time Work 15-19 years 20+ years Females Looking for Full Time Work 15-19 years 20+ years 2006-07 17. 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.1 5. Australian Economic Indicators.4% of the total unemployed.6% 23. Cat. and there was a decline in job losses. Unemployment rates according to sex and age between 2006-07 and 2012-13 are shown in Table 8.1 4.7% 23.3 2011-12 21. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 195 .300 117.4 3.6% Source: ABS (2012).4% 2011-12 225.7% 21.0 5.6% 2010-11 215.2%.4 29.2 Source: ABS (2012).2 5.500 Job Job Never Former Loser Leaver Worked Worker 39.8%) which had strong labour demand due to the global resources boom. This leads to high rates of youth unemployment for 15-19 year olds seeking their first job. 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.6 5. with the lowest unemployment rates in the resource rich states of Western Australia (3%) and Queensland (3.6 2007-08 15. Most states recorded falls in their unemployment rates in 2008 (see Table 8. No.400 146.500 124.300 143.3 5.1 2010-11 19.200 128.0 2008-09 24. training and experience.6% of the total unemployed. But jobs growth occurred between 2009-10 and 2010-11 due to economic recovery. The corresponding unemployment rates for females were 29.5 4.© Tim Riley Publications Pty Ltd Chapter 8: Unemployment Table 8.400 35.6 6.4: Unemployed Persons in Australia . and • Being a former worker (re-entering the labour force) accounted for 18. Australian Economic Indicators. 1350.0.1 21.2% in 2012-13 compared to 5.3% 22. Catalogue 1350.Reason for Leaving Last Job 2009-12 Reasons for Unemployment Job Loser Job Leaver Percentage of Unemployed Never Former Worked Worker 2009-10 242.6 2009-10 22. Cat. Young males (15-19 years) had an unemployment rate of 23. Table 8.4% for males 20 years and over.2 27.2% 19. The distribution of unemployment between Australian states changed between 2006 and 2008 as the labour market reached full employment.000 161.9 26.2 4.400 35.4 2012-13 23. Holden.0.000 90. July.6% and 6.1% 14.2 5. Ford and Blue Scope Steel which retrenched workers.9 24.5 22.

4% 5.2% .3% 5.June 2013 5. 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. Large rises in unemployment in Western Australia and Queensland reflected a contraction in mining output.4% 3.4% 6. Discuss the impact of the Global Financial Crisis and recession on the labour market in 2008-09. where mining accounts for a large proportion of their state product. but rose again between 2012 and 2013 with lower economic growth and a re-balancing of growth away from the resources sector. The impact of the Global Financial Crisis and recession in 2008 led to negative employment growth and rising unemployment rates in all states in 2009.9% 4. Account for the trends in the unemployment rates of the states between 2008 and 2013.1% 5. with the national unemployment rate increasing from 4.4% 5.0.2% 5. 7. 3.8% 3.0% 5.2% 4.7% Source: ABS (2013).1% 6. Labour Force. All states had strong employment growth in 2008 and the national unemployment rate fell to 4.6). to the resource rich states of Western Australia and Queensland.9% .4% .September 2008 4. July. The global resources boom and rising terms of trade led to a reallocation of the economy’s resources (such as labour and capital).9% 5. 8.8% (see Table 8. whilst in the larger states of NSW and Victoria it was caused by a fall in employment in manufacturing and the financial sector.1 and discuss the changes in the composition of the Australian labour force between 2006-07 and 2012-13.4% 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.7% 5. 5.July 2011 SA WA TAS Australia 5.2% 4.0% 3.6% 7.2% 4. 4. They recorded higher economic and employment growth and lower unemployment rates than non resource rich states between 2003 and 2008.1% 5. Victoria and South Australia.9% 7. Discuss the reasons for the higher rates of unemployment experienced by young people.8% 4.July 2010 5.8% .3% 5. 1990s and 2000s? 6.0% .June 2012 5.9% 3. Discuss the four main factors influencing the size of the Australian labour force.3% 4.5% 5.4% 5.196 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd Table 8. Catalogue 6202.5% 5.3% 5. Refer to Table 8.8% 5.6% 8.1% 5.3% 4. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd .5% 5.June 2009 6. 1980s.3% (see Table 8.2 and compare the trends for male and female participation rates between 2004-05 and 2012-13. REVIEW QUESTIONS MEASUREMENT AND RECENT TRENDS IN UNEMPLOYMENT 1.6: Unemployment Rates by State 2008 to 2013 NSW VIC QLD . away from the non resource rich states of NSW.1% 4.6). Australia. What is the participation rate and how is it measured? What factors influence the participation rate? Refer to Table 8. Discuss recent trends in long term unemployment and the main reasons for unemployment.6% 5.3% in 2008 to 5. State unemployment rates generally fell in 2010-11 due to a national economic recovery.

6. Between 2010 and 2013 the high value of the Australian dollar led to structural unemployment in manufacturing (e. and persons employed full time who have been switched to part time hours. 4. or people leaving a failed business to join a new industry. Examples might include workers employed during farm harvest times or people working Summer jobs such as in Christmas retailing. the number of underemployed workers as a percentage of the labour force) in 2012-13 as 7.9% in 2012-13. people searching for better paid career jobs. Structural change in manufacturing for example. Cyclical unemployment rose in 2008-09 in Australia because of the GFC and the lower rate of growth. who would work if suitable jobs were available and they could find affordable child care facilities. or attitude problems based on a poor motivation to seek work or a poor physical appearance) in finding and holding suitable jobs. Regional unemployment occurs when a major industry such as steel. Cyclical unemployment is also known as involuntary unemployment as workers are laid off as a result of a fall in the demand for labour. This may be due to a lack of skills. The ABS calculated the underemployment rate (i. Some of the hidden unemployed may also be discouraged workers who have given up looking for work because labour market conditions have deteriorated. women leaving and re-entering the workforce after rearing children. The hidden unemployed refer to persons such as married women with children. There is often an imperfect flow of information between job seekers and employers in the labour market.g. Cyclical unemployment rises in a recession as spending and GDP growth fall. 8. Wollongong. Structural unemployment results from a mismatch between the labour skills of employees and the job vacancies offered by employers. partner or parent and are not eligible for Job Search Allowance.e. 3. The ABS also calculated the labour underutilisation rate (the unemployment rate of 5. training. education or the motivation to find and secure suitable employment opportunities in the labour market. 7. whilst new jobs may be created in expanding industries such as mining and services. or Winter jobs in the snowfields such as ski lift operators or instructors. 2. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 197 . It takes time for workers to acquire new skills and relocate before they can fill the vacancies offered by employers.2%) as 12. Frictional unemployment is caused by the search times needed for workers to find jobs and for firms to find employees. may lead to the introduction of new technology making some jobs obsolete.2%. 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. Frictional unemployment is caused by people moving between jobs or experiencing changing economic circumstances. not because they lose the incentive to work. Cyclical unemployment is caused by a contraction in economic activity or aggregate demand. a criminal record. causing employers to lay off some existing workers and cease hiring new workers. 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. TCF or PMV in a particular geographic region reduces its demand for labour causing widespread unemployment. which have led to the restructuring of workforces in these industries. health problems such as drug or alcohol abuse. 5. 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.© Tim Riley Publications Pty Ltd Chapter 8: Unemployment THE TYPES OF UNEMPLOYMENT 1. mental or emotional problems. Underemployment refers to persons working part time who want to work more hours or switch to full time employment. 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. Whyalla and Geelong. Examples of frictional unemployment include young people leaving school to find jobs.7% plus the underemployment rate of 7. This is the case in manufacturing regions undergoing large scale structural change and adjustment such as major industrial regions in Australia like Port Kembla. the car industry) because of a loss of competitiveness. Newcastle. Long term unemployment refers to those persons who are unemployed for over 12 months. A fall in aggregate demand reduces the derived demand for labour. These workers may face particular personal difficulties (such as physical.

2% to 5. Interest and Money in 1936. any decline in aggregate demand may lead to a rise in cyclical unemployment. unemployment rose from 4. where supply or capacity constraints are encountered and the aggregate supply curve becomes vertical. the Global Financial Crisis and recession in late 2008 led to a fall in aggregate spending and economic activity in Australia in 2008-09. determined by the intersection of the aggregate demand (AD) and aggregate supply (AS) curves. Another model used to show how cyclical unemployment arises is the aggregate demand and aggregate supply model. After a lag of some six months. The unemployment rate rose from under 8% of the Australian labour force in 1989-90 to over 11% by 1992. 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. In Figure 8. If total spending was insufficient to guarantee full employment of the economy’s resources. causing unemployment to rise in the economy. If AD shifts to the left to AD1.5% in the December quarter 2008. For example. whereas the aggregate supply curve slopes upwards to the right until it reaches the full employment level of GDP at real GDP1. the equilibrium level of national income is Ye. clothing Figure 8. Since the demand for labour is derived from the demand for final output. Uncompetitive industries such as textiles. Keynes argued that the equilibrium level of national income in an economy may not necessarily coincide with the full employment level of income. the economy’s price level is measured on the vertical axis and real GDP on the horizontal axis. Cyclical changes in domestic and international economic activity may lead to changes in the demand for labour.3. This led to a severe recession in Australia. a deflationary gap or unemployment gap of ab would arise. following negative growth in GDP of -0.8% of the labour force by mid 2009. there is full employment of the economy’s resources. For example. the introduction of new labour saving technology in primary and secondary industries has led to a fall in employment in these industries.Chapter 8: Unemployment © Tim Riley Publications Pty Ltd THE CAUSES OF UNEMPLOYMENT The major cause of cyclical unemployment is a deficiency in aggregate demand (AD = C + I + G + X – M). If the initial equilibrium level of income is at real GDP1 where AD equals AS. A deflationary or unemployment gap of ab results. Structural changes in consumption and production can cause the level of structural unemployment to rise. which was compounded by a world recession in 1990-91 which reduced export demand. a new equilibrium level of real GDP is established below full employment at real GDP2. causing cyclical unemployment to increase.2. denoted by Yf in Figure 8.2. A theoretical explanation for cyclical or involuntary unemployment was put forward by John Maynard Keynes in his General Theory of Employment.2: The Keynesian Deflationary or Unemployment Gap Figure 8. In Figure 8. Aggregate demand (AD) slopes downwards to the right as more output is demanded at lower price levels.3: The AD/AS Deflationary or Unemployment Gap Price Level Expenditure AD AS deflationary gap a } b AS AD 1 AD deflationary gap a b AS 0 Ye Year 12 Economics 2014 Yf Income 0 AD } 198 AD 1 real real Real GDP GDP2 GDP1 © Tim Riley Publications Pty Ltd .

2005 and 2010. 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. and the spread of enterprise agreements in the labour market in the 1990s and 2000s. This is illustrated in Figure 8. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 199 .© Tim Riley Publications Pty Ltd Chapter 8: Unemployment Figure 8. the percentage of workers reliant on arbitrated awards for pay rises fell from 67% of employees in 1990 to around 15. 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. The Howard government’s labour market reforms in the Workplace Relations Amendment Act (WorkChoices) in 2006 sought to shift more workers away from awards to individual agreements.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. businesses may cut wage costs by making some labour redundant. causing a rise in what is known as voluntary unemployment or wage induced unemployment. creating new employment opportunities in the services sector. 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. An important factor that may cause unemployment is the role of wage expectations in pushing up the price of labour relative to capital. arguing that this would stimulate employment and reduce unemployment. new industries have been established and others have expanded. For example. Rapid rises in real wage costs will reduce the demand for labour and provide employers with the incentive to substitute capital for labour. In the 1990s there was also widespread reform of Public Trading Enterprises through deregulation and privatisation. This has helped to link wage increases to improvements in productivity that reflect individual enterprise and industry conditions. With the introduction of enterprise bargaining in 1991 as a wage fixing principle. 1991. 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. unemployment of QL1QL2 will occur since the demand for labour (QL1) is less than the supply of labour (QL2) at wage rate W1.2% by 2013. which may be inconsistent with industry’s capacity to pay or productivity levels. As a result. which led to an increase in workforce downsizing and the retrenchment of some labour in affected industries.4: The Effect of Wage Expectations on Employment Wage Rate SL DL minimum or award wage unemployment W1 W DL SL 0 Q L1 QL Q L2 Quantity of Labour and footwear. Although some industries have contracted in manufacturing. The supply of labour (SL) is a positive function of the wage rate and slopes upwards from left to right. if trade unions have large bargaining power and win large wage increases. Australian governments have tried to control wages growth through a system of enterprise wage bargaining in the labour market. 2000.

6: The LRPC and the NAIRU 6% U 3% 0% DL SL 0 QL Year 12 Economics 2014 QN LRPC 1 LRPC A C B SRPC 6% 5% NAIRU1 NAIRU SRPC1 Unemployment % Q of L © Tim Riley Publications Pty Ltd .5 illustrates the concept of the natural rate of unemployment. Full employment is where equilibrium (E) occurs in the labour market at real wage W and labour quantity QL.200 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd The labour market is very dynamic with many factors influencing the flow of information between job seekers and potential employers. Unemployment can therefore be caused by high ‘on costs’ of labour and a lack of skills. The real wage rate is measured on the vertical axis and the quantity of labour on the horizontal axis. education and training. The distance EU (QN . In Australia. The National Training Authority was formed to increase apprenticeships for young people and an Alternative Pathways Programme established to address skills shortages in 2013.5: The Natural Rate of Unemployment Real Wage DL Inflation % LF E W Figure 8. training and skills of the labour force by implementing labour market programmes such as Building Australia’s Future Workforce (2011). unfair dismissals legislation and award conditions) can also reduce the hiring intentions (through higher ‘on costs’ of labour) of employers. superannuation. taxation. 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.QL) is equivalent to the natural rate of unemployment.g. Some workers will be unemployed because they are in between jobs. empirical research by Treasury (2011) estimates the natural rate of unemployment at between 5% and 6% of the Australian workforce. The labour force is denoted by the vertical line LF. This refers to a rate of unemployment that is consistent with a constant inflation rate or no change in the inflation rate. Figure 8. 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). Successive Australian governments have addressed the issue of improving the education. The natural rate of unemployment fluctuates because of changes in the levels of frictional and structural unemployment in the labour market. The Non Accelerating Inflation Rate of Unemployment (NAIRU) Full employment is where the quantity of labour demanded equals the quantity of labour supplied. A lack of efficiency in the labour market in matching labour skills with the jobs available can influence the level of frictional unemployment. the National Education Framework and A Plan for Australian Jobs (2013).6 illustrates the Short Run Phillips’ Curve (SRPC) which shows the short run tradeoff between the rates of inflation and unemployment. the Job Compact. Rigidities in the labour market like government regulations (e. and others because they lack the skills necessary for the jobs available. Figure 8. For example an economy may have 6% inflation and Figure 8. 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. workers’ compensation. causing 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. the Job Network. The unemployment rate at full employment is called the natural rate of unemployment.

Unemployment also affects workers according to their occupation.g. the rate of unemployment was 4. the percentage of long term unemployed was 30% in 2012-13.2% for females. a vocational qualification or had completed high school. 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. Family status also impacts on rates of unemployment. For workers over 20 years. 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. For workers between 25 and 44 years. Unemployment rates tend to be higher in industries affected by high rates of structural change like manufacturing. with the economy’s NAIRU equal to the natural rate of unemployment of 6%.2% and for females it was 29. the rate of unemployment varied between 6% and 8. In the long run the LRPC would shift from LRPC to LRPC1 and lower the NAIRU from 6% to 5% at point C. labourers and factory workers) had unemployment rates of 7% to 10% in the 1990s and 2000s. In contrast. 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 rates of unemployment were around 16.3% and 14. without any change in the inflation rate at 3%. Unemployment is distributed nationally. However for workers between 45 and 54 years. However all groups (i. who experienced a 17% unemployment rate.e. 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. Teenagers (15 -19 years) experience the highest rates of unemployment. Aborigines and Torres Strait Islanders also experience high rates of unemployment and long term unemployment. The Long Run Phillips’ Curve (LRPC) shows that there is no tradeoff between inflation and unemployment in the long run. their unemployment rate was 12. For males in 2012-13 the rate was 23. building and construction and trades. This was lower than for migrants arriving after 1995. Migrants can also experience high rates of unemployment according to their time of arrival. Workers with low levels of educational attainment tend to experience higher rates of unemployment than those with higher levels of educational qualifications. education. professionals and trades persons. for workers who had degrees. recent immigrants and persons whose last job was in blue collar occupations account for disproportionately high shares of unemployment.5% in the 1990s and 2000s. dependent students and non dependent children having rates of unemployment between 16% and 18% in the 1990s.9% in 2012-13. Workers in semi-skilled or unskilled occupations (e. However these rates fell when labour demand rose during the housing and resource booms in the 2000s. diplomas. the rate of unemployment in 2012-13 for males was 5. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 201 .6% respectively in the 1990s and 2000s. but there are variations between the states of Australia. males and females aged 15 to 64 years) experienced increases in their rates of unemployment over the period from the 1970s to 1990s.1% in 1998.6% (see Table 8. If these policies are successful in the short run.4% and 6.5 on page 195). Young and less educated labour force participants. the SRPC would shift from SRPC to SRPC1. These industries had the highest rates of unemployment in the 1990s and also the highest percentage of long term unemployed. with sole parents.© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 5% unemployment in the short run (point A) or 3% inflation and 6% unemployment (point B) on SRPC. For migrants arriving between 1986 and 1995. The Main Groups Affected by Unemployment The incidence of unemployment varies between demographic and skill groups in the labour force. For males and females who had not completed high school. 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 NAIRU is the lowest unemployment rate which can be sustained without an increase in inflation. Teenagers experience difficulty in securing their first job because of a lack of experience. 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%. training and skills. compared to rates of 1% to 5% for managers.

with annual inflation averaging 2. Unemployment can also lead to a less equal distribution of income as the unemployed will be reliant on income support from government welfare payments. Real GDP will be lower (as it is below full employment) and national income will be reduced. higher suicide rates. along with living standards. Since 1996 inflation in Australia has been well anchored. and increased duration of unemployment will increase this rate of depreciation. 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.202 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd THE EFFECTS OF UNEMPLOYMENT The primary economic cost of unemployment is the opportunity cost of lost output and income. Arthur Okun. At the same time the unemployment rate fell steadily and the economy reached full employment in 2008. reaching nearly 40% of the total number of unemployed. the rate of economic growth needs to exceed the growth in labour productivity plus the growth in the labour force through new entrants. If the productivity of the workforce is rising over time because of the more efficient use of capital and labour in the workplace. migrants and single women. middle aged men from professional or trades backgrounds. In Australia higher average sustainable economic growth of around 4% between 1996 and 2008 resulted in unemployment falling to 4. formulated a relationship between economic growth. There is therefore a depreciation in the human capital of the unemployed. with widespread labour shortages and rising inflation and wage pressures. The unemployed are also likely to experience a loss of self esteem and dignity. Okun’s Law suggests that for a government to reduce unemployment. 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. 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. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . the breakdown of family relationships.2%. A lack of motivation can lead to higher rates of long term unemployment and dependence on government welfare payments for income support. workers with ethnic or indigenous backgrounds. 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. These social problems may be linked to particular groups of unemployed people such as young people. 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. increased drug and alcohol dependency. unemployment and productivity which has become known as Okun’s Law. The longer a person is unemployed.8% in 2008-09.3% in 2008-09 due to the Global Financial Crisis and recession led to a rise in the unemployment rate from 4. 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.5%. However the lower rate of economic growth of 1. health problems for the unemployed. sole parents. The social costs of unemployment are difficult to quantify but researchers have linked them to undesirable social trends such as rising crime rates. However this situation changed in 2008-09 because of the impact of the Global Financial Crisis and recession. fewer workers will be needed to produce the same output. which reduces their motivation to search for jobs or to undergo re-training and education to increase their skills.2% in 2007-08 to 5. rising unemployment and lower inflation. This could lead to a rise in a budget deficit or a fall in a budget surplus. and a loss of self esteem and human dignity for the unemployed. The federal government will experience an erosion of its tax base due to unemployment and a rise in cyclical expenditure on social security payments. with declining rates of economic growth. and concentrated disproportionately in the lowest quintile of the distribution of household income. The most negative feature of the higher unemployment rate resulting from the 1990-91 recession was the rising percentage of long term unemployed. The American economist.

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.5% of GDP) with new discretionary spending on cash payments to households ($10. This was viewed by the Howard government as a means of direct intervention in labour markets in order to reduce unemployment. • Abolition of the No Disadvantage Test applicable to AWAs and Union Collective Agreements. developing and emerging economies. Industrial relations policy or wages policy to contain the growth in aggregate wages.25% by the Reserve Bank between September 2008 and April 2009. incorporated measures designed to curb union powers and weaken unfair dismissal laws. In Australia the cash rate was cut by -4. is another key element of the government’s labour market reform agenda. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 203 .© Tim Riley Publications Pty Ltd Chapter 8: Unemployment POLICIES TO REDUCE UNEMPLOYMENT The main policies available to the Australian government to reduce unemployment are as follows: • • • • Stimulatory monetary policy through cuts to interest rates. and the Australian government increased the size of the budget deficit to -$53b (or -4. higher levels of output will require increased levels of employment. encourage more competitive work practices and higher levels of labour productivity.e. 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. The continuing process of Awards Modernisation in making awards simpler instruments that do not impede workplace efficiency and employment growth.4b) and infrastructure projects through the Nation Building and Jobs Plan ($42b). Labour market deregulation and the movement towards decentralised wage determination. This in turn should lead to higher levels of employment as employers have a greater incentive to hire additional workers. 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. Expansionary fiscal policy through an increase in government spending and/or cuts in taxes. and Microeconomic reform policies to improve the economy’s resource allocation and productivity. Labour market reform legislation such as the Workplace Relations Act 1996. where firms and employees are able to negotiate wage increases on the basis of improved levels of productivity. In 2008-09 as the Global Financial Crisis and recession impacted on major advanced.M). 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. Promoting Higher Sustainable Economic Growth In order to reduce cyclical unemployment. Given that the demand for labour is derived from the demand for goods and services that it is used to produce. which in turn should lead to a lowering of the level and rate of unemployment. and • Exemption of businesses with less than 100 employees from unfair dismissals legislation. has been the central component of Australia’s recent labour market reform agenda. • Reduction of the 20 allowable matters in the award safety net to 16. and increase the output of goods and services in the economy. expansionary fiscal policy) and the easing of monetary policy have the potential to stimulate aggregate demand or spending (C+ I + G + X . education and training programmes to help workers to adjust to structural changes in the workplace. Labour Market Reforms Labour market reform policies are designed to make labour markets more flexible. Therefore greater emphasis has been placed on labour market reform policies such as government employment.

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. the Building Australia’s Future Workforce package included $3b of Australian government funding for new skills measures such as apprenticeships. • Funding for vocational and school education including the National Education Framework for Schools to raise literacy and numeracy standards. training and development.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. This involved expenditure of $1.9b to deliver up to 630. This is supported by Australian Job Search. • Expansion of school based apprenticeship systems to develop apprenticeship skills in schools. 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. Modern Awards and annual adjustments to the National Minimum Wage by Fair Work Australia. with individual workplace agreements such as AWAs phased out. • Providing greater flexibility for schools to improve the educational outcomes of students. employment assistance to workers who became unemployed. In the 2013-14 budget the government established a $68m Alternative Pathways Program to address skills shortages. an Australian government run online job noticeboard. Education and Training A major reason for unemployment is the lack of education. with the government believing that the new reforms would lead to further gains in employment and productivity. This included the introduction of ten National Employment Standards. 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. In the 2011-12 and 2012-13 budgets. • The Australian National Training Authority was established to improve the skill development of Australian workers through ongoing education. training and skills of some workers (especially young workers aged 15 to 19 years) demanded by employers for the jobs available. 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. The government also introduced a $5. training places for persons under 25 who wanted to upskill.9b new programme called the Education Revolution. and assistance to regions and communities directly affected by the global recession. The main measures in the Compact included a Training Supplement Scheme to eligible job seekers to undertake training. vocational education and training facilities. With the election of the Rudd Labor government in 2007. • Creating a flexible and competitive national vocational training system. Emphasis was also placed on collective bargaining. Labour market assistance to job seekers is based on the Australian government’s Job Services Australia. 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. and a reduction in the unemployment rate because of greater flexibility in wage and employment setting procedures.000 additional training places over five years. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . In the 2009-10 budget the government introduced the Jobs and Training Compact at a cost of $1. 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.204 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd These changes further deregulated the industrial relations system. and measures to boost the workforce participation of disadvantaged groups. reform of the VET system. a national network of private. community and government organisations contracted to assist the unemployed to find jobs.

mature aged people. Increasing the supply of skilled labour through an intake of skilled migrants in specific occupations and industries. It targeted parents. 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. The ABS reported in 2005 that 149. Funding was allocated to help mature age workers to up-skill and reskill. the federal government’s Building Australia’s Future Workforce skills package contained funding for 50. part time or full time work: • The Australians Working Together package (2001). Increasing labour force participation by retaining older workers with specific skills. as well as a net shortage of much needed labour skills.500 jobs could not be filled nationwide with a significant proportion of these jobs in the mining boom states of Western Australia and Queensland. the long term unemployed and people in disadvantaged locations. In sum there are two main policies that can be used by the government to address the skills shortage: 1. and for child care assistance to increase parents’ workforce participation. the government announced its More Help for Families package. • 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.400 in 2009-10. indigenous people and people with disabilities to seek paid work or training. • In the 2011-12 budget. Therefore Australia was not producing enough skilled workers to meet the demand for many skilled jobs. and funding for child care. tax cuts and incentives for saving for retirement. Immigration overall also increases aggregate demand and hence the derived demand for labour. 2. single parents. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 205 . included reforms to help people out of work to return to the labour force through a system of working and training credits. • In the 2006-07 budget the federal government committed $60. There is a geographic imbalance between job availability and the supply of labour. A National Partnership Agreement on Skills Reform was also signed with the states to strengthen the VET system. • In the 2012-13 budget. as part of the Building Australia’s Future Workforce package.2m to provide an additional 25.000 new training places under the National Workforce Development Fund. • In the 2004-05 budget. building and construction) in relation to the demand for these labour skills. • 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.© Tim Riley Publications Pty Ltd Chapter 8: Unemployment Tax and Welfare Reforms A 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. The Australian government increased skilled migration between 2001 and 2009 but capped the skilled stream at 115. The intake of skilled migrants can be reviewed to meet economic requirements.000 child care places to encourage more parents to seek paid work in the labour market. 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. The Skills Shortage The 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. 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. and encouraging other groups such as younger workers and females to acquire higher levels of education and training. • In the 2008-09 budget the federal government announced cuts in personal income tax designed to provide incentives for individuals. The government’s Building Australia’s Future Workforce package (2011) addressed these issues.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. including part time workers to participate in the workforce. people with a disability.

The government’s Jobs and Training Compact was designed to support young Australians. vital for increasing labour force skills. This would provide a payment of $41. vocational and school education. The Realising Our Potential package in the 2007 budget increased funding for university. In the 2010-11 budget the government invested $661. Redundant workers were expected to maintain. Figure 8. productivity and participation. reform of the VET system. 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. In the 2011-12 and 2012-13 budgets. update or learn new skills to improve their job prospects. retrenched workers and local communities to secure future employment. training and skills recognition.206 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd Programmes to Develop Labour Skills The 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). • A $438m Compact with Retrenched Workers provided immediate employment assistance through Job Services Australia to workers who became unemployed. The stimulus measures were estimated by Treasury to reduce the forecast peak unemployment rate by 1.7: The Unemployment Rate Pre-Stimulus and Post Stimulus Source: Commonwealth of Australia (2009). with a COAG agreement for a national approach to apprenticeships. Job Services Australia commenced operating in 2009 to provide employment services to more disadvantaged job seekers.2m in a new Skills for Sustainable Growth programme. The government’s fiscal and employment stimulus packages were expected to support labour demand and raise the level of GDP in 2009-10. 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.7. 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. The Jobs and Training Compact The Australian government allocated $1. the Building Australia’s Future Workforce package included $3b of Australian government funding for new skills measures such as apprenticeships. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . Budget Strategy and Outlook 2009-10.5% in 2010 from 10% to 8.5% as shown in Figure 8.5b in the 2009-10 budget to assist workers whose job prospects were adversely affected by the global recession. and measures to boost the workforce participation of disadvantaged groups. The Skills for the Future package in October 2006 committed $837m in new funding to support skills creation in the VET sector. • 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.60 per fortnight to eligible job seekers on Newstart Allowance or Parenting Payment who undertake approved training.

Discuss government policies to reduce the incidence of structural and long term unemployment. 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. 14. 12. Discuss the government’s 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. 4. 10. Why are certain groups more likely to experience unemployment than others? 9. Refer to Figures 8. 6.3 and the text and explain how a deficiency in aggregate demand can cause cyclical or involuntary unemployment to occur in the economy. 5. Discuss the reasons for the skills shortage in Australia and the policies used by the Australian government to address the skills shortage. Discuss government policies that can be used to reduce the incidence of cyclical unemployment.5 and explain how unemployment can arise in the labour market when labour demand equals labour supply. Using examples. explain how structural change in the economy can lead to structural unemployment. Refer to Figure 8. What is meant by the natural rate of unemployment? Refer to Figure 8. Discuss the main groups in society affected by high rates of unemployment and long term unemployment. How can the government try to reduce the Non Accelerating Inflation Rate of Unemployment? 8.2 and 8. 7. 2.4 and explain how excessive wage expectations might affect unemployment. CAUSES AND EFFECTS OF UNEMPLOYMENT 1. Using examples.© Tim Riley Publications Pty Ltd Chapter 8: Unemployment REVIEW QUESTIONS THE TYPES. Discuss the economic and social costs of unemployment in the Australian economy.6 and explain the Non Accelerating Inflation Rate of Unemployment (NAIRU). Refer to Figure 8. 13. 11. Define the following terms and add them to a glossary: apprenticeships cyclical unemployment education and training enterprise bargaining frictional unemployment full time employment hard core unemployment hidden unemployment human capital incidence of unemployment labour demand labour force labour market reform © Tim Riley Publications Pty Ltd labour skills labour underutilisation rate long term unemployment LRPC NAIRU natural rate of unemployment net migration Okun’s Law part time employment participation rate poverty trap productivity regional unemployment retrenchments seasonal unemployment skills shortage SRPC structural change structural unemployment tax and welfare reform underemployment unemployment unemployment gap VET wage expectations welfare dependency Year 12 Economics 2014 207 . distinguish between cyclical. structural. frictional and seasonal unemployment.

Year 12 Economics 2014 © Tim Riley Publications Pty Ltd .000 631.900 18.595.099.900 1.900 17. 3.900 3.300 18.100 3.000 18.200 3.976.000 3.500 3. (4) Explain TWO government policies used to reduce unemployment in Australia.700 2.4 2012-13 8.880. (2) 4. Calculate the change in the unemployment rate between 2011-12 and 2012-13.600 Unemployed Persons Civilian Population Aged 15+ years 662.504.100 607.3 2010-11 8.000 18. Calculate the size of the labour force in 2012-13.500 3.373.800 2009-10 7.520.100 706.139. (1) 2.208 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd [CHAPTER 8: SHORT ANSWER QUESTIONS Year Full Time Part Time Employed Employed Persons Persons 3.353. Explain TWO causes of unemployment in the Australian labour market.9 2011-12 8.435.082.3 Marks 1.611. (1) Calculate the participation rate in 2011-12. (2) 5.000 591.400 Real GDP %r pa 2008-09 7. 1.370.150.065.0 Refer to the table above of selected data for the Australian labour force between 2008-09 and 2012-13 and answer the questions below.

Explain recent trends in Australia’s unemployment rate and the relationship between changes in economic growth.75% rise in Canada. Over the past 18 months employment has grown strongly. but the subsequent recovery has been substantial with the unemployment rate falling to 4. the Australian labour market was remarkably resilient during the Global Financial Crisis (GFC). The long term unemployment rate also remains low and continues to decline. Not only was the increase in Australia’s unemployment rate relatively modest. In the lead up to and during the GFC the unemployment rate rose by a total of around 1.” Unemployment Rates Employment Growth Source: Commonwealth of Australia (2011).8% in Australia. lower than most of the major advanced economies.6% from 4.75% rise in the USA. has since strengthened. the unemployment rate has fallen steadily. and the participation rate has reached record highs.2% to 5. a 3.© Tim Riley Publications Pty Ltd Chapter 8: Unemployment [CHAPTER FOCUS ON UNEMPLOYMENT “Unlike most advanced economies. Budget Strategy and Outlook 2011-12. employment and the unemployment rate. © Tim Riley Publications Pty Ltd Year 12 Economics 2014 209 . [CHAPTER 8: EXTENDED RESPONSE QUESTION Explain the main causes of unemployment in Australia and discuss the use of government macroeconomic and microeconomic policies to reduce the rate of unemployment.5% rise in New Zealand and a 5. compared with around a 2. and following a short period of weakness.9% as at March 2011.

The unemployment rate peaked in the recession of the early 1990s when it was 11% of the labour force. before rising to 5. and Aborigines and Torres Strait Islanders. plus self employed persons and those unemployed but actively seeking work are included in the Australian labour force. migrants from non English speaking backgrounds. skills and training. 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. The Non Accelerating Inflation Rate of Unemployment (NAIRU) is the rate of unemployment that is consistent with a constant or non accelerating inflation rate. It fell from 11% in 1992 to an historic low of 4. 9. The labour force consists of all persons employed (i. and • Excessive wage expectations may lead to rising wage costs for employers and a lower demand for labour. According to the Australian Bureau of Statistics (ABS). alcohol or drug dependency.7% of the labour force. persons over 15 years who are currently employed for at least one hour per week.8% in 2008-09 due to the impact of the Global Financial Crisis and recession. The natural rate of unemployment is where some workers remain unemployed due to frictional and structural factors in the labour market.e. the age distribution of the population.210 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd CHAPTER SUMMARY UNEMPLOYMENT 1. 3. Some of the main groups affected by unemployment include young people. 12. frictional. 4. Year 12 Economics 2014 © Tim Riley Publications Pty Ltd . both full time and part time employees) plus unemployed persons registered as actively seeking and available for work. Full employment of the labour force is a major goal of government economic policy. 5. 6.2% in 2007-08. causing employers to substitute capital for labour in production. eventhough the demand and supply of labour are in equilibrium in the labour market. hidden and regional. 8. 2. Some of the main causes of unemployment include the following: • A deficiency in aggregate demand leading to a deflationary gap in the economy. underemployment. The unemployment rate is calculated as the percentage of the total labour force classified as unemployed. 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. 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. and a breakdown in their family relationships. workers with low levels of education. 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. 7. 10. • Structural changes in production and technology may make some labour redundant because of a mismatch between the labour skills demanded and the skills supplied by the labour force. Unemployment also results in social costs to the community as the unemployed may experience health problems. seasonal. and the participation rate of the working age population. 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. long term. The size of the labour force is determined by factors such as the size and growth of the population. 11. structural. The unemployed also suffer from lower incomes and a loss of self esteem the longer they are unemployed. In 2012-13 the unemployment rate in Australia was 5. blue collar workers in manufacturing. The main types of unemployment are classified as cyclical.