Chapter 7: Unemployment

Question 1

Why does the ABS conduct the Labour force survey?

Answer 1

To collect date to calculate the unemployment rate. The ABS interviews adults in a sample of around 0.32% of the civilian population about the employment status of everyone in the household agreed 15 years and older.

Question 2

When are people considered employed?

Answer 2

If they worked for at least one hour in paid employment in the week before the survey.

Question 3

What happens if respondents in the labour force survey are not considered employed?

Answer 3

Respondents are asked two further sets of questions relating to: first, have they actively sought work in the previous four weeks and, second, are they currently available to state work?

Question 4

When are people considered unemployed?

Answer 4

Respondents are classified as unemployed only if they answer ‘no’ to the employment status question and ‘yes’ to both of the subsequent questions.

Question 5

What is the unemployment rate?

Answer 5

This is the percentage of the labour force that is unemployed.
Number of unemployed/labour force x 100 = unemployment rate (%)

Question 6

What is the labour force?

Answer 6

The sum of employed and unemployed workers in the economy.

Question 7

What happens if a respondent does not meet the survey requirements of being either employed or unemployed?

Answer 7

The person is classified as not being in the labour force. For example, full-time homemakers, non-working retirees and full-time students. Also, not in the labour force are people who are classified as marginally attached to the labour force. These include people who have been looking of work but are not available to start work during the past four weeks.

Question 8

What are discouraged workers?

Answer 8

People who are available for work but have not looking for a job during the previous four weeks because they believe no jobs are available for them.

Question 9

What is the labour force participation rate?

Answer 9

The percentage of the working age (those aged 15 years and over) population in the labour force.
Labour force/working age population x 100 = labour force participation rate (%)

Question 10

What are the problems with measuring the unemployment rate?

Answer 10

Although the labour force survey reports the unemployment rate measured to one-tenth of a percentage point, it is not a perfect measure of the current state of joblessness in the economy.

Significant understatement of the unemployment rate
- During an economic recession, for example, an increase in discouraged workers usually occurs as people who have had trouble finding a job stop actively looking.
- Because these workers are not counted as unemployed, the unemployment rate as measured by the ABS may significantly understate the true degree of joblessness in the economy.
Underemployed workers
- Workers who want to work more hours than they currently have.
- In recognition of this issue, the ABS estimates underemployment and publishes a labour force underutilisation rate.

Question 11

What is the labour force underutilisation rate?

Answer 11

This is the sum of the officially measure of unemployment and underemployment. In august 2016 the underemployment rate was 8.6% and the unemployment rate was 5.7%, which gives us a labour force underutilisation rate of 14.3%.

Question 12

What is long-term unemployment?

Answer 12

Those in the labour force who have been continuously unemployed for a year or longer. The lower the level of education, the more likely a person is to become long-term unemployed.

Question 13

How does the creation and destruction of jobs take place?

Answer 13

The creation and destruction of jobs results from changes in consumer tastes and technological progress, together with the successes and failures f entrepreneurs in responding to the opportunities and challenges of shifting consumer tastes and technological change.

Question 14

What are the costs of unemployment?

Answer 14

There are extremely good economic and social reasons for economic policy to focus on reducing the rate of unemployment. The costs to the individual and to the economy are substantial. Furthermore, the costs to the individual from being unemployed are not equally distributed among the different age, education and socioeconomic groups.

Question 15

What are the costs of unemployment to the economy?

Answer 15

• Loss of GDP
• Loss of human capital
• Retraining costs
• Costs to the government

Question 16

Explain the following way unemployment is a cost to the economy: Loss of GDP

Answer 16

For the economy, unemployment means that there is a loss of GDP. If everyone who is willing and able to work could find a job, this would increase total output in the economy.

Question 17

Explain the following way unemployment is a cost to the economy: Loss of human capital

Answer 17

For the economy and for the individual, unemployment, particularly for lengthy periods of time, can lead to a loss of human capital because a person’s skills may deteriorate when they are not using them.

Question 18

Explain the following way unemployment is a cost to the economy: Retraining costs

Answer 18

Unemployment imposes costs in terms of retraining, although retraining may ultimately lead to a more productive workforce. The unemployed may have to retrain due to their skills deteriorating during their period of unemployment, or because their pre-existing skills are no longer required by the economy.

Question 19

Explain the following way unemployment is a cost to the economy: Costs to the government

Answer 19

In Australia and many other countries, unemployed people can receive a benefit payment from the government. This represents a net drain on the budget of the government, and also carries with an opportunity cost – namely, the government could have used the funds for other expenditures. The impact on a government’s budget increases during times of rising unemployment, due not only to the increase in unemployment benefits paid by the government, but also to the loss of tax revenue that the government would have received had more people been working and paying personal income tax.
Furthermore, given that unemployed people normally have significantly lower incomes than if they were working, they spend less, which means businesses have lower sales and profits than if there had been full employment. Lower business profits translate into less company income tax revenue for the government, and lower consumer spending also means less GST and excise tax revenue to the government.

Question 20

What are the costs of unemployment on the individual?

Answer 20

• Loss of income

- Social costs

Question 21

Explain the following way unemployment is a cost to the individual: Loss of income

Answer 21

When a previously employed person becomes unemployed they experience a significant reduction in income, equal to the difference between their previous wage level and the unemployment benefit. Unemployment is one of the main causes of poverty.

Question 22

Explain the following way unemployment is a cost to the individual: Social costs

Answer 22

The individual may also experience loss of skills during their period of unemployment, and retraining costs. However, becoming unemployed can also lead to despair and loss of self-esteem. Furthermore, a number of studies have found that unemployment can be a factor in family break-ups, health problems, mental illness, crime and political unrest.

Question 23

What are the types of unemployment?

Answer 23

• Cyclical unemployment
• Frictional unemployment
• Seasonal employment
• Structural unemployment
• Full employment

Question 24

What is cyclical unemployment?

Answer 24

Unemployment caused by a business cycle contraction.
When the economy moves into a contraction or recession, many firms find their sales falling and cut back on production. As production falls, they start laying off workers. Workers who lose their jobs because of a contraction or recession are experiencing cyclical unemployment (AKA demand-deficient unemployment). When the economy begins to recover, cyclical unemployment begins to fall, although with a lag.

Question 25

Why does the unemployment rate never fall to zero?

Answer 25

Due to frictional and structural unemployment.

Question 26

What is frictional unemployment?

Answer 26

This is short-term unemployment arising from the process of matching workers with jobs. The process of job search takes time, so there will always be some workers who a frictionally unemployed because they are between jobs and in the process of searching for new ones.
Workers have different skills, interests and abilities, and jobs have different skill requirements, working conditions and pay levels. As a result, workers who have lost their jobs or quit to look for new jobs or workers entering the labour force will probably not find an acceptable job right away.

Question 27

What is seasonal unemployment?

Answer 27

Unemployment due to factors such as weather, variations in tourism and other calendar-related events. For example, businesses located in beach resort areas reduce their hiring during the winter, just as ski resorts reduce their hiring during the summer.
Because seasonal unemployment can make the unemployment can make the unemployment rate seem artificially high during some months and artificially low during other months, the ABS reports two unemployment rates each month – one that is seasonably adjusted and one that is not seasonally adjusted.

Question 28

Why is frictional unemployment good?

Answer 28

It is good for the economy because it represents workers and firms taking the time necessary to ensure a good match between the attributes of workers and the characteristics of jobs. By devoting time to searching for jobs, workers end up with jobs they find satisfying and in which they can be productive.

Question 29

What is structural unemployment?

Answer 29

This is unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs. While frictional unemployment is short-term, structural unemployment can last for longer periods because workers need time to learn new skills and some may never acquire these.

Question 30

What is full employment?

Answer 30

As the economy moves through the expansion phase of the business cycle, cyclical unemployment will eventually drop to zero. The unemployment rate will not be zero, however, because of frictional and structural unemployment. When the only remaining unemployment is structural and frictional unemployment, the economy is said to be at full employment.

Question 31

What do economists often see frictional and structural unemployment as?

Answer 31

They see it as being the normal underlying level of unemployment in the economy (the natural rate of unemployment). The fluctuations around this normal level of unemployment are mainly due to change in the level of cyclical unemployment.

Question 32

What is the natural rate of unemployment?

Answer 32

The normal level of unemployment, which is the sum of frictional and structural unemployment, is referred to as the natural rate of unemployment. The unemployment rate that exists when the economy is operating at potential GDP (meaning, there is no cyclical unemployment).

Question 33

What is the non-accelerating inflation rate of unemployment (NAIRU)?

Answer 33

This is the level of unemployment below which the rate of inflation will rise. If the unemployment rates falls below the NAIRU, firms will find it harder to retain and recruit workers without increasing wages. These increases in wages will then flow through to increases in prices.

Question 34

How can government policies aid in the search of jobs?

Answer 34

Governments can help reduce the level of frictional unemployment by pursuing policies that help speed up the process of matching unemployed workings with unfilled jobs. Governments can help reduce structural unemployment through policies that aid the retraining of workers.

Question 35

How can government policies add to the level of frictional and structural unemployment?

Answer 35

Through policies which increase the unemployment rate either by increasing the time workers devote to searching for jobs, by providing disincentives to firms to hire workers, or by keeping wages above their market level.

• Social security and other payments to the unemployed
• Minimum wages
• Trade unions
• Efficiency wages

Question 36

Explain Australia’s labour market regulation and deregulation.

Answer 36

Australia has moved from a highly centralised wages and industrial relations system to a more decentralised system. Australia had, for most of the twentieth century, a system of wage determination, and of industrial relations more generally, that had only one or two counterparts in the rest of the industrialised world, known as compulsory arbitration.
In 1991, the AIRC encouraged works and their employees to bargain directly with each other at the enterprise level. This is known as enterprise bargaining.

Question 37

What is enterprise bargaining?

Answer 37

Wages and working conditions negotiations between employers and unions or employers and employees at the workplace level.

Question 38

What is the effect of imposing minimum wages?

Answer 38

To increase the wages only of those who would otherwise receive the lowest wages, in turn affecting only those low-skilled, low-paid jobs. Economists are divided as to whether minimum wages positively or negatively affect the unemployment rate.
Some economists believe that the effect of minimum wages is that it causes a large reduction in employment of workers who could otherwise have earned below the minimum wage. An alternative view, held by a number of economists, is that minimum wages have very little effect on employment, and therefore the protection of workers’ wages offered by minimum wage legislation outweighs any possible small (if any) effect on employment.

Question 39

What are trade unions?

Answer 39

Trade unions are organisations of workers that bargain with employers for higher wages and better working conditions for their members. In unionised industries, wages are usually above what they would otherwise be if wages were left to be determined by the market.

Question 40

What are efficiency wages?

Answer 40

A high-than-market wage paid by a firm to increase worker productivity. Many firms pay efficiency wages because the believe doing so will increase profits and not because the government requires them to do so or because they are unionised. This link may seem like a paradox, however many studies have shown that workers are motivated to work harder is they receive higher wages. Furthermore, by paying a wage above the market wage, the firm raise the costs to workers of losing their jobs because alternative jobs may pay only the market wage.