Topic 3 - Unemployment Flashcards
What is unemployment?
Unemployment is a measure of the amount of individuals who want to work but are unable to find a job.
What are unemployed people considered by?
These are people aged 15+ who are available for work and actively seeking work but are unable to find a job
What is the major goal of the gov in terms of u/e?
Full employment of labour
Why are high levels of u/e a problem?
because the opportunity cost of higher unemployment includes less production, slower EG, lower taxation revenue and higher social welfare payments. U/e can also lead to major LT social costs including increased inequality, poverty, family problems, crime and social division
What is u/e a measure of?
It is a measure of the proportion of the LF that is under-utilised, its most important use is as an indicator of the performance of the economy
What does a high rate of ue indicate?
A high rate of UE indicates limited employment opportunities in a labour market that is oversupplied. A low rate of UE indicates a tight labour market, potential scarcity of skilled labour, and future cost pressures from wage demands from workers
What are the 3 measures of u/e?
Labour force, participation rate, unemployment rate
What is the labour force?
It is defined as the section of the population aged 15+ (working aged population), who are either working or actively seeking work
How is the total Labour Force in Australia calculated?
Calculated by adding:
Total part time and full time employed people over 15 PLUS total unemployed people over 15
What is the size of labour force in 2022?
14 million
What does the labour force include?
Persons over 15 who are currently employed for at least one hour per week, including people on paid leave, on workers compensation or have been stood fown for less than 4 weeks, on strike, on worker’s compensation or receiving payment whilst understanding full time study
Self employed people working for at least 1 hour per week in their own or a family business
Unemployed people over 15; actively seeking and available for work
What does the labour force NOT include?
Children under 15 years
Full time, non-working students above 15 years
People doing full time domestic duties
UE people who are not willing to actively apply for jobs
Retired people
What is the labour force affected by?
The size of population, level of net migration, age distribution of population and labour force participation rate
What is the labour force participation rate?
Labour force participation rate (LFPR) refers to the percentage of the population aged 15+ in the labour force that is either employed or unemployed (either working or actively seeking work)
How is Labour force participation rate calculated?
(Labour force / Working age population (15+)) * 100/1
What was the participation rate of Aus in March 2023?
66.8%
Does the participation rate fluctuate with eco cycle?
The PR changes with eco cycle with better eco conditions, leading to better job prospects
What is unemployment?
Unemployment refers to a situation where individuals want to work but are unable to find a job, and as a result labour resources in an economy are not utilised fully
What is the criteria for unemployment?
Not working more than 1 hr in the reference week
Actively looking for work in previous four weeks
Available to start work in the reference week
How do you calculate u/e rate % ?
(Number of persons unemployed/total labour force) * 100/1
WHo calculates u/e and how?
ABS calculates the no. of unemployed people and the u/e rate by collecting data from a monthly survey of about 26 000 dwellings. Overall data is collected from about 52 000 people
(This is a bit sketch, so dont trust too much)
What are some issues with the method utilised to measure unemploment?
By classifying people as either employed or unemployed, official stats don’t take into account the number of hours people work. Some employed people may be underemployed indicating that they want to work more hours
Doesn’t include the hidden unemployed who have not been able to find work and have left the labour force, this may include family members undertaking home duties, and people with disabilities who would take up suitable employment if possible
What is the labour force underutilisation rate?
Labour force underutilisation rate is a measure of the number of people unemployed plus the number who want to work more hours (unemployed + underemployed).
What are the types of unemployment? (7)
Cyclical
Structural
Frictional
Hidden
Seasonal
underemployment
Long term
What is structural u/e?
Structural unemployment occurs because of structural changes within the economy caused by changes in technology or the pattern of demand for g+s and microeconomic reform. Here, there is a mismatch of skills and location
I.e. workers released from declining industries find they do not have the skills to take up jobs in growing industries
What is cyclical u/e?
Cyclical Unemployment occurs because of a downturn in the level of eco activity and falls during times of strong EG.
Cyclical u/e rises during a downswing/recession as spending and GDP growth fall, causing employers to lay off some existing workers and cease hiring new workers
Cyclical u/e falls during a boom, as spending and GDP growth rises, causing employers to hire more workers to meet with the high D
What is frictional u/e?
Frictional Unemployment refers to those people who are temporarily unemployed as they change or find jobs - they have finished one job but have not started a new one.
It is caused by search times needed for workers to find jobs and for firms to find employees
What is seasonal unemployment?
Seasonal unemployment occurs at predictable and regular times throughout the year because of the seasonal nature of some kinds of work (for example, selling gelato in summer or being a shopping centre Santa Claus)
What is hidden unemployment?
Hidden unemployment refers to those people who can be considered unemployed but do not fit the official definition of unemployment and are thus not reflected in the unemployment statistics
Hidden unemployment occurs when people are not officially counted as unemployed, but would probably work if they had an opportunity.
These include individuals who have been discouraged from seeking employment and are no longer actively looking for a job. Because they aren’t actively seeking work, such people are not classified as unemployed but instead are just not participating in the labour force
What is underemployment?
Underemployment refers to people who work for less than full time (35 hrs a week), but would like to work longer hours. These people aren’t classified as unemployed as they work more than 1 hr a week but represent a growing part of Aus’s unemployment problem
What is Long Term unemployment?
Long term Unemployment refers to those people who are unemployed for 12 months or more, usually due to structural u/e
Long term UE can be difficult to reduce, as those out of work for long periods lose skills and confidence. They can also be regarded less favourably from potential employers
What is Hard core unemployment?
Hard core unemployment is a term used to refer to those people who face chronic period of UE or long term UE often due to physical, mental, emotional difficulties
Some examples may be that a person has mental health problems, physically disabled, abuses drugs or partakes in anti social behaviours
What is the non-accelerating inflation rate of unemployment (NAIRU)?
The NAIRU refers to the rate of UE that is consistent with a constant inflationr ate or no change of the inflation rate. It refers to the level of unemployment at which there is no cyclical unemployment - when the economy is at full unemployment
(When there is full employment in everything, and cyclical unemployment is ignored)
It is the lowest u/e rate that can be sustained without causing wage growths and inflation to rise
How is NAIRU calculated?
NAIRU reflects that there is always going to be a level of frictional, seasonal, structural and hardcore unemployment in the economy. Thus, to calculate it, we need to eliminate the cyclical unemployment
How could NAIRU be improved?
It could be improved through structural unemployment because NAIRU is dependent on other u/e factors other than cyclical u/e, and the one thing that could be changed is structural u/e
The gov will have to implement micro policies which aim to boost efficiency, productivity which is achieved through improving the skills of a workforce –> improvement in structural u/e is required to improve NAIRU
It could also kind of be influenced in the LT by policies that reduce seasonal and frictional u/e
What happens if u/e is above the NAIRU?
When u/e is above the NAIRU, there is spare capacity in the labour market, which suggests that policymakers should stimulate EG, with the aim of reducing u/e
What happens if u/e is already at or below the NAIRU?
When u/e is already at or below the NAIRU, an increase in EG will increase wage pressures because they are insufficient numbers of unemployed people to fill those job vacancies. ANy efforts to reduce u/e below the NAIRU will result in higher inflation
What is the effect of a lower NAIRU?
It increases the economy’s capacity to grow without increasing inflation (as it allows for higher rates of employment, ultimately contributing to a greater eco capacity)
How might NAIRU be reduced
Through retraining and re skilling programs to aid the structurally unemployed or by making it easier for workers to change jobs or move interstate
What are the 10 causes of u/e?
Deficiency in AD/Low levels of EG
Stance of macroeconomic policies
Constraints on EG
Rising participation rates
Structural Change
Technological change
Inadequate levels of training and development
Labour costs
Inflexibility in the labour market
Productivity of labour
How does a deficiency in AD/Low levels of EG cause u/e?
Demand for labour is a derived demand - from demand for goods and services. If there is a downturn in aggregate demand, this may be reflected in a downturn in demand for labour, increasing levels of unemployment.
What can cause a decline in AD? (3)
Economic downturn due to lower domestic consumption and investment
Government policies→ Dampening demand
Decrease in demand for Australia’s X due to downturn in IBC, slower growth in our major trading partners or fall in competitiveness of Aus G+S
Is there a correlation between EG and u/e?
There is a strong correlation between the two. There is usually a six month lag between a change in EG and ue levels (as ue is considered a lagging indicator of EG).
Generally u/e will rise when GDP growth is below 3%, and UE will fall when GDP growth is above 3.5% (only as an indicator)
How does the stance of macroeconomic policies cause u/e?
Expansionary fiscal and monetary policy stances can decrease cyclical UE in the ST-MT by increasing eco activity and AD
Contractionary fiscal and monetary policy stances can increase cyclical UE in the ST-MT by decreasing eco activity and AD
How do constraints on EG cause u/e?
Inflationary expectations may lead to contractionary stances in macroeconomic policies –> an increase in u/e
An increasing CAD and rising foreign debt may lead to a debt sustainability problem, where a larger proportion of our GDP must be used to service existing debt
In the LT, u/e is influenced by the level of sustained EG achieved in an economy. If there are significant constraints on EG, the economy will struggle to create enough jobs to reduce u/e
How do rising participation rates influence u/e?
An increase in the PR can cause a ST increase in u/e as previously discouraged or hidden unemployed persons re-enter the LF and start to actively seek work (but may not get work straight away), however, over time u/e rates can reduce slowly during an EG as there are more people who are looking for jobs which may result in increased employment but only has a minimal impact on the ue
What is structural change?
Involves changes in the patterns of production that reflect changes in tech, consumer demand, global competitiveness and other factors
Structural change will often occur when less efficient industries decline (due to removal of protection, sustained appreciation of the currency) and due to reforms in technology and the development of machinery to replace humans
How does structural change influence u/e?
There will be a loss of jobs in less efficient industries and in areas undergoing major structural changes (in the ST), however in the LT it is theorised to help reduce u/e as resources are directed to more efficient industries
How does technological change influence u/e? Include examples as well
Changing tech can cause structural u/e in the ST due to substitution of labour for capital, and changing skills required for new tech.
However, new tech can increase production and wealth, thus creating new job opportunities. Tech change is how economies achieve higher standards of living and that as new technologies increase productivity, they can increase demand and create as many jobs as they destroy
It could also be beneficial, as seen in covid, where tech was used to be able to work from home, allowing for more than ⅓ of the workforce globally to work from home
How do inadequate levels of training and development influence u/e?
A mismatch of labour skills available and labour skills demanded will result in structural u/e. SKills shortages have been a significant issue in the 2000s. These skill shortages suggest gaps in Aus education and training system, which causes Aus to be reliant on skilled migration to fill job vacancies
Ultimately contributes to a certain level of structural u/e
How do labour costs influence u/e?
Sudden increases in labour costs can lead to an increase UE as it makes it less attractive to hire labour (more expensive
Meanwhile, decreases in labour costs can also lead to a decrease in UE as it makes it more attractive to hire labour (this rarely happens)
Why might increases in labour costs occur? (4)
Shortage of skilled labour causing competition for existing labour thus wage inflation, leading to RBA tightening MP, increasing IR and decreasing eco growth
Nominal wages outstripping inflation and productivity increases causing firms to substitute capital for labour (strong unions)
Fair work Aus and increases in its Minimum Wage Decision might make it too expensive for some firms to keep all employees
A substantial rise in labour on-costs. These are the additional costs of employing labour, and include payroll tax, superannuation, sick leave, holiday pay, workers compensations and more - largely affected by gov policy decisions. If these on costs are too high, they can cause a decline in the demand for labour
How does the inflexibility in the labour market influence u/e?
Relatively high minimum wages and limited downward wage flexibility during economic downturns may make it less attractive for firms to hire less skilled workers
How does the productivity of labour influence ue? (2)
In the ST, higher productivity growth will slow employment growth and increase UE because less employees are required per unit of output, and because firms want to maintain higher profits, will hire less people → increasing UE. However, in the LT, higher productivity growth contributes to higher EG and thus lower UE
In the ST, lower productivity growths will lead to lower u/e in the ST because a firm will need more employees to be able to achieve a certain production but higher u/e in the longer term, as an economy with lower productivity growth will be less competitive and will grow slowly, and will try to increase efficiency through purchase of capital.
What are the 5 economic costs of unemployment?
Opportunity cost
Lower living standards
Loss of human capital / Decline in labour market skills for the LT unemployed
Costs to the government
Lower wage growth
What is opportunity cost as an economic cost of ue?
The primary economic cost of UE is the opportunity cost of lost output and income
As the economy’s resources are not being used to their full capacity, real GDP is lower than what it could potentially be, and national income is reduced
Lower total output also means lower household incomes which result in less expenditure and firms achieve lower profits further lowering investment, output and employment
Higher u/e levels can therefore lead to reduced business investment, production and EG
What is lower living standards as an economic cost of ue?
Unemployed people do not contribute to the production process and often rely on welfare payments. Less consumer and capital goods will be produced reducing total output. In the LT, economic growth and living standards will be lower
Those who are in employment will need to contribute higher taxes to cover the cost of income support to the unemployed
Furthermore, unemployed people may become dependent on welfare, and this cycle of dependent may lead to families falling into the poverty trap
What is cost to the government as an economic cost of ue?
Higher UE leads to lower household incomes and therefore less tax revenue, while at the same time the gov is burdened with an increase in transfer payments (unemployment benefits) to the unemployed as well as the cost of training and labour market programs
The decrease in revenue and increase in expenditure will cause a deterioration in the budget outcome
What is lower wage growth as an economic cost of ue?
A fall in equilibrium wages may occur when there are high levels of UE because of excess labour supply
However, regulations that restrict the downward flexibility of wages means that high UE levels would only lead to slower wages growth rather than wage reductions
What is loss of human capital/decline in labour market skills as an economic cost of ue?
Unemployed people who are without work for a long time can become less employable or unemployable as they lose their labour market skills, self-esteem and experience. Tech change can also make their skills redundant and those who are initially cyclically unemployed may become structurally unemployed
Persistently high u/e will mean that those who are unemployed will lose their labour market skills, confidence and experience and will become less employable or even unemployable.
Hysteresis
What is hysteresis?
Hysteresis is the process whereby unemployment in the current period results in the persistence of UE in future periods as unemployed people can lose their skills, job contacts and motivation to work
What are the 3 social costs of ue?
Increased inequality
Other costs - personal and social problems
Unemployment for particular groups
What is increased inequality as a social cost of ue?
UE results in lower incomes and greater reliance on welfare payments. As lower income earners with less skills are more likely to face UE, they become relatively worse off than higher income earners. Consequently, there is increased inequality in the distribution of income.
What is considered as ‘other social costs - personal and social problems’ as a social cost of ue? (11 - but probs only remember like 3-4 of them )
These include but are not limited to:
Severe financial hardship and poverty
Increased levels of debt
homelessness and housing problems
Family tensions and breakdown
Loss of work skills
Increased social isolation
increased level of crime
Erosion of confidence and self esteem
Poor health, mental health conditions and a higher risk of suicide
Drug and alcohol dependency
health problems
What is ‘unemployment for particular groups’ as a social cost of ue?
Some groups in society face higher levels of UE. This may reflect greater discrimination and unequal employment opportunities in the labour market
Which groups are more likely to face ue?
Youth
Indigenous Australians
Older Workers
Specific regions (not really included)
People born outside of Aus
Why are youth more affected by ue?
Youth- lack of skills, education and training, this often occurs due to employers often seeking workers who have education, training and experience.
What are the stats for youth ue?
Among 15-19 yr. old who are in the LF, the rate of UE is 17.6%, around three times the national average
The labour force underutilisation rate in mid 2022 was 28.2% in May 2022, compared to the national average of 9.6% for youth
Why are Indigenous Australians more affected by ue?
Indigenous Australians- especially in regional areas. This may be attributed to the levels of education achieved by ATSI peoples,as the higher the level of education for ATSI people, there is almost no difference in employment rate. There may also be discrimination towards ATSI people in the workplace (in terms of hiring)
WHat are the stats for Indigenous AUstralians ue?
In 2020, ATSI peoples have 49.1% employment rate, as opposed to 75% for the non-ATSI population
WHy are older workers more affected by ue?
Older workers- face difficulty getting employment once they have lost a job and often leave the labour force as they become discouraged workers
What are the stats for older workers ue?
2017 University of SA study showed that the average length of time job seeking for that UE over 55 was 68 weeks
Why are people born outside of Aus affected by ue?
People born outside Aus- face higher levels of UE than those born in Aus. People from non-English speaking backgrounds are more affected
This is because of cultural, religious differences –> discrimination
Many will also face language barriers which make them unfavourable for certain jobs compared to people born in Aus
WHat are the stats for ue for people born outside of Aus?
In 2018 the UE rate for people who had migrated to Aus in the past decade was 7.4% compared with 5.3% for the population overall
More significant is the higher level of workforce participation among people born overseas, which in 2016 was 70% compared with a rate of 66% among people born in Australia (shows that migrants have a higher level of ue but proportionally, they have a higher level of workforce participation)
In June 2022, the unemployment rate for people who had migrated to Aus in the past five years was 4.2% for those from the main English speaking countries, and 5.5% from other countries, which is compared to 3.5% for those born in Aus
Why are people in specific regions more affected by ue?
Difference regions have different employment opportunities. Places in rural and remote areas may have less employment opportunities –> higher rates of ue compared to other regions
What are the stats related to ue for people in different regions?
In 2021-22, the avg u/e rate in Greater Sydney with a labour force of 3 million averaged 3.2%, while it was 4.1% for the rest of the state
Within Greater Sydney, unemployment rates varied from 2.4% in Sutherland to 7.3% in Sydney’s South West
In the rest of NSW, u/e rates varied from 2.7% in the Riverina to 6.3% in New England and the North West
What is Okun’s law?
Okun’s Law-explains relationship between UE and eco growth, showing that to reduce UE, the annual rate of eco growth must exceed the sum of percentage growth in productivity plus increase in the size of the labour force in any one year
