Unemployment

Question 1

Theory

Answer 1

• Intro - rephrase the question
• Unemployment refers to the number of people who are out of work but actively seeking employment
• Unemployment rate = number of unemployed / Total labour force x 100
• Labour force – Persons 15 years or above who are currently employed for 1 hour or more a week
• Labour participation rate = labour force / working age population *100
• The participation rate in 2018-19 was 65.9%

Question 2

Types and causes

Answer 2

• Structural unemployment - from structural changes in the economy
• Cyclical unemployment - from downturn in the economy
• Frictional unemployment - people who are temporarily unemployed
• Seasonal unemployment - predictable and regular times throughout the year
• Hidden unemployment - those who are considered unemployed but do not fit the Australian Bureau of Statistics definition of unemployment
• Underemployment - people who would like to work more hours
• Long-term unemployment - people who have been out of work for 12 months or longer
• Hard-core unemployment - those who are unemployable due to their personal circumstances e.g. mental or physical disability, drug abuse or anti-social behaviour

Question 3

Okuns Law

Answer 3

A decrease in the participation rate can also decrease unemployment in the short term as
more people who were previously looking for work are now not doing so. This is evident in
Okun’s Law that states that unemployment will increase when the sum of productivity
growth and the increase in the labour force exceeds economic growth. The opposite of this
phenomenon is occurring presently, with the current unemployment rate of 5.3% in June
coming despite 3900 net job losses in the month. This is because there were 10,000 fewer
people looking for work during the month, thus reducing the labour force, and hence,
unemployment (SMH).

Question 4

economic growth

Answer 4

The biggest cause of unemployment is the level of economic growth in the economy. This is
because labour is a derived demand, where the level of AD will determine the demand for
labour by firms. As such, if there is a downturn in economic activity, it will result in higher
cyclical unemployment. This was seen in the recession in the early 1990s where growth fell by 1.7% leading to a record high unemployment rate of 11.2% in December 1992. These recessions also can lead to increased hidden unemployment, as people give up searching for
work. Furthermore, the stance of macroeconomic policy can affect unemployment. An expansionary stance that aims to drive growth will improve unemployment, evident during the GFC, with the loosened monetary policy and $52b worth of fiscal stimulus packages saving 210,000 jobs, and helping unemployment to only rise to 5.8%, well below the 8.8% OECD average.

Question 5

Structural change

Answer 5

Structural change within the economy causes high unemployment in the short term, although it provides improved efficiency and lower unemployment in the long term. This has been seen as a result of Australia’s microeconomic reform, which began with Whitlam’s 25% ‘across the board’ tariff cuts, which forced inefficient industries to contract or close down. This was primarily seen with Australia’s manufacturing and automotive industries, which saw 50,000 job losses as a result of the closure of automotive industries in Victoria and SA in 2017. This prompted the government to spend $155m on a Growth Fund to assist structurally unemployment people in finding work. In the long term however, unemployment has benefited from such microeconomic reform, with resources redirected to more efficient industries such as education, where 109,000 new jobs have been created, and the industry growing to account for $28b of the economies GDP (3 rd largest export). Labour market reform has had a positive effect on unemployment, with the shift from a centralised to a decentralised wage system providing benefits to firms. Most recently, the Fair Work Act 2009 modernized awards by streamlining the number of awards from 4300 to 122 amongst other things. Reforms such have these have allowed unemployment to fall from a peak of 11.2% in 1992 to 5.2% currently, as labour has become more attractive relative to capital, since wages growth is now more closely linked to growth in productivity. However, this labour market reform, coupled with structural change since the GFC has seen underemployment become a growing issue in Australia, with a number of full-time jobs replaced by part-time and casual jobs. Currently Australia has the 3 rd highest proportion of part-time workers in the industrialized world, with over 30% of employment. This has caused the underemployment rate to rise from 5.7% pre-GFC to a current level of 8.3%. There are a number of economic costs of unemployment on the Australian economy. There is an opportunity cost in the economy from unemployment, where the economy is operating below the Production Possibility Frontier, and thus not utilizing resources to full capacity (figure 1).