HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment

Syllabus Dot
Point
Measurement
Labour
force
Participatio
n rate
Unemploy
ment rate

Notes + Information

Unemployment: a situation where people

who are willing and able to work are unable to
find jobs.

It is an undesirable economic situation because

it means that aggregate production and income
is less than that which the economy is capable
of producing.

Trends

In addition, unemployment leads to major long

term social costs including:
o Increased inequality
o Poverty
o Family problems
o Increased crime
o Social division

Labour force: the section of the workplace 15

years of age and above who are either working
or actively seeking work.

The labour force consists of:

o Persons aged 15 and over who are currently
employed for at least one hour per week of
paid work. It also includes those on paid
leave, as well as those on leave or stood
down without pay for less than four weeks,
on strike, on workers compensation, or
receiving payment whilst undertaking full
time study.
o Self-employed persons working for at least
one hour per week in their own business or
family business.
o Unemployed persons aged 15 years and
over, who are currently available for work
and are actively seeking work.

Types and
causes

Cyclical
Structural
Frictional
Seasonal
underempl
oyment
Hidden
Long term

Nonaccelerating
inflation rate
of
unemployme
nt (NAIRU)

Main groups
affected by
unemployme
nt

Effects of
unemployme
nt economic

Unemployment costs the economy a lot there

are also increased social welfare payments and
a loss of taxation revenue.

Those persons not included in the labour force

are:
o Children under 15 years
o Full time, non-working students over 15
years

Statistics

In 2011-12, the total A

labour force totalled 12,
persons:
o
o
o

8,065,500
(66.5%)
employed full time
3,435,000
(28.3%)
employed part time
631,300
(5.2%)
unemployed

The size of Australian popu

2011-12
was
appro
22,485,300 persons.
o People
over
15
18,595,500
o People in the labour
12,131,800
o Participation rate: 65.

Population growth is caused

of natural
increase
an
migration.

The participation rate var

the level of economic activit
during booms (e.g. from 6
2003-04 to 65.3% in 2007
2008-09) when more jo
available.

The participation rate falls

periods of low growth
unemployment rises (recess
when job vacancies fall.

Young people and wome

young children who are retu
the labour force have the
impact on participation rate

The participation rate for m

higher than that of
(relatively stable, around 7
there has been evident
participation rate for wom

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment
o

and social
costs

o
o

People who perform full time domestic

duties
Unemployed persons who are not willing to
actively find work
Retired people

from 55.6% in 2003-04 to 5

2010-11).

The level and rate of unemp

remained high in Australia a
1970s
when
st
(simultaneous
high
lev
inflation and unemployme
low economic growth) led t
in the unemployment rate
in 1960s to over 6% in 1970

In the 1980s, unemployme

up to 8% of the labour fo
after the early 1990s re
reached 11% of Australian
force,
mostly
due
to
becoming
unemployed
manufacturing
industr

In 1992, unemployment rate

at 11% then fell slowly,
7.4% in 1998-99.

In 2007-08, the unemploym

was 4.2%, lowest level in
years.

Much of the fall in unemp

rate between 1999 and 20
due to high rates of sus
economic growth.

The 2008-09 GFC had a

impact on the Australian
market with unemploymen
from 4.2% in 2007-0 to
2008-09 due to low
economic growth of 1.3%.

There were major retrenchm

the mining, manufacturin
finance industry.

However with economic gr

2.3% in 2009-10 the unemp
rate fell back to 5.1% and to
2010-11.

Total Australian Labour Force:

Total Labour Force = Employed Unemployed
N.B. Employed includes both full-time and
part-time workers

Labour force participation rate: percentage

of the population aged 15 and over, in the
labour force that is either employed or
unemployed.

Labour Force Participation Rate (%):

Number of people in the labour force x
Working age population (15 +)

100

Participation rate changes with the business

cycle. As the economy improves, better job
prospects bring people into the workforce with
the reverse occurring in a downturn.
Unemployment Rate (%):
Number of persons employed x 100
Total labour force

TYPES OF UNEMPLOYMENT:

Structural unemployment:
o Structural unemployment occurs because
some labor markets have more workers
than there are jobs available, and for some
reason wages don't decrease to bring the
markets into equilibrium.
o Another way to think about structural
unemployment
is
that
structural
unemployment
results
when
workers
possess skills that aren't in high demand in
the marketplace and lack skills that are in
high demand.
o In other words, structural unemployment
results when there is a mismatch with
workers' skills and employers' needs.
o Structural unemployment is thought to be a

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment

pretty significant problem, mainly because

structural unemployment tends to be
largely of the long-term variety and
retraining workers is not a cheap or easy
task.
Structural change and the introduction of
technology are necessary for firms to
remain competitive in their industries. Firms
can only survive in the long-run if they
introduce new and improved products and
lower their production costs.
Historical examples include industrial
revolution when steam engine and combine
harvester replaced manual labour.
Other recent examples include substitution
of labour for tasks which computers can
perform.
Although structural and technological
change may cause unemployment in short
term,
they
can
also
create
new
opportunities and new jobs in medium to
long term.

Cyclical unemployment:
o It's
probably
not
surprising
that
unemployment is higher during recessions
and depressions and lower during periods
of high economic growth.
o Because of this, economists have coined
the term cyclical unemployment to describe
the
unemployment
associated
with
business cycles occurring in the economy.
o Cyclical unemployment occurs during
recessions because, when demand for
goods and services in an economy falls,
some companies respond by cutting
production and laying off workers rather
than by reducing wages and prices.
o When this happens, there are more workers
in an economy than there are available
jobs, and unemployment must result.
Frictional unemployment:
o Frictional unemployment occurs because
workers take some time to move from one
job to another. While it may be the case
that some workers find new jobs before
they leave their old ones, a lot of workers
leave or lose their jobs before they have

High economic growth

Australia has led to in
employment and unemp
falling to 5.1% in 2012.

Generally a level of e
growth of between 2 and
required to reduce the
unemployment in Australia
determined by considering t
of labour productivity
workforce and increase in
of workers joining the workfo

ABS calculated underemp

rate in 2012-13 as 7.2%.

The ABS also calculated th

utilisation rate (the unemp
rate of 5.7% plus underemp
rate of 7.2%) as 12.9% in 20

Comparison of Unempl
Rates of Different Coun
Recent Periods:
United States
Australia
Singapore
Japan
Germany

7.7%
5.4%
1.8%
4.2%
5.4%

Main
Groups
Affecte
Unemployment (2012):
Category
Males
Females
Males (15 19)
Females (15
19)
Long-term
unemployed
Sydney
Blacktown
Fairfield
Indigenous
Born overseas

Unemplo
t Rate
4.8%
5.5%
17.5%
15.8%
19.0%

5.3%
11.3%
11.0%
18%
12.0%

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment

other work lined up.

In these cases, a worker must look around
for a job that it is a good fit for her, and this
process takes some time. During this time,
the individual is considered to be
unemployed, but unemployment due to
frictional unemployment is usually thought
to last only short periods of time and not be
specifically problematic from an economic
standpoint.
This is particularly true now that technology
is helping both workers and companies
make the job search process more efficient.
Frictional unemployment can also occur
when students move into the work force for
the first time, when an individual moves to
a new city and needs to find work, and
when women re-enter the work force after
having children.

Seasonal unemployment:
o Seasonal
unemployment
is,
not
surprisingly, unemployment that occurs
because the demand for some workers
varies widely over the course of the year.
o Pool lifeguards, for example, probably
experience a decent amount of seasonal
unemployment.
o Seasonal unemployment can be thought of
as a form of structural unemployment,
mainly because the skills of the seasonal
employees are not needed in certain labor
markets for at least some part of the year.
o That said, seasonal unemployment is
viewed as less problematic than regular
structural unemployment, mainly because
the demand for seasonal skills hasn't gone
away forever and resurfaces in a fairly
predictable pattern.

Hidden unemployment:
o Hidden unemployment refers to the levels
of
involuntary
joblessness
and
underemployment that are not counted in
the official unemployment statistics.
o People are counted as unemployed by the
ABS if:
They are not employed that is, they
have not had one or more hours of paid

From China
From
Vietnam
From
Lebanon

6.2%
7.2%
7.3%

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment
work in a week
They have been actively seeking
employment within the last month
They are able to start work immediately
Hidden unemployment is defined as
including:
Severely unemployed people: people
who are working for less than 16 hours
per week and want to work more hours
Excluded jobless people: a subset of
people who are marginally attached to
the labour force and who have a
preference for working.
The presence of hidden unemployment
shows up in the statistics as a decline in the
labour force participation rate when these
individuals give up looking for work but
they are not shown in the unemployment
statistics.

Hardcore unemployment:
o Hardcore unemployment is a result of some
members of society who are unemployable
because of physical or mental disability e.g.
age, health, attitudinal and behavioural
characteristics.
o Most people in this category in Australia are
on the disability support pension and are
not counted in the official unemployment
statistics.

Long-term unemployment:
o Long-term unemployment refers to people
who are unemployed for over 12 months.
This may be due to lack of skills, training,
education, or the motivation to find and
secure suitable employment opportunities
in the labour market.

Underemployment:
o Underemployment
refers
to
persons
working part-time but who want to work
more hours or switch to full time
unemployment, and persons employed full
time who have been switched to part time
hours.
o The ABS calculated underemployment rate
in 2011-12 was 7.4%.

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment
Natural rate of unemployment:
o Economists often speak of a floor in the
level of unemployment below which it is
difficult to descend. This is known as the
natural rate of unemployment.
o The natural rate of unemployment refers to
the level of unemployment at which there is
no cyclical unemployment i.e. where the
economy is at full employment.
o It is comprised of frictional unemployment,
structural
unemployment,
seasonal
unemployment
and
hardcore
unemployment.

At the real wage rate W 1 in the diagram

above, E1 workers are employed. But the
total labour force remains higher than the
employed labour force. Thus the natural
rate of unemployment = AB and consists of
frictional & structural unemployment
The government might cut the natural rate
of
unemployment
by
reducing
the
horizontal distance between the supply of
labour curve and the labour force curve.
Any supply-side labour market policy that
can increase the number of people willing
and able to find employment in the labour
market will shift SL to the right, this
narrowing the gap.
The natural rate of unemployment is
sometimes called the non-accelerating
inflation rate of unemployment (NAIRU). It
is the level of unemployment consistent
with a stable or non-accelerating inflation
rate.

MAIN CAUSES OF UNEMPLOYMENT:

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment

Insufficient Aggregate Demand:

o According to Keynes, unemployment is
fundamentally
caused
by
less than
optimum aggregate demand. With a fall in
aggregate demand [C + I + G + (X M)],
businesses require less staff to satisfy that
demand
o Note that a fall in world economic activity
will impact on aggregate demand, as the
demand
for
exports
and
foreign
investments decreases results in higher
unemployment.
o This can have the effect of reducing
demand even more, as unemployed people
spend less than employed people. Private
investment will also decline.
o Unemployment caused by insufficient
aggregate demand is known as cyclical
unemployment.
o A deflationary gap occurs when aggregate
expenditure is insufficient to employ all
resources in the economy.
o In order to eliminate this unemployment,
aggregate expenditure must rise.

Technological Change:
o Technological change: the development
of new industries, globalisation and
geographic shifts in production often
require more capital intensive methods and
sophisticated technological skills.
o As a result, labour is often substituted for
capital equipment in the short term.
o Economic theory suggest, however, that in
the long term, this releases resources which
may be utilised more efficiently in other
sectors, leading to increased output and
standards of living.

Government Policy:
o Government policy can have an impact on
both aggregate demand and structural
change.
o Fiscal policy (government revenue &
expenditure) affects the level of aggregate
demand in the economy.
o In addition, government fiscal policy (as
part of microeconomic policy) may target
particular industries in the form of

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment

protection.
Reducing tariffs, subsidies and quotas may
cause structural unemployment in the short
run.
Tightening of monetary policy (interest
rates) will reduce level of investment and
consumption expenditure in the economy.
Reductions in these components of
aggregate demand are likely to cause
cyclical unemployment.

Rising Labour Costs:

Increases in labour costs greater than
increase in productivity may result in
structural/technological
change

structural unemployment will result.

POLICIES TO REDUCE UNEMPLOYMENT:

Policies
to
Reduce
Cyclical
Unemployment:
o Manipulation of aggregate demand in the
economy in order to minimise the effect of
cyclical swings.
o Expansion of fiscal policy and easy
monetary policy.
o As investment is the most volatile mover,
policies to stabilise this may be particularly
important.

Policies
to
Reduce
Structural
Unemployment:
o Structural unemployment can be targeted
by
increasing
the
efficiency
and
adaptability of the economy. This may be
through
improved
educational
opportunities (e.g. accessibility to first
degree) and microeconomic reform to
increase productivity and lower costs.
o Hence, this will increase long term
unemployment.

EFFECTS OF UNEMPLOYMENT:

Output Effects:
o Unemployment means that resources are
underutilised and output therefore must be
less than with full employment. This can be
shown on the production possibility frontier.

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment

o
o

The lost output involved is the cost in terms

of welfare, lower income and living
standards.
Aggregate demand is reduced and hence,
the rate of economic growth.
As plant and equipment become obsolete
during unemployment, the unemployed
workers lose their skills and are unable to
gain new ones. Hence, an erosion of skill
base and reduction of quality of workforce.
Shortage of skilled labour may actually lead
to WAGE INFLATION due to lack of supply
over
demand
for
suitably
qualified
employees.
Reduction in government revenue due to
lower tax receipts and there may be an
increase in government expenditure on
welfare and social security.
Though welfare and social security benefit
the recipient, there may be fall in spending
allocated to areas which could bring greater
long term benefits to the economy e.g. in
education, youth programs, capital works.

Distribution Effects:
o Unemployment impacts young unskilled,
Aboriginals and elderly.

SOCIAL AND ECONOMIC COSTS OF

UNEMPLOYMENT:

Economic Costs:
o Opportunity Costs: Unemployment means
that the economys resources are not being
used to their full capacity, therefore output

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment

is below what it could be. Lower output

means lower household income and
expenditure leading to lower sales and
profits.
Lower living standards: Unemployed people
are unable to contribute to the production
process.
Higher rates of unemployment
Reduction in goods production

Reduction in economic growth

Lower living standards

Decline in labour market skills for the long
term unemployed: Unemployment leads to
a loss of skills among existing workers.
Persistent unemployment will lead those
workers to lose their skills and become less
employable.
Cyclical
or
short
term
unemployment can turn into long term
structural unemployment.
Costs to the government: High levels of
unemployment can have an impact on the
governments revenue and expenditure.
Falling incomes means less tax revenue,
and higher unemployment means greater
welfare expenditure.
Lower wage growth: High levels of
unemployment means that is an excess of
supply of labour that could lead to a fall in
the wage level. Regulations restricting wage
movements
means
that
higher
unemployment lead to slower wage growth
instead of reductions.

Social Costs:
o Increased inequality: Unemployment tends
to occur more frequently among lower
income earners such as the young and
unskilled. As unemployment means a loss
of income for these people they become
relatively worse off compared to higher
income earners
o Other social costs: Unemployment is also

HS C EC ONOMI C S TOP IC T HREE EC ONOMIC

ISSU E S
Unemployment
associated with social problems such as
financial hardships and poverty, increased
levels of debt, homelessness and housing
problems, loss of work skills, increased
levels of crime. Economic costs result from
this as resources need to be diverted to
deal with these problems.