© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 191

Chapter 8
Unemployment

THE MEASUREMENT OF UNEMPLOYMENT

Achieving full employment 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.
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:
• 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 2003-04 to 2011-12

Full Time Part Time Unemployed Labour Force

Employed Persons Employed Persons Persons

2003-04 6,840,300 2,719,100 586,000 10,145,400

2004-05 7,038,500 2,787,900 540,500 10,366,900

2005-06 7,182,600 2,881,700 527,100 10,591,400

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

Source: ABS (2012), Labour Force, Catalogue 6202.0, July.

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

192 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd

Table 8.2: Australian Labour Force Participation Rates 2003-04 to 2011-12

Year Persons Males Females Labour force Civilian Population

Aged 15+ years

2003-04 63.5 71.6 55.6 10,145,400 15,986,900

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

Source: ABS (2011), Australian Economic Indicators, Catalogue No. 1350.0, August and Cat. 6202 (2012), June.

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 2011-12, the Australian labour force totalled 12,131,800 persons, of which
8,065,500 or 66.5% were employed full time; 3,435,000 or 28.3% were employed part time; and
631,300 or 5.2% 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 2011-12 was approximately 22,485,300 persons. The
civilian population over 15 years of age was 18,595,500 in 2011-12, but only 12,131,800 were
counted as part of the labour force (refer to Table 8.2). This meant that the participation rate in
2011-12 was 65.2%. Population growth (258,600 in 2010-11) is influenced by the rate of natural
increase and net migration. The population growth rate (1.2% in 2010-11) is equal to the sum of
the rate of natural increase (150,500 in 2010-11) plus net migration (108,100 in 2010-11) 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.
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 2010-11, there were 15,034,900 people in the 15 to
64 year age group, representing some 67.3% of the total Australian population of 22,328,900.
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:

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 193

___ Work Force 100 12,131,800 100

Participation Rate = Working Age Population x 1 = 18,595,500 x 1 = 65.2%

In 2011-12 the participation rate was 65.2% down from 65.6% in 2010-11 (see Table 8.2). The
participation rate varies with the level of economic activity, rising during booms (e.g. from 63.5%
in 2003-04 to 65.3% in 2007-08 and 2008-09) when more jobs are available. It tends to fall during
recessions or periods of low growth when unemployment rises and job vacancies fall (e.g. from
65.6% in 2010-11 to 65.2% in 2011-12). 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. The participation rate for males is higher than
for females but the participation rate for females has tended to increase over time (e.g. from 55.6%
in 2003-04 to 59.1% in 2010-11) whereas the participation rate for males has tended to remain
relatively stable at around 72%. Participation rates for males, females and persons were relatively
stable during the period of weaker labour demand associated with the Global Financial Crisis in
2008-09, but declined slightly in 2011-12 because of uneven growth in the Australian economy.
Unemployment refers to people who are willing and able to work, actively seeking work, but are unable
to find suitable employment. In Australia, unemployment is measured by a monthly Australian Bureau
of Statistics (ABS) telephone survey of the labour force. To be counted as unemployed by the ABS
labour force survey, a person must be available for work and fall into one of the two following categories:
1. 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; or
2. 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.
The unemployment rate is calculated as a percentage of the labour force, which includes all persons
employed (i.e. full time plus part time workers), plus all unemployed persons i.e.

Total Number Unemployed 100

Unemployment Rate = Labour force (Employed + Unemployed) x 1

In 2011-12 there were 8,065,500 persons employed full time, 3,435,000 persons employed part time,
and 631,300 persons classified as unemployed. This gave a total labour force of 12,131,800 persons.
The unemployment rate calculated by the ABS in June 2012 was therefore 5.2% i.e.
Unemployment Rate for June 2012 = 631,300 100
12,131,800 x 1 = 5.2%

RECENT TRENDS IN UNEMPLOYMENT

The level and rate of unemployment remained high in Australia after the 1970s, 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. In the 1980s unemployment rose to 8% of the labour force and after the early 1990s
recession, it reached 11% of the Australian labour force, 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.
The unemployment rate peaked at 11% in 1992 and then fell slowly, reaching 7.4% in 1998-99. In
2007-08 the unemployment rate was 4.2%, its lowest level in over 30 years (see Table 8.3). Much
of the fall in the unemployment rate between 1999 and 2008 was due to high rates of sustainable
economic growth, averaging over 3% per annum in this period. Figure 8.1 shows the gradual fall in
the unemployment rate between 1999-00 and 2007-08, mainly because of consistently high rates of
sustainable economic growth in Australia and structural reforms in the labour market.

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

194 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd

Figure 8.1: Australia’s Unemployment Rate 1999-00 to 2011-12

% of Workforce
8
7
6
5
4
3
2
1
0
99-0 00-1 01-2 02-3 03-4 04-5 05-6 06-7 07-8 08-9 09-10 10-11 11-12

Source: ABS (2012), Australian Economic Indicators, Catalogue 1350.0, July.

In 2008-09 the Global %Financial Crisis and recession had a major impact on the Australian labour
of Workforce
market, with unemployment rising from 4.2% in 2007-08 to 5.8% in 2008-09 due to the low rate of
economic growth of 1.3% (refer to Table 8.3). In 2008-09 many employers cut hours of work and
switched workers from full time to part time work. There were also major retrenchments in industries
affected by the GFC such as mining, manufacturing and finance. However with economic growth
of 2.3% in 2009-10 the unemployment rate fell back to 5.1% and to 4.9% in 2010-11. In 2011-
12 an uneven pattern of growth and structural change led to retrenchments in industries such as car
manufacturing, steel, retailing, building and construction and the unemployment rate rose to 5.2%.
Another trend in unemployment in Australia is the high incidence of long term unemployment (i.e.
persons unemployed for more than 12 months) and the increasing duration of unemployment. Long
term unemployment rose from 14.2% to 19.5% of the total number unemployed between 2007-08
and 2010-11 as shown in Table 8.3. The average duration of unemployment was around 56.3 weeks.
The major reasons for being unemployed between 2009-10 and 2011-12 are shown in Table 8.4. The
reasons for unemployment in 2011-12 included the following:
• Loss of job or being made redundant accounted for 35.7% of the total unemployed;
• Leaving a job accounted for 23.3% of the total unemployed;

Table 8.3: The Australian Unemployment Rate 2005-06 to 2011-12

Labour Force Unemployed Unemployment Long Term Unemployed Real GDP

Persons Persons Rate (%) (% of Total Unemployed) %r pa

2005-06 10,591,400 527,100 5.0% 18.3% 3.0%

2006-07 10,823,500 489,000 4.5% 16.9% 3.3%

2007-08 11,189,500 473,800 4.2% 14.2% 3.7%

2008-09 11,425,300 662,900 5.8% 15.7% 1.3%

2009-10 11,840,100 607,000 5.1% 18.7% 2.3%

2010-11 12,046,100 591,000 4.9% 19.5% 1.9%

2011-12 12,131,800 631,300 5.2% 18.7% 3.0%

Source: ABS (2012), Australian Economic Indicators, Catalogue 1350.0, July and Catalogue 6202.0 (2012), July.

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 195

Table 8.4: Unemployed Persons in Australia - Reason for Leaving Last Job 2009-12

Reasons for Unemployment Percentage of Unemployed

Job Job Never Former Job Job Never Former

Loser Leaver Worked Worker Loser Leaver Worked Worker

2009-10 242,000 161,500 124,000 90,500 39.2% 26.1% 20.1% 14.6%

2010-11 215,300
143,200 128,300
117,400 35.6% 23.7% 21.2% 19.4%

2011-12 225,400
146,900 141,200
117,400 35.7% 23.3% 22.4% 18.6%
Source: ABS (2012), Australian Economic Indicators, Catalogue 1350.0, July.

• Never having worked (looking for a first job) accounted for 22.4% of the total unemployed; and
• Being a former worker (re-entering the labour force) accounted for 18.6% of the total unemployed.
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. However the percentage of job leavers fell as workers placed more
emphasis on job security. 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. But jobs growth
occurred between 2009-10 and 2010-11 due to economic recovery, and there was a decline in job losses.
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, Holden Ford and Blue Scope Steel which retrenched workers.
Unemployment rates according to sex and age between 2005-06 and 2011-12 are shown in Table 8.5.
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. Young males (15-19 years)
had an unemployment rate of 21.7% in 2011-12 compared to 3.9% for males 20 years and over.
The corresponding unemployment rates for females were 26% and 5.4%. Young people therefore
experience more difficulty in securing employment because of a lack of skills, training and experience.
This leads to high rates of youth unemployment for 15-19 year olds seeking their first job.
The distribution of unemployment between Australian states changed between 2006 and 2008 as the
labour market reached full employment. Most states recorded falls in their unemployment rates in 2008
(see Table 8.6), with the lowest unemployment rates in the resource rich states of Western Australia
(3%) and Queensland (3.8%) which had strong labour demand due to the global resources boom.
Table 8.5: Unemployment Rate by Sex and Age Group 2005-2012 (annual average %)

Males Looking for Full Time Work Females Looking for Full Time Work
15-19 years 20+ years 15-19 years 20+ years

2005-06 18.3 4.0 23.4 4.9

2006-07 17.1 3.5 22.5 4.6

2007-08 15.4 3.1 21.2 4.0

2008-09 24.1 5.4 29.2 5.6

2009-10 22.1 4.2 27.6 5.1

2010-11 19.6 3.9 24.3 5.3

2011-12 21.7 3.9 26.0 5.4

Source: ABS (2012), Australian Economic Indicators, Catalogue No. 1350.0, July.

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

196 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd

Table 8.6: Unemployment Rates by State 2008-12

NSW VIC QLD SA WA TAS Australia

- September 2008 4.9% 4.4% 3.8% 5.8% 3.0% 3.8% 4.3%

- June 2009 6.4% 6.0% 5.5% 5.4% 5.2% 4.6% 5.8%
- July 2010 5.4% 5.4% 5.5% 5.3% 4.1% 6.5% 5.3%
- July 2011 5.2% 4.9% 5.4% 5.2% 4.1% 5.3% 4.9%
- June 2012 5.1% 5.3% 5.1% 5.9% 3.6% 7.0% 5.2%
Source: ABS (2012), Labour Force, Australia, Catalogue 6202.0, July.

All states experienced strong employment growth in 2008, with the national average being 2.3% in the
year to September 2008, and the unemployment rate fell to 4.3% (see Table 8.6). The global resources
boom and the large rise in the terms of trade led to a reallocation of the economy’s resources (including
labour and capital), away from non resource rich states such as NSW, Victoria and South Australia,
to the resource rich states of Western Australia and Queensland, where mining accounts for a large
proportion of their state product. These states recorded higher economic and employment growth and
lower levels of unemployment than the non resource rich states between 2003 and 2008.
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, with the national unemployment rate increasing
from 4.3% in 2008 to 5.8% (see Table 8.6). Large rises in unemployment in Western Australia and
Queensland reflected a contraction in mining output, whilst in the larger states of NSW and Victoria it
was caused by a fall in employment in manufacturing and the financial sector. State unemployment rates
generally fell in 2010-11 due to a national economic recovery, but uneven growth and retrenchments in
manufacturing increased unemployment rates in Victoria (5.3%) and South Australia (5.9%) in 2012.

REVIEW QUESTIONS
MEASUREMENT AND RECENT TRENDS IN UNEMPLOYMENT

1. 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. Refer to Table 8.1 and discuss the changes in the composition of the Australian labour force
between 2003-04 and 2011-12.

3. Discuss the four main factors influencing the size of the Australian labour force.

4. What is the participation rate and how is it measured? What factors influence the participation
rate? Refer to Table 8.2 and compare the trends for male and female participation rates
between 2003-04 and 2011-12.

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, 1980s, 1990s and 2000s?

6. Discuss recent trends in long term unemployment and the main reasons for unemployment.

7. Discuss the reasons for the higher rates of unemployment experienced by young people.

8. Account for the trends in the unemployment rates of the states between 2008 and 2012.
Discuss the impact of the global financial crisis and recession on the labour market in 2008-09.

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 197

THE TYPES OF UNEMPLOYMENT

1. Cyclical unemployment is caused by a contraction in economic activity or aggregate demand. A fall
in aggregate demand reduces the derived demand for labour. Cyclical unemployment is also known
as involuntary unemployment as workers are laid off as a result of a fall in the demand for labour, not
because they lose the incentive to work. Cyclical unemployment rises in a recession as spending and
GDP growth fall, causing employers to lay off some existing workers and cease hiring new workers.
Cyclical unemployment rose in 2008-09 in Australia because of the GFC and the lower rate of growth.
2. Structural unemployment results from a mismatch between the labour skills of employees and the
job vacancies offered by employers. Structural change in manufacturing for example, may lead to
the introduction of new technology making some jobs obsolete, whilst new jobs may be created in
expanding industries such as mining and services. It takes time for workers to acquire new skills and
relocate before they can fill the vacancies offered by employers. 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, which have led to the restructuring
of workforces in these industries. Between 2010 and 2012 the high value of the Australian dollar led to
structural unemployment in manufacturing (e.g. the car industry) because of a loss of competitiveness.
3. Frictional unemployment is caused by people moving between jobs or experiencing changing
economic circumstances. Examples of frictional unemployment include young people leaving school to
find jobs; people searching for better paid career jobs; women leaving and re-entering the workforce after
rearing children; or people leaving a failed business to join a new industry. Frictional unemployment
is caused by the search times needed for workers to find jobs and for firms to find employees. There is
often an imperfect flow of information between job seekers and employers in the labour market.
4. 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.
Examples might include workers employed during farm harvest times or people working Summer jobs
such as in Christmas retailing, or Winter jobs in the snowfields such as ski lift operators or instructors.
5. Underemployment refers to persons working part time who want to work more hours or switch to
full time employment, and persons employed full time who have been switched to part time hours. The
ABS calculated the underemployment rate (i.e. the number of underemployed workers as a percentage
of the labour force) in 2011-12 as 7.4%. The ABS also calculated the labour underutilisation rate (the
unemployment rate of 5.2% plus the underemployment rate of 7.4%) as 12.6% in 2011-12.
6. 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, partner or parent and are not eligible for Job Search Allowance. The hidden unemployed refer
to persons such as married women with children, who would work if suitable jobs were available and
they could find affordable child care facilities. Some of the hidden unemployed may also be discouraged
workers who have given up looking for work because labour market conditions have deteriorated.
7. Long term unemployment refers to those persons who are unemployed for over 12 months. This may
be due to a lack of skills, training, education or the motivation to find and secure suitable employment
opportunities in the labour market. 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.
These workers may face particular personal difficulties (such as physical, mental or emotional problems;
a criminal record; health problems such as drug or alcohol abuse; or attitude problems based on a poor
motivation to seek work or a poor physical appearance) in finding and holding suitable jobs.
8. Regional unemployment occurs when a major industry such as steel, TCF or PMV in a particular
geographic region reduces its demand for labour causing widespread unemployment. This is the
case in manufacturing regions undergoing large scale structural adjustment such as the Port Kembla,
Wollongong, Newcastle, Whyalla and Geelong industrial regions of Australia.

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

198 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). Cyclical changes in domestic and international economic activity may lead to changes in the
demand for labour. Since the demand for labour is derived from the demand for final output, any
decline in aggregate demand may lead to a rise in cyclical unemployment. For example, the Global
Financial Crisis and recession in late 2008 led to a fall in aggregate spending and economic activity in
Australia in 2008-09. After a lag of some six months, following negative growth in GDP of -0.5% in
the December quarter 2008, unemployment rose from 4.2% to 5.8% of the labour force by mid 2009.
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. This led to a severe recession in Australia, which was
compounded by a world recession in 1990-91 which reduced export demand. The unemployment rate
rose from under 8% of the Australian labour force in 1989-90 to over 11% by 1992.
A theoretical explanation for cyclical or involuntary unemployment was put forward by John Maynard
Keynes in his General Theory of Employment, Interest and Money in 1936. In Figure 8.2, the equilibrium
level of national income is Ye, determined by the intersection of the aggregate demand (AD) and aggregate
supply (AS) curves. Keynes argued that the equilibrium level of national income in an economy may
not necessarily coincide with the full employment level of income, denoted by Yf in Figure 8.2. If total
spending was insufficient to guarantee full employment of the economy’s resources, a deflationary gap
or unemployment gap of ab would arise, causing cyclical unemployment to increase.
Another model used to show how cyclical unemployment arises is the aggregate demand and aggregate
supply model. In Figure 8.3, the economy’s price level is measured on the vertical axis and real GDP on
the horizontal axis. Aggregate demand (AD) slopes downwards to the right as more output is demanded
at lower price levels, whereas the aggregate supply curve slopes upwards to the right until it reaches the
full employment level of GDP at real GDP1, where supply or capacity constraints are encountered and
the aggregate supply curve becomes vertical. If the initial equilibrium level of income is at real GDP1
where AD equals AS, there is full employment of the economy’s resources. If AD shifts to the left
to AD1, a new equilibrium level of real GDP is established below full employment at real GDP2. A
deflationary or unemployment gap of ab results, causing unemployment to rise in the economy.
Structural changes in consumption and production can cause the level of structural unemployment to
rise. For example, the introduction of new labour saving technology in primary and secondary industries
has led to a fall in employment in these industries. Uncompetitive industries such as textiles, clothing

Figure 8.2: The Keynesian Deflationary Figure 8.3: The AD/AS Deflationary
or Unemployment Gap or Unemployment Gap

Expenditure Price Level

AS AD AS
AD 1
deflationary gap a
} AD
b
deflationary gap
a b
AS AD
AD 1
0 0
}

Ye Yf Income real real Real GDP

GDP2 GDP1

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 199

Figure 8.4: The Effect of Wage Expectations on Employment

Wage Rate
DL SL
unemployment minimum or
W1 award wage

SL DL
0
Q L1 QL Q L2 Quantity of Labour

and footwear, 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, 1991, 2000, 2005 and 2010.
Although some industries have contracted in manufacturing, new industries have been established and
others have expanded, creating new employment opportunities in the services sector. In the 1990s there
was also widespread reform of Public Trading Enterprises through deregulation and privatisation, which
led to an increase in workforce downsizing and the retrenchment of some labour in affected industries.
An important factor that may cause unemployment is the role of wage expectations in pushing up the
price of labour relative to capital. Rapid rises in real wage costs will reduce the demand for labour and
provide employers with the incentive to substitute capital for labour, causing a rise in what is known as
voluntary unemployment or wage induced unemployment. For example, if trade unions have large
bargaining power and win large wage increases, which may be inconsistent with industry’s capacity to
pay or productivity levels, businesses may cut wage costs by making some labour redundant.
This is illustrated in Figure 8.4 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. The supply of labour (SL)
is a positive function of the wage rate and slopes upwards from left to right. 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, unemployment of QL1QL2
will occur since the demand for labour (QL1) is less than the supply of labour (QL2) at wage rate W1.
Australian governments have tried to control wages growth through a system of enterprise wage
bargaining in the labour market. This has led to less reliance by workers on adjustments to the safety
net of the National Minimum Wage and Modern Awards set by Fair Work Australia and state industrial
tribunals for wage increases. With the introduction of enterprise bargaining in 1991 as a wage fixing
principle, and the spread of enterprise agreements in the labour market in the 1990s and 2000s, the
percentage of workers reliant on arbitrated awards for pay rises fell from 67% of employees in 1990
to around 15.2% by 2012. This has helped to link wage increases to improvements in productivity
that reflect individual enterprise and industry conditions. As a result, 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. 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, arguing that this would stimulate employment and reduce unemployment.

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

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. A lack of efficiency in the labour market in matching labour skills with
the jobs available can influence the level of frictional unemployment. Rigidities in the labour market
like government regulations (e.g. superannuation, taxation, workers’ compensation, unfair dismissals
legislation and award conditions) can also reduce the hiring intentions (through higher ‘on costs’ of
labour) of employers, causing unemployment. 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. Unemployment
can therefore be caused by high ‘on costs’ of labour and a lack of skills, education and training.
Successive Australian governments have addressed the issue of improving the education, training and
skills of the labour force by implementing labour market programmes such as Building Australia’s Future
Workforce (2011), the Job Compact, the Job Network, the National Education Framework and Welfare
to Work. The National Training Authority was formed to increase apprenticeships to develop the skills of
young people (15 to 19 years) who have a higher incidence of unemployment than mature age workers.
The Non Accelerating Inflation Rate of Unemployment (NAIRU)
Full employment is where the quantity of labour demanded equals the quantity of labour supplied. The
unemployment rate at full employment is called the natural rate of unemployment. The natural rate
of unemployment fluctuates because of changes in the levels of frictional and structural unemployment
in the labour market. Some workers will be unemployed because they are in between jobs, and others
because they lack the skills necessary for the jobs available. In Australia, empirical research by Treasury
(2011) estimates the natural rate of unemployment at between 5% and 6% of the Australian workforce.
Figure 8.5 illustrates the concept of the natural rate of unemployment. The real wage rate is measured
on the vertical axis and the quantity of labour on the horizontal axis. 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. The labour force is denoted by the vertical line LF. Full employment is where equilibrium
(E) occurs in the labour market at real wage W and labour quantity QL. The distance EU (QN - QL) is
equivalent to the natural rate of 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.
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). This refers
to a rate of unemployment that is consistent with a constant inflation rate or no change in the inflation
rate. Figure 8.6 illustrates the Short Run Phillips’ Curve (SRPC) which shows the short run tradeoff
between the rates of inflation and unemployment. For example an economy may have 6% inflation and

Figure 8.5: The Natural Rate of Figure 8.6: The LRPC and the NAIRU
Unemployment
Real Wage LF Inflation % LRPC 1 LRPC
DL

6% A
E U
W
3% B
C
SRPC
0%
5% 6% SRPC1
SL DL NAIRU1 NAIRU Unemployment %

0
QL QN Q of L

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 201

5% unemployment in the short run (point A) or 3% inflation and 6% unemployment (point B) on

SRPC. 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%. 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 Long Run Phillips’ Curve (LRPC) shows that there is no tradeoff between inflation and
unemployment in the long run, with the economy’s NAIRU equal to the natural rate of unemployment
of 6%. The NAIRU is the lowest unemployment rate which can be sustained without an increase in
inflation. 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. If these
policies are successful in the short run, the SRPC would shift from SRPC to SRPC1. In the long run
the LRPC would shift from LRPC to LRPC1 and lower the NAIRU from 6% to 5% at point C, without
any change in the inflation rate at 3%.

The Main Groups Affected by Unemployment

The incidence of unemployment varies between demographic and skill groups in the labour force. Young
and less educated labour force participants, recent immigrants and persons whose last job was in blue
collar occupations account for disproportionately high shares of unemployment. However all groups
(i.e. males and females aged 15 to 64 years) experienced increases in their rates of unemployment over
the period from the 1970s to 1990s. 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.
Teenagers (15 -19 years) experience the highest rates of unemployment. For males in 2011-12 the rate
was 21.7% and for females it was 26% (see Table 8.5 on page 195). Teenagers experience difficulty in
securing their first job because of a lack of experience, education, training and skills. For workers over
20 years, the rate of unemployment in 2011-12 for males was 3.9% and 5.4% for females. For workers
between 25 and 44 years, the rate of unemployment was 4.9% in 2011-12. However for workers
between 45 and 54 years, the percentage of long term unemployed was 30% in 2011-12, 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.
Workers with low levels of educational attainment tend to experience higher rates of unemployment
than those with higher levels of educational qualifications. For males and females who had not
completed high school, the rates of unemployment were around 16.3% and 14.6% respectively in the
1990s and 2000s. In contrast, for workers who had degrees, diplomas, a vocational qualification or
had completed high school, the rate of unemployment varied between 6% and 8.5% in the 1990s and
2000s. Unemployment also affects workers according to their occupation. Workers in semi-skilled or
unskilled occupations (e.g. labourers and factory workers) had unemployment rates of 7% to 10% in
the 1990s and 2000s, compared to rates of 1% to 5% for managers, professionals and trades persons.
Unemployment rates tend to be higher in industries affected by high rates of structural change like
manufacturing, building and construction and trades. These industries had the highest rates of
unemployment in the 1990s and also the highest percentage of long term unemployed. However these
rates fell when labour demand rose during the housing and resource booms in the 2000s. Migrants can
also experience high rates of unemployment according to their time of arrival. For migrants arriving
between 1986 and 1995, their unemployment rate was 12.1% in 1998. This was lower than for migrants
arriving after 1995, who experienced a 17% unemployment rate.
Aborigines and Torres Strait Islanders also experience high rates of unemployment and long term
unemployment. Family status also impacts on rates of unemployment, with sole parents, dependent
students and non dependent children having rates of unemployment between 16% and 18% in the
1990s. Unemployment is distributed nationally, but there are variations between the states of Australia.
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.

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

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.
Real GDP will be lower (as it is below full employment) and national income will be reduced, along
with living standards. 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.
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.
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. There is therefore a depreciation in human capital of
the unemployed, and increased duration of unemployment will increase this rate of depreciation.
The most negative feature of the higher unemployment rate resulting from the 1990-91 recession was the
rising percentage of long term unemployed, reaching nearly 40% of the total number of unemployed.
The longer a person is unemployed, the more difficult it is for them to secure a job because they are less
preferred to new entrant workers by employers for the jobs available. The unemployed are also likely
to experience a loss of self esteem and dignity, which reduces their motivation to search for jobs or to
undergo re-training and education to increase their skills. A lack of motivation can lead to higher rates
of long term unemployment and dependence on government welfare payments for income support.
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. The federal government will experience an erosion of its tax base due to
unemployment and a rise in cyclical expenditure on social security payments. This could lead to a rise in
a budget deficit or a fall in a budget surplus. Unemployment can also lead to a less equal distribution
of income as the unemployed will be reliant on income support from government welfare payments,
and concentrated disproportionately in the lowest quintile of the distribution of household income.
The social costs of unemployment are difficult to quantify but researchers have linked them to
undesirable social trends such as rising crime rates; increased drug and alcohol dependency; health
problems for the unemployed; higher suicide rates; the breakdown of family relationships; and a loss of
self esteem and human dignity for the unemployed. These social problems may be linked to particular
groups of unemployed people such as young people, sole parents, middle aged men from professional or
trades backgrounds, workers with ethnic or indigenous backgrounds, migrants and single women.
If the productivity of the workforce is rising over time because of the more efficient use of capital and
labour in the workplace, fewer workers will be needed to produce the same output. The American
economist, Arthur Okun, formulated a relationship between economic growth, unemployment and
productivity which has become known as Okun’s Law. This Law suggests that for a government to
reduce unemployment, the rate of economic growth needs to exceed the growth in labour productivity
plus the growth in the labour force through new entrants. In Australia higher average sustainable
economic growth of around 4% between 1996 and 2008 resulted in unemployment falling to 4.2%.
However the lower rate of economic growth of 1.3% in 2008-09 due to the Global Financial Crisis and
recession led to a rise in the unemployment rate from 4.2% in 2007-08 to 5.8% in 2008-09.
Since 1996 inflation in Australia has been well anchored, with annual inflation averaging 2.5%. At
the same time the unemployment rate fell steadily and the economy reached full employment in 2008,
with widespread labour shortages and rising inflation and wage pressures. However this situation
changed in 2008-09 because of the impact of the Global Financial Crisis and recession, with declining
rates of economic growth, rising unemployment and lower inflation. 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.

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 203

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;
• Expansionary fiscal policy through an increase in government spending and/or cuts in taxes;
• Industrial relations policy or wages policy to contain the growth in aggregate wages; and
• Microeconomic reform policies to improve the economy’s resource allocation and productivity.

Promoting Higher Sustainable Economic Growth

In order to reduce cyclical unemployment, 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.e. expansionary fiscal policy) and the easing of monetary policy
have the potential to stimulate aggregate demand or spending (C+ I + G + X - M), and increase the
output of goods and services in the economy. Given that the demand for labour is derived from the
demand for goods and services that it is used to produce, higher levels of output will require increased
levels of employment, which in turn should lead to a lowering of the level and rate of unemployment.
In 2008-09 as the Global Financial Crisis and recession impacted on major advanced, developing
and emerging economies, 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. In Australia the cash rate was cut by -4.25% by the
Reserve Bank between September 2008 and April 2009, and the Australian government increased the
size of the budget deficit to -$53b (or -4.5% of GDP) with new discretionary spending on cash payments
to households ($10.4b) and infrastructure projects through the Nation Building and Jobs Plan ($42b).
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. Therefore
greater emphasis has been placed on labour market reform policies such as government employment,
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, and encourage
more competitive work practices and higher levels of labour productivity. This in turn should lead to
higher levels of employment as employers have a greater incentive to hire additional workers. Labour
market deregulation and the movement towards decentralised wage determination, where firms and
employees are able to negotiate wage increases on the basis of improved levels of productivity, has been
the central component of Australia’s recent labour market reform agenda. The continuing process of
awards modernisation in making awards simpler instruments that do not impede workplace efficiency
and employment growth, is another key element of the government’s labour market reform agenda.
Labour market reform legislation such as the Workplace Relations Act 1996, incorporated measures
designed to curb union powers and weaken unfair dismissal laws. This was viewed by the Howard
government as a means of direct intervention in labour markets in order to reduce unemployment. 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;
• Abolition of the No Disadvantage Test applicable to AWAs and Union Collective Agreements;
• Reduction of the 20 allowable matters in the award safety net to 16; and
• Exemption of businesses with less than 100 employees from unfair dismissals legislation.

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

204 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd

These changes further deregulated the industrial relations system, with the government believing that
the new reforms would lead to further gains in employment and productivity, and a reduction in the
unemployment rate because of greater flexibility in wage and employment setting procedures.
With the election of the Rudd Labor government in 2007, 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. This included the introduction of ten new National Employment Standards, Modern
Awards and annual adjustments to the National Minimum Wage by Fair Work Australia. Emphasis was
also placed on collective bargaining, with individual workplace agreements such as AWAs phased out.
The negotiation of enterprise agreements are subject to a Better Off Overall Test (BOOT) to ensure that
workers under enterprise agreements receive better than minimum conditions of employment, and have
an incentive to raise productivity to receive higher wages.

Education and Training

A major reason for unemployment is the lack of education, training and skills of some workers (e.g.
young workers aged 15 to 19 years) demanded by employers for the jobs available. 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.
• Expansion of school based apprenticeship systems to develop apprenticeship skills in schools.
• Funding for vocational and school education including the National Education Framework for
Schools to raise literacy and numeracy standards.
• The Australian National Training Authority was established to improve the skill development of
Australian workers through ongoing education, training and development.
Labour market assistance to job seekers is based on the government’s Job Services Australia, a national
network of private, community and government organisations contracted by the government to assist
the unemployed to find jobs. This is supported by Jobs Search, a government run online job noticeboard.
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, vocational education and training facilities. The
government also introduced a $5.9b new programme called the Education Revolution, 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.
• Providing greater flexibility for schools to improve the educational outcomes of students. 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.
• Creating a flexible and competitive national vocational training system. This involved expenditure
of $1.9b to deliver up to 630,000 additional training places over five years.
In the 2009-10 budget the government introduced the Jobs and Training Compact at a cost of $1.5b
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. The main measures in the Compact included:
• A temporary $83m Training Supplement Scheme to eligible job seekers to undertake training;
• A $277m Compact with Young Australians which guaranteed an education or training place for
persons under 25 who wanted to upskill;
• A $438m Compact with Retrenched Workers provided immediate employment assistance to
workers who became unemployed; and
• A Compact with Local Communities to provide assistance through a $650m Jobs Fund to regions
and communities directly affected by the global recession.

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 205

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, part time or full time work:
• The Australians Working Together package (2001), included reforms to help people out of work to
return to the labour force through a system of working and training credits. It targeted parents,
mature aged people, indigenous people and people with disabilities to seek paid work or training.
• In the 2004-05 budget, the government announced its More Help for Families package, tax cuts and
incentives for saving for retirement. 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.
• In the 2006-07 budget the federal government committed $60.2m to provide an additional 25,000
child care places to encourage more parents to seek paid work in the labour market.
• 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.
• In the 2008-09 budget the federal government announced cuts in personal income tax between
July 1st 2008 and July 1st 2010 which were designed to provide further incentives for individuals,
including part time workers to participate in the workforce.
• In the 2011-12 budget, as part of the Building Australia’s Future Workforce package, 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, single parents, people
with a disability, the long term unemployed and people in disadvantaged locations.
• In the 2012-13 budget, the federal government’s Building Australia’s Future Workforce skills
package ($3b) contained funding for 50,000 new training places under the National Workforce
Development Fund. A $1.75b National Partnership Agreement on Skills Reform was also signed
with the states to strengthen the VET system. Funding was also allocated to help mature age
workers to up-skill and re-skill, and $225.1m was allocated for child care assistance to increase
parents’ workforce 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, building and construction) in relation to
the demand for these labour skills. 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. Therefore
Australia was not producing enough skilled workers to meet the demand for many skilled jobs.
The ABS reported in 2005 that 149,500 jobs could not be filled nationwide with a significant proportion
of these jobs in the mining boom states of Western Australia and Queensland. There is a geographic
imbalance between job availability and the supply of labour, as well as a net shortage of much needed
labour skills. The Australian government increased skilled migration between 2001 and 2009 but
capped the skill stream at 115,000 in March 2009 because of the impact of the Global Financial Crisis
on the labour market. The number of places in the skilled stream was reduced by 25,400 in 2009-10.
In sum there are two main policies that can be used by the government to address the skills shortage:
1. Increasing labour force participation by retaining older workers with specific skills, and encouraging
other groups such as younger workers and females to acquire higher levels of education and training.
The government’s Building Australia’s Future Workforce package (2011) addressed these issues.
2. Increasing the supply of skilled labour through an intake of skilled migrants in specific occupations
and industries. Immigration overall also increases aggregate demand and hence the derived demand
for labour. The intake of skilled migrants can be reviewed to meet economic requirements.

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

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). The Skills for the Future package in October 2006 committed $837m in new funding to support
skills creation in the VET sector, with a COAG agreement for a national approach to apprenticeships,
training and skills recognition. The Realising Our Potential package in the 2007 budget increased funding
for university, vocational and school education, vital for increasing labour force skills, productivity and
participation. In the 2010-11 budget the government invested $661.2m in a new Skills for Sustainable
Growth programme. In the 2011-12 and 2012-13 budgets, the Building Australia’s Future Workforce
package included $3b of Australian government funding for new skills measures such as apprenticeships,
reform of the VET system, and measures to boost the workforce participation of disadvantaged groups.
The Jobs and Training Compact
The Australian government allocated $1.5b in the 2009-10 budget to assist workers whose job prospects
were adversely affected by the global recession. 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. Redundant workers were expected to maintain, update or learn
new skills to improve their job prospects. The government’s Jobs and Training Compact was designed to
support young Australians, retrenched workers and local communities to secure future employment,
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. This would provide a payment of $41.60 per fortnight to eligible job seekers
on Newstart Allowance or Parenting Payment who undertake approved training;
• 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;
• A $438m Compact with Retrenched Workers provided immediate employment assistance through
Job Services Australia to workers who became unemployed. Job Services Australia commenced
operating in 2009 to provide employment services to more disadvantaged job seekers; 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.
The government’s fiscal and employment stimulus packages were expected to support labour demand
and raise the level of GDP in 2009-10. The stimulus measures were estimated by Treasury to reduce the
forecast peak unemployment rate by 1.5% in 2010 from 10% to 8.5% as shown in Figure 8.7.

Figure 8.7: The Unemployment Rate Pre-Stimulus and Post Stimulus

Source: Commonwealth of Australia (2009), Budget Strategy and Outlook 2009-10.

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 207

REVIEW QUESTIONS
THE TYPES, CAUSES AND EFFECTS OF UNEMPLOYMENT

1. Using examples, distinguish between cyclical, structural, frictional and seasonal unemployment.

2. What is long term unemployment? How does it differ to underemployment and hidden
unemployment? How does the ABS calculate the labour underutilisation rate?

3. Refer to Figures 8.2 and 8.3 and the text and explain how a deficiency in aggregate demand
can cause cyclical or involuntary unemployment to occur in the economy.

4. Using examples, explain how structural change can lead to structural unemployment.

5. Refer to Figure 8.4 and explain how excessive wage expectations might affect unemployment.

6. What is meant by the natural rate of unemployment? Refer to Figure 8.5 and explain how
unemployment can arise in the labour market when labour demand equals labour supply.

7. Refer to Figure 8.6 and explain the Non Accelerating Inflation Rate of Unemployment (NAIRU).
How can the government try to reduce the Non Accelerating Inflation Rate of Unemployment?

8. Discuss the main groups in society affected by high rates of unemployment and long term
unemployment. Why are certain groups more likely to experience unemployment than others?

9. Discuss the economic and social costs of unemployment in the Australian economy.

10. Discuss government policies that can be used to reduce the incidence of cyclical unemployment.

11. Discuss government policies to reduce the incidence of structural and long term unemployment.

12. Discuss the reasons for the skills shortage in Australia and the policies used by the Australian
government to address the skills shortage.

13. 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.

14. Define the following terms and add them to a glossary:

apprenticeships labour skills retrenchments

cyclical unemployment labour underutilisation rate seasonal unemployment
education and training long term unemployment skills shortage
enterprise bargaining LRPC SRPC
frictional unemployment NAIRU structural change
full time employment natural rate of unemployment structural unemployment
hard core unemployment net migration tax and welfare reform
hidden unemployment Okun’s Law underemployment
human capital part time employment unemployment
incidence of unemployment participation rate unemployment gap
labour demand poverty trap VET
labour force productivity wage expectations
labour market reform regional unemployment welfare dependency

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

208 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd

[CHAPTER 8: SHORT ANSWER QUESTIONS

Year Full Time Part Time Unemployed Civilian Population Real GDP
Employed Employed Persons Aged 15+ years %r pa
Persons Persons
2008-09 7,611,800 3,150,600 662,900 17,504,400 1.3

2009-10 7,880,000 3,353,100 607,000 18,099,700 2.3

2010-11 8,082,100 3,373,000 591,000 18,370,900 1.9

2011-12 8,065,500 3,435,000 631,300 18,595,500 3.0

Refer to the table above of selected data for the Australian labour force between 2008-09
and 2011-12 and answer the questions below. Marks

1. Calculate the size of the labour force in 2011-12. (1)

2. Calculate the participation rate in 2010-11. (1)

3. Calculate the change in the unemployment rate between 2010-11 and 2011-12. (2)

4. Explain TWO factors contributing to the rise in the rate of unemployment

in Australia between 2007-08 and 2008-09. (2)

5. Explain TWO government policies used to reduce unemployment in Australia. (4)

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd

© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 209

[CHAPTER FOCUS ON UNEMPLOYMENT

“Unlike most advanced economies, the Australian labour market was remarkably resilient during the
Global Financial Crisis (GFC), and following a short period of weakness, has since strengthened.
Over the past 18 months employment has grown strongly, the unemployment rate has fallen
steadily, and the participation rate has reached record highs. The long term unemployment rate
also remains low and continues to decline.

In the lead up to and during the GFC the unemployment rate rose by a total of around 1.6% from
4.2% to 5.8% in Australia, compared with around a 2.75% rise in Canada, a 3.5% rise in New
Zealand and a 5.75% rise in the USA. Not only was the increase in Australia’s unemployment
rate relatively modest, but the subsequent recovery has been substantial with the unemployment
rate falling to 4.9% as at March 2011, lower than most of the major advanced economies.”

Unemployment Rates Employment Growth

Source: Commonwealth of Australia (2011), Budget Strategy and Outlook 2011-12.

Explain recent trends in Australia’s unemployment rate and the relationship between changes in
economic growth, employment and the unemployment rate.

[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.

© Tim Riley Publications Pty Ltd Year 12 Economics 2013

210 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd

CHAPTER SUMMARY
UNEMPLOYMENT
1. Full employment of the labour force is a major goal of government economic policy.

2. The labour force consists of all persons employed (i.e. both full time and part time employees) plus
unemployed persons registered as actively seeking work.

3. According to the Australian Bureau of Statistics, persons over 15 years who are currently employed
for at least one hour per week, plus self employed persons and those unemployed but actively
seeking work are included in the Australian labour force.

4. The size of the labour force is determined by factors such as the size and growth of the population;
the age distribution of the population; and the participation rate of the working age population.

5. The unemployment rate is calculated as the percentage of the total labour force classified as
unemployed. In 2011-12 the unemployment rate in Australia was 5.2% of the labour force.

6. The unemployment rate peaked in the recession of the early 1990s when it was 11% of the labour
force. It fell from 11% in 1992 to an historic low of 4.2% in 2007-08, before rising to 5.8% in
2008-09 due to the impact of the Global Financial Crisis and recession.
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.
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.

7. The main types of unemployment are classified as cyclical, structural, frictional, seasonal,
underemployment, long term, hidden and regional.

8. Some of the main causes of unemployment include the following:

• A deficiency in aggregate demand leading to a deflationary gap in the economy;

• 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; and

• Excessive wage expectations may lead to rising wage costs for employers and a lower demand
for labour, causing employers to substitute capital for labour in production.

9. The natural rate of unemployment is where some workers remain unemployed due to frictional
and structural factors in the labour market, eventhough the demand and supply of labour are in
equilibrium in the labour market. The Non Accelerating Inflation Rate of Unemployment (NAIRU)
is the rate of unemployment that is consistent with a constant or non accelerating inflation rate.

10. Some of the main groups affected by unemployment include young people; workers with low levels
of education and skills; blue collar workers in manufacturing; migrants from non English speaking
backgrounds; and Aborigines and Torres Strait Islanders.

11. 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. The unemployed also
suffer from lower incomes and a loss of self esteem the longer they are unemployed. 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.

12. Unemployment also results in social costs to the community as the unemployed may experience
health problems; alcohol or drug dependency; and a breakdown in their family relationships.
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.

Year 12 Economics 2013 © Tim Riley Publications Pty Ltd