© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 191

Chapter 8
Unemployment
THE MEASUREMENT OF UNEMPLOYMENT
Achieving full employment in the labour market is a major macroeconomic objective of the Australian
government. Full employment was estimated by the Reserve Bank in 2015 to be around the Non
Accelerating Inflation Rate of Unemployment (the NAIRU) of 5%. However in 2019 the Reserve
Bank governor, Philip Lowe, suggested a lower figure of 4%-4.5% may approximate the NAIRU. After
the 1990-91 recession the unemployment rate rose to 11.2% in 1992 and then fell slowly to an historic
low of 4.2% in 2007-08 after seventeen years 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 2010-11
helped to lower unemployment to 5.2% by 2012. In 2014-15 the unemployment rate rose to 6.1%
due to lower growth as the economy transitioned from the peak in mining investment in 2013 to non
mining sources of growth. Low but positive growth led to the unemployment rate falling slowly to
5.2% or 701,700 persons of the workforce in 2018-19 a shown in Table 8.1.
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, part time or casual 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 (full time + part 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 during its monthly labour force survey:
• 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 or 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 2014-15 to 2018-19

Full Time Part Time Unemployed Labour Force

Employed Persons Employed Persons Persons

2014-15 8,164,500 3,632,700 772,300 12,569,500

2015-16 8,172,200 3,761,200 725,900 12,659,300

2016-17 8,318,700 3,841,300 726,800 12,886,800

2017-18 8,556,700 4,006,100 719,000 13,281,800

2018-19 8,816,200 4,059,600 701,700 13,577,500

Source: ABS (2019), Labour Force, Catalogue 6202.0, June. NB: The statistics used are trend estimates in June in each year.

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192 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd

Table 8.2: Australian Labour Force Participation Rates 2010-11 to 2018-19

Year Persons Males Females Labour force Civilian Population

Aged 15+ years

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

2012-13 65.2 71.7 58.8 12,366,900 18,976,200

2013-14 64.6 70.9 58.6 12,339,000 19,069,200

2014-15 64.8 71.0 58.9 12,569,500 19,364,500

2015-16 65.0 70.7 59.5 12,659,300 19,540,100

2016-17 64.9 70.5 59.5 12,886,800 19,852,200

2017-18 65.6 70.8 60.7 13,281,800 20,237,100

2018-19 66.0 71.2 60.9 13,577,500 20,586,400

Source: ABS (2019), Labour Force, Catalogue 6202.0, June & Australian Demographic Statistics, Cat. 3101, Dec.

Those persons who are not classified as part of the Australian workforce include the following categories:
• Children under 15 years of age, those who are retired, unable to work or do voluntary work.
• 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 June 2019, the Australian labour force totalled 13,577,500 persons, of which
8,816,200 or 64.9% were employed full time; 4,059,600 or 29.9% were employed part time; and
701,700 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 2018-19 was approximately 25,180,200 persons. The
civilian population over 15 years of age was 20,586,400 in 2018-19, but only 13,577,500 were
counted as part of the labour force (refer to Table 8.2). This meant that the participation rate in
2018-19 was 66%. Population growth of 1.6% (404,800) in 2018-19 was equal to the rate of
natural increase of 0.6% (156,400) plus net migration of 1% (248,400) i.e.

Population Growth Rate (% ) 1.6% = Natural Increase (% ) 0.6% + Net Migration (% ) 1%

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. However the
migrant intake had increased to 248,400 by 2018-19 as economic recovery occurred after the GFC.
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 2018-19, there were 16,375,965 people in the 15 to
64 year age group, representing some 65% of the total Australian population of 25,180,200.
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 (i.e. full time and part time employees plus
the unemployed). The participation rate for 2018-19 is calculated by using the following equation:

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© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 193

___ Work Force 100 13,577,500 100

Participation Rate = Working Age Population x 1 = 20,586,400 x 1 = 66%

In 2018-19 the participation rate was 66% up from 64.9% in 2016-17 (see Table 8.2). This reflected
an increase in job vacancies with a higher level of economic activity attracting more people into the
labour force. The participation rate tends to fall during recessions or periods of lower growth when
unemployment rises and job vacancies fall (e.g. from 65.6% in 2010-11 to 64.6% in 2013-14) and
rise during periods of stronger growth (e.g. 64.9% in 2016-17 to 66% in 2018-19) when more jobs
are created. Three groups that have a big impact on the participation rate are young people looking for
their first job (such as graduates and school leavers); women re-entering the labour force; and mature
age job seekers. 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 59.1% in 2010-11 to 60.9% in 2018-19) whereas
the participation rate for males has tended to decline slightly from 72.2% in 2010-11 to 71.2% in
2018-19. Participation rates for males, females and persons tended to rise quickly between 2016-17
and 2018-19 as there was strong employment growth of over 2% including in full time jobs.
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 2018-19 there were 8,816,200 persons employed full time and 4,059,600 persons employed part
time, with 701,700 persons classified as unemployed. This gave a total labour force of 13,577,500
persons. The trend unemployment rate calculated by the ABS in June 2019 was therefore 5.2% i.e.
Unemployment Rate for June 2019 = 701,700 100
13,577,500 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 rates 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 recession in the
early 1990s, it reached 11% of the Australian labour force, with much of the rise in unemployment
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 had fallen to 4.2%, its lowest level in over 30 years. Much of
the fall in the unemployment rate between 1999 and 2007-08 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 2001-02 and 2007-08, mainly because of consistently high rates of
sustainable economic growth in Australia and structural reforms in the labour market and the economy.

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194 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd

In 2008-09 the Global Financial

Figure 8.1: Australia’s GDP Growth and the
Unemployment Rate 2000 to 2015
Crisis and recession had a major
impact on the Australian labour
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%.
There were major retrenchments
in industries affected by the GFC
such as mining, manufacturing
and finance. In 2009-10 higher
economic growth of 2.3% reduced
the unemployment rate to 5.1%,
and then to 4.9% in 2010-11.
An uneven pattern of growth and
structural change in 2011-12 led to
retrenchments in industries such as
car and steel manufacturing, and
the unemployment rate rose to
5.2% (refer to Table 8.3). In 2012-
Source: RBA (2015), Statement on Monetary Policy, May. 13 a lower rate of economic growth
of 2.6% led to the unemployment
rate increasing to 5.7%. The pattern of below trend growth continued in 2013-14 and 2014-15 as the
mining investment boom ended, and commodity prices and the terms of trade fell. The unemployment
rate rose to 6.1% in 2014-15 before falling to 5.6% in June 2017 and then to 5.2% in June 2019
because of stronger economic growth which led to growth in employment.
Much of the increase in the unemployment rate between 2011 and 2015 was due to a rise in the
medium term unemployed (those who have been unemployed for between 4 and 52 weeks) as shown in
Figure 8.2. However the rate of long term unemployment or those unemployed for over 52 weeks also
rose which was consistent with a protracted period of subdued labour market conditions. In June 2019
there were 160,000 persons classified as long term unemployed which was 22.8% of the total number
unemployed or 1.2% of the labour force. Long term unemployment rose from 18.6% in 2012-13 to
25.3% of the workforce in 2017-18, before declining to 22.8% in 2018-19 as shown in Table 8.3.

Table 8.3: The Australian Unemployment Rate 2011-12 to 2018-19

Labour Force Unemployed Unemployment Long Term Unemployed Real GDP

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

2011-12 12,131,800 631,300 5.2% 18.7% 3.4%

2012-13 12,366,900 706,900 5.7% 18.6% 2.6%
2013-14 12,339,000 756,700 6.1% 23.6% 2.5%
2014-15 12,569,500 772,300 6.1% 24.2% 2.5%
2015-16 12,659,300 725,900 5.7% 23.4% 2.5%

2016-17 12,886,800 726,800 5.6% 22.5% 1.7%

2017-18 13,281,800 719,000 5.4% 25.3% 2.7%

2018-19 13,577,500 701,700 5.2% 22.8% 1.8%

Source: ABS (2019), Labour Force, Catalogue 6202.0, June and Catalogue 6291.0.55.001, Table 14b.

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© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 195

There was an increase in the

Figure 8.2: Unemployment and Labour Market
Turnover in Australia 2005-2019 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. 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
Source: RBA (2019), Statement on Monetary Policy, May. 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.
The major car makers shut their Australian plants over 2016-17 leading to large job losses.
Unemployment rates according to sex and age between 2016 and 2019 are shown in Table 8.4. The
unemployment rate for young (15 to 24 years) males and females looking for full time work was between
two and three times the rate for males and females over fifteen years of age in the labour force in this
period. Young males (15-24 years) had an unemployment rate of 12.5% in 2019 compared to 5.2% for
males 15 years and over. The corresponding unemployment rates for females were 10.5% and 5.3%.
Young people therefore experience more difficulty in securing employment because of a lack of skills,
education, training and experience. This leads to high rates of youth unemployment for 15-24 year olds
seeking their first job, such as school leavers, potential apprentices, tradespersons and tertiary graduates.
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, 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. All states had
strong employment growth in 2008 and the national unemployment rate fell to 4.3%. The global
resources boom and rising terms of trade led to a reallocation of the economy’s resources (such as
labour and capital), away from the non resource rich states of NSW, Victoria and South Australia,

Table 8.4: Unemployment Rates by Sex and Age Group 2016-2019 (annual average %)

Males Looking for Full Time Work Females Looking for Full Time Work
15-24 years 15+ years 15-24 years 15+ years

2016 13.5 5.7 11.6 5.7

2017 13.8 5.5 11.9 5.7

2018 13.0 5.6 10.3 5.3

2019 12.5 5.2 10.5 5.3

Source: ABS (2019), Labour Force, Catalogue 6202.0, June.

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196 Chapter 8: Unemployment © Tim Riley Publications Pty Ltd

Table 8.5: Unemployment Rates by State 2014 to 2019

NSW VIC QLD SA WA TAS Australia
- July 2014 5.8% 6.6% 6.5% 7.1% 5.0% 7.5% 6.1%
- July 2015 5.8% 6.2% 6.3% 7.9% 6.0% 6.7% 6.1%
- July 2016 5.2% 5.7% 6.5% 6.9% 5.5% 6.5% 5.7%
- June 2017 4.8% 6.0% 6.3% 7.0% 5.6% 5.8% 5.6%
- June 2018 4.8% 5.3% 6.1% 5.6% 6.2% 6.0% 5.4%
- June 2019 4.5% 4.7% 6.3% 5.9% 5.9% 6.7% 5.2%
Source: ABS (2019), Labour Force, Australia, Catalogue 6202.0, June.

to the resource rich states of Western Australia and Queensland, where mining accounts for a large
proportion of their state product. They recorded higher economic and employment growth and lower
unemployment rates 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% in 2009. Large rises in unemployment in Western Australia and Queensland
reflected a contraction in mining output, whilst in the larger states of NSW and Victoria employment
fell in the manufacturing industry and the financial sector.
Similarly, after the end of the mining investment boom in 2012 unemployment rates rose in Western
Australia and Queensland, but began to fall in NSW and Victoria with higher economic growth in these
states and a re-balancing of growth away from the resources sector and resource rich states. In June
2019 the unemployment rates in Tasmania (6.7%), Queensland (6.3%), Western Australia (5.9%) and
South Australia (5.9%) were above the national average of 5.2% as shown in Table 8.5, whilst in NSW
(4.5%) and Victoria (4.7%) they were lower due to higher economic and employment growth.

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 2014-15 and 2018-19.

3. Discuss the four main factors that influence 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 2010-11 and 2018-19.

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 trends in medium term and long term unemployment between 2005 and 2019.

7. Discuss the reasons for the higher rates of unemployment experienced by young people (15-24).

8. Account for the trends in the unemployment rates of the states between 2008 and 2019.
Discuss the impact of the transition to non mining growth on the labour market over 2013-19.

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© 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 led to the restructuring of
workforces in these industries. Between 2010 and 2014 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 their first job; people searching for higher paid career jobs; women 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 new 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 can occur in specific industries or occupations which 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 as beach lifeguards,
or Winter jobs in the snowfields such as ski lift operators, instructors and hospitality staff.
5. Underemployment refers to persons working part time or casually 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 2018-19 as 8.3%. The ABS also calculated the labour underutilisation
rate (the unemployment rate of 5.2% plus the underemployment rate of 8.3%) as 13.5% in 2018-19.
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 there is a shortage of suitable job vacancies.
7. Long term unemployment refers to those persons who are unemployed for over 52 weeks. 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 prolonged periods of long term unemployment (over 104 weeks).
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 change and loss of jobs such as industrial
regions in Melbourne, Sydney, Adelaide, Port Kembla, Wollongong, Newcastle, Whyalla and Geelong.

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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, as the Australian economy made the slow transition from mining led growth to non mining
sources of growth between 2012 and 2019, the slower growth in aggregate demand led to lower rates
of economic growth. Spare capacity emerged in the labour market with the unemployment rate rising
from 5.2% in 2012 to 6.1% in 2015 as the number of medium and long term unemployed increased.
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 8.3, 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 8.3. 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 in the economy.
Another model used to show how cyclical unemployment arises is the aggregate demand and aggregate
supply model. In Figure 8.4, 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 gap or unemployment gap of ab results, causing cyclical unemployment 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,

Figure 8.3: The Keynesian Deflationary Figure 8.4: 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

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© Tim Riley Publications Pty Ltd Chapter 8: Unemployment 199

Figure 8.5: 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

clothing and footwear, steel and passenger motor vehicles have also reduced their workforces because
of tariff and quota cuts introduced by the government in 1988, 1991, 2000, 2005, 2010 and 2015.
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.
Other factors causing structural change and unemployment include the impact of globalisation, with
businesses using outsourcing and offshoring in cheap labour countries to reduce labour costs.
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 an 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
collective 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 8.5 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 Modern Award
wage of W1 is established above the market equilibrium wage rate of W by the Fair Work Commission
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 and
individual wage bargaining in the labour market. This has reduced reliance by workers on adjustments
to the safety net of the National Minimum Wage and Modern Awards set by the Fair Work Commission
and state industrial tribunals. Enterprise bargaining was introduced in 1991 as a wage fixing principle.
The spread of enterprise agreements in the labour market in the 1990s and 2000s, led to the percentage
of workers reliant on arbitrated awards for pay rises falling from 67% of employees in 1990 to around
21% by 2018. 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.

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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 such as 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.
Successive Australian governments have addressed the issue of improving the education, training and
skills of the labour force by implementing labour market programmes. These included the Building
Australia’s Future Workforce (2011), the Job Compact, the Job Network, the National Education
Framework and A Plan for Australian Jobs (2013). The Youth Jobs Path programme was introduced in
the 2016-17 budget to assist youth to acquire skills, training and placement in jobs. The Delivering Skills
for Today and Tomorrow package in the 2019-20 budget targeted vocational education and training.
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) estimated the natural rate of unemployment at between 5% and 6% of the Australian workforce.
Figure 8.6 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 8.7 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 8.6: The Natural Rate of Figure 8.7: 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

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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 Reserve Bank estimated a NAIRU of 5% in Australia in 2017
and argued that there was an unemployment gap of 0.6% since unemployment was 5.6% and therefore
0.6% above the estimated NAIRU of 5% of the labour force. In 2019 the Reserve Bank governor, Philip
Lowe, argued that the NAIRU may in fact be lower at between 4% and 4.5% before inflation rose.

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 a ‘blue
collar’ occupation 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 in services and a fall in the rate of unemployment to 4.2% up to mid 2008 before the GFC.
Young people (15-24 years) experience the highest rates of unemployment. For males in 2018-19 the
rate was 12.5% and for females it was 10.5% (see Table 8.4 on page 195). Young people experience
difficulty in securing their first job because of a lack of experience, education, training and skills. For
workers over 15 years, the average rate of unemployment in 2018-19 for males was 5.2% and 5.3%
for females. For workers between 25 and 34 years, the rate of unemployment was 5.9% in 2017.
For workers between 45 and 54 years, the unemployment rate was lower at 4.1% in 2017, reflecting
employer demand for more mature workers with higher levels of skill, education and experience.
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 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 resources 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 around 12% in the 1990s and 2000s. This was lower than for
migrants arriving after 1995, who experienced a higher unemployment rate of 17%.
Aborigines and Torres Strait Islanders also experience high rates of unemployment and long term
unemployment due to low levels of literacy and high rates of welfare dependency. Family status can also
impact 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 rates also tend
to be higher in regional areas compared to metropolitan areas where there are more job opportunities.

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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, saving, education, healthcare and recreation are
reduced for the unemployed and their dependants. Unemployment may also cause poverty traps and
become intergenerational because of welfare dependency (a reliance on welfare payments for income).
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 the 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 workforce entrants (causing a rise in the participation rate) 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.
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 be 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 increasing rates
and duration of unemployment 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 and personal relationships and increased domestic violence; 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, single women and women with children.
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. Okun’s 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 contained, 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.

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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 by the Reserve Bank of Australia;
• 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).
In the 2016, 2017, 2018 and 2019 budgets the Australian government adopted a ‘Jobs and Growth’
strategy with a Ten Year Enterprise Tax Plan to cut personal and corporate taxes, a Youth Jobs PaTH
Programme of wage subsidies to employers, and spending of $100m on a National Infrastructure Plan.
Between 2011 and 2019 the Reserve Bank cut the cash rate from 4.75% to 1% to support economic
growth and reduce the unemployment rate. Whilst monetary and fiscal policy stimulus can help to
reduce cyclical unemployment they are not as effective in reducing structural unemployment. Emphasis
has therefore been placed on labour market reform policies to target structural unemployment.
Labour Market Reforms
Labour market reform policies are designed to make labour markets more flexible, encourage more
efficient work practices and higher levels of labour productivity. This can 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 based on improved levels of productivity, has been the central component
of Australia’s recent labour market reform agenda. The process of Awards Modernisation and more
reliance on individual and collective agreements are also part of the 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.

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These changes further deregulated the industrial relations system, with the government arguing 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.
The Rudd Labor government passed the Workplace Relations Amendment (Transition to Fairness) Act 2008
and the Fair Work Act 2009 to strengthen the safety net of the workplace relations system. This included
the introduction of ten National Employment Standards, Modern Awards and annual adjustments to
the National Minimum Wage by the Fair Work Commission. Emphasis was also placed on collective
bargaining, with the negotiation of collective enterprise agreements subject to a Better Off Overall Test
(BOOT) to ensure that workers under enterprise agreements received better than minimum conditions
of employment, and had 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 (especially
young workers aged 15 to 24 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 Australian government’s Job Active, a national
network of Job Active providers contracted to help the unemployed and job seekers to find and keep
jobs. Job Active is administered by the Department of Jobs and Small Business.
In the 2008-09 budget the Rudd government established an Education Investment Fund with an
allocation of $11b to be spent on higher education, vocational education and training facilities. It also
introduced the $5.9b Education Revolution programme to boost the quality of Australian education
and training with $1.9b allocated over five years to create 630,000 additional training places.
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 higher unemployment rate caused by the impact of the Global Financial
Crisis. Major measures included a Training Supplement Scheme to eligible job seekers to undertake
training; training places for persons under 25 to upskill; employment assistance to workers who became
unemployed; and assistance to regions and communities directly affected by the global recession.
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. In the 2013-14
budget the government established a $68m Alternative Pathways Program to address skills shortages. In
the 2014-15 budget the Abbott government introduced a ‘Learn or Earn’ policy requiring job seekers up
to 30 years of age to participate in job search and employment activities. In the 2015-16 budget $5.5b
was allocated to a Jobs and Small Business package to stimulate investment and employment.
In the 2016-17 budget the Australian government announced a Youth Employment Package to assist
over 100,000 young people to gain work. This included the $752m Youth Jobs PaTH programme with
pre-employment skills training; internship placement; and wage subsidies to employers. In the 2018-19
budget $1.2b was allocated to vocational and industry training and $1.9b for labour market assistance
to job seekers and industry. A controversial Job Seeker Compliance Framework was also announced
to impose greater financial penalties on non compliant job seekers. In the 2019-20 budget a $525.3m
Delivering Skills for Today and Tomorrow package was announced for vocational education and training.

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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 poverty traps where high effective
marginal taxation rates (EMTRs) can reduce the incentive for welfare recipients to seek paid work.
• 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 designed to
provide 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 for 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 Building Australia’s Future Workforce skills package contained funding
for 50,000 new training places; a National Partnership Agreement on Skills Reform was signed
with the states to strengthen the VET system; funding was allocated to help mature age workers to
up-skill and re-skill; and greater child care assistance to increase parents’ workforce participation.
• In the 2013-14 budget support was given to job seekers in the transition to work through an
increase in the income free area for Newstart Allowance, and more funding for child care.
• In the 2016 and 2017 budgets the Turnbull government introduced the Ten Year Enterprise
Tax Plan to cut the company tax rate to 25% by 2026-27. In the 2018 and 2019 budgets new
tax measures were announced including lower taxes for small and medium sized businesses to
encourage employment. New income tax rates and tax thresholds (19% for $18,200-$45,00; 30%
for $45,001-$200,00; and 45% for over $200,000) were planned for introduction in 2024 to make
the tax system simpler, flatter and to reduce the tax burden on middle income earners.
The Skills Shortage
The skills shortage in Australia is 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 demand.
The skills shortage arose in 2006 due to a mismatch between the skills demanded by employers in job
vacancies and the skills of job seekers. This was apparent in Western Australia and Queensland during
the mining boom. The Australian government increased skilled migration between 2001 and 2009
but capped the skilled stream at 115,000 in March 2009 because of the impact of the Global Financial
Crisis on the labour market. Over the medium term the Australian government has addressed the skills
shortage and the impact of population ageing on the labour market by using the following policies:
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.
2. Increasing the supply of skilled labour through an intake of skilled migrants in specific occupations
and industries. Temporary Skilled Work visas (457 visas) were used in 2012 to allow skilled workers
from overseas to work in areas of skills shortages. These visas were abolished in the 2017 budget and
replaced with a new Temporary Skill Shortage visa. Employers who nominate workers under this
visa are required to pay a levy, with the revenue used to finance the Skilling Australia Fund.

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Programmes to Develop Labour Skills

The Australian government has addressed the skills 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. 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 in funding for
apprenticeships, reform of the VET system and the workforce participation of disadvantaged groups.
In the 2017-18 budget the government announced reforms to help disadvantaged groups to access
employment including the Parent Next programme to provide services such as childcare, pre-
employment training, financial management, literacy and numeracy classes. The Australian government
also introduced the Retrenchment Rapid Response Framework and the Automotive Industry Structural
Adjustment Programme to address structural unemployment in the car, steel and electricity industries.
Measures introduced in the 2019-20 budget were the Delivering Skills for Today and Tomorrow package
with $525.3m for vocational education and training, the establishment of a National Skills Commission
and the trialling of a new model of digital employment services for ‘job ready’ job seekers.

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 GFC. 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
undertook approved training by providing a payment of $41.60 per fortnight to eligible job seekers;
• A $277m Compact with Young Australians which guaranteed them an education or training place;
• A $438m Compact with Retrenched Workers to provide them with employment assistance; and
• A Compact with Local Communities to provide assistance to regions through a $650m Jobs Fund.
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 8.8.

Figure 8.8: The Unemployment Rate Pre-Stimulus and Post Stimulus

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

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© 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 from underemployment and hidden
unemployment? How does the ABS calculate the labour force underutilisation rate?

3. Refer to Figures 8.3 and 8.4 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 in the economy can lead to structural
unemployment.

5. Refer to Figure 8.5 and explain how excessive wage expectations might affect unemployment.

6. What is meant by the natural rate of unemployment? Refer to Figure 8.6 and explain how
unemployment can arise in the labour market when labour demand equals labour supply.

7. Refer to Figure 8.7 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 force underutilisation rate regional unemployment

casual employment labour market retrenchments
cyclical unemployment labour market reform seasonal unemployment
deflationary gap labour skills skills shortage
education and training long term unemployment SRPC
enterprise bargaining LRPC structural adjustment
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 VET
labour demand poverty trap wage expectations
labour force productivity welfare dependency

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[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

2014-15 8,164,500 3,632,700 772,300 19,364,500 2.5

2015-16 8,172,200 3,761,200 725,900 19,540,100 2.5

2016-17 8,318,700 3,841,300 726,800 19,852,200 1.7

2017-18 8,556,700 4,006,100 719,000 20,237,100 2.7

2018-19 8,816,200 4,059,600 701,700 20,586,400 1.8

Refer to the table above of selected data for the Australian labour force between 2014-15
and 2018-19 and answer the questions below. Marks

1. Calculate the size of the labour force in 2018-19. (1)

2. Calculate the participation rate in 2018-19. (1)

3. Calculate the change in the unemployment rate between 2017-18 and 2018-19. (2)

4. Explain TWO causes of unemployment in the Australian labour market. (2)

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

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[CHAPTER FOCUS ON UNEMPLOYMENT

“After declining by 0.6% over 2018, the unemployment rate was little changed in the March
quarter 2019 at 5%. This is the lowest level since mid 2011 and lower than expected a year ago.
The share of underemployed workers who want and are available to work additional hours has
also declined a little.

As a result, a broader measure of labour market underutilisation, which captures both the hours
sought by the unemployed and the additional hours that underemployed people would like to
work, declined over the past year, and is also around its lowest rate since 2011. The labour
force participation rate was little changed over the past year at just under 66% of the working
age population, which is around historical highs.”

Labour Market Indicators 2009-2019

Source: Reserve Bank of Australia (2019), Statement on Monetary Policy, May.

Explain the main trends in the unemployment rate, the underemployment rate and the
participation rate in the Australian labour market between 2011 and 2019.

[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.

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CHAPTER SUMMARY
UNEMPLOYMENT
1. Full employment of the labour force is a major goal of Australian 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 and available for work.
3. According to the Australian Bureau of Statistics (ABS), 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 2018-19 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 24 years) because they may
lack the education, training and experience required by employers compared to older workers.
Unemployment rates have tended to fall in non mining states such as NSW and Victoria and rise
in mining states such as Queensland and Western Australia since the end of the mining boom.
7. The main types of unemployment are classified as cyclical, structural, frictional, seasonal, long
term, hidden (or disguised) and regional. Underemployment is a situation where people who are
working part time or switched from full time to part time hours want to work more hours.
8. Some of the main causes of unemployment in the Australian economy include the following:

• A deficiency in aggregate demand leading to a deflationary/unemployment 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, skills and training; 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 the depreciation of human capital as labour skills are not used. 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 2020 © Tim Riley Publications Pty Ltd