Unemployment HSC Notes

• Costs to the government:

• High U/E → significant impact on government revenue and expenditure
• Falling incomes due to unemployment → less tax revenue
• Government forced to pay more transfer payments e.g. unemployment benefits + funding training and labour market programs
• Hence decrease in revenue and increase in expenditure will cause a deterioration in government’s budget balance

• Lower wage growth:

• High levels of unemployment mean that there is an excess supply of labour → fall in equilibrium level of wages.
• If regulations are imposed to restrict the downward flexibility of wages, higher unemployment is likely to lead to slower wage growth, rather than wage reductions

SOCIAL COSTS

• Increased Inequality:

• Unemployment → more frequent in low income earners e.g. young and unskilled
• Unemployment means loss of income → ∴ become relatively worse-off compared to high income earners →overall inequality in income distribution

• Other Social Costs:

• Unemployment → results in an increase in social problems including:

• Severe financial hardship and poverty
• Increased levels of debt
• Homelessness and housing problems
• Family tensions and breakdown
• Boredom
• Loss of work skills
• Increases social isolation
• Increased level of crime
• Erosion of confidence and self esteem
• Poor health, psychological disorders and suicide

• Social problems have am economic cost for the community as whole since more resources must be directed toward dealing with them

• Unemployment for particular groups:

• High youth unemployment: a result of employers seeking higher skilled and more experienced workers. ∴ Higher school retention rates → 1980s: 1/3 completed secondary school now stabilised at around 75%. Government policy →reducing social security benefits to the youth and increasing study allowances → increase retention rates
• Indigenous Australians: Relatively high unemployment especially in regional areas 2007 Study: Indigenous U/E is 13% compared to 4% of non-indigenous people. Indigenous have much lower participation rate
• Age Related Unemployment: Older workers find it harder to find jobs once they have lost one job. Average length of time for job seeker over 55 is 47 weeks compared to 20 weeks for 20-24 year olds. Once a person over 55 has lost a job, they often become discouraged to seek jobs and are then officially unemployed.
• Specific Regions: Suffer from higher unemployment than other regions. E.g. Capital cities in Australia had an unemployment rate of 4.6% compared to 5.6% in non-metropolitan areas.
• People Born Outside of Australia: Unemployment rates higher for these people, caused by language barriers. Australian born residents: 4% compared to 5% of people born outside Australia.

Historical/Recent Unemployment Trends in Australia

In the past thirty years, the unemployment rate has been a constant challenge for the Australian economy. Since the onset of the 20th century until the depression in 1930s, the unemployment rate ranged from 3-6%. During The Great Depression, the unemployment rate peaked at more than 19%, which then took nine years and the start of WWII in 1939 to return below 4%, at one point it even got down to less than 1%. Since the end of the world war and until 1973-74, unemployment averaged only 2%, which would have been regarded as the full employment rate (the other 2% was due to frictional unemployment) this is referred to as the Golden Age.

1973-74 marked the end of the Golden Age and the onset of a problem known as STAGFLATION – combination of stagnant economic growth and high inflation. During this period the world economy also experienced its first OPEC oil shock, this in conjunction with the Whitlam government economic policies led to a wage explosion, causing the real cost of labour to be higher than it had been.

Since 1974, Australia’s unemployment rate moves in a cyclical pattern. The rate shot up after the 1974-74 recession, but then by the first half of 1981 fell to 5.6%. Then it shot back up to 10.3% in the recession of 1981-82, and again dropped to 5.7% in late 1989. The recession of 1990-91 caused the unemployment rate to jump to 10.7% and then steadily decreased to just less than 4% in 2007-08. From this we see that after the onset of each recession, the unemployment rate shoots up to an even higher level than before, and then take a much longer time to fall back. This phenomenon is referred to as THE RATCHET EFFECT, where unemployment ratchets even higher with each successive recession and takes longer to get back down before the next recession. But it is worthwhile to note, that the 2008-09 recession, did not follow this cyclical pattern.

The level of unemployment peaked in the early 1990 at 10.9% in 1992-93 which was the highest level since The Great Depression. This increase may have been the direct corollary of the severe recession in the 1990s, both in Australia and the Global Economy. Cutbacks in production and the closure of firms was caused by falling aggregate demand which in turn led to ‘shedding’ of labour and hence an increase in unemployment.

Extensive structural and microeconomic reform during this time period, also results in a worsening of the unemployment problem (increase structural unemployment). People who lost their jobs in declining industries found it difficult to obtain new jobs in the growth industries, and these job vacancies required higher or completely different skills. These structural changes were exemplified by the introduction of new technologies and production techniques.

Post 1991 recession, there was a gradually decline in the unemployment rate, generating the longest continual economic growth in Australia’s economic history i.e. 17 years. In 2008 unemployment dropped to 3.9% its lowest in 34 years. There was some disparity of unemployment rate between the states, with WA and QLD benefitting the greatest from the rapid growth of the mining industry, due to the high commodity prices. However, this extremely low unemployment rate was below our NAIRU and the shortages of skilled workers posed another problem.

The 2008 GFC and resulting downturn in global economic activity in 2009 helped to reduce the demand for labour. It was estimated that unemployment would reach 8.5% by 2010/11 and would recover by 2011/12. Yet since Australia‘s labour force proved to be resilient, the Australian economic was not as affected as predicted and as a result the unemployment rate did not increase by much. Since the downturn, many firms were unwilling to let go of their workers as there was already a shortage of workers. Instead many people were switched from full-time to part time jobs, in effect increasing the underemployment. Therefore since underemployment is not counted in the unemployment figures, the unemployment rate is insufficient and masks some of the problems.

To keep reducing the unemployment rate, Australia needs to achieve economic growth rates of more than 3.5%. This relationship between economic growth and the unemployment rate is explained by Okun’s Law; to reduce unemployment, the annual rate of economic growth much exceed the sum of percentage growth in productivity plus the increase in the size of the labour force in any one year. This explains why during 1990s, the decline in the unemployment rate slowed, as in the 1990s labour productivity increased which meant that new workers did not need to be hired. By the early 2000s, the productivity growth slowed and hence the unemployment rate fell.

Lower productivity growth in the short run will create more jobs as firms will hire more workers to increase production. But in the long run, stronger productivity growth will lead to stronger economic growth and more job creation.

The Natural Rate of Unemployment (NAIRU)

        

 

The natural rate of unemployment in effects represents the supply constraint of the economy the limit of labour resources that can be utilised. Once this level is reached, further cuts I wages or policies will not cause permanent reductions in the unemployment rate, instead it may cause other effects such as an increase in inflation. In 2009 the Australian Treasury’s economic modelling database estimated the NAIRU to be 5.0% (down from 5.2% in 2000). A lower NAIRU means that an economy has more capacity to grow without increasing inflation.

During the resources boom, the unemployment rate fell down below the estimated NAIRU level. Some economists argued that this continual growth will put upward pressure on inflation. Since the inflation did not fluctuate, it shows that the real NAIRU is much lower than estimated.

Causes of Unemployment

• There are many explanations for unemployment:

• People do not have adequate opportunities for education and training.
• People do not have the right skills to match job vacancies.
• Wage rates are too high.
• There are too many regulations surrounding employment, discouraging employers from hiring new employees.
• Some people choose to remain unemployed, because they can receive government welfare benefits instead.
• Workers in high income economies cannot compete with the people who are paid low wages in developing countries.
• Job losses are an inevitable result of new labour saving technologies.
• Economic growth has been too low to generate adequate employment growth.

• The Level of Economic Growth

• Demand for labour is a DERIVED DEMAND – derived from the demand for goods and services that labour helps to produce. For example if there is a downturn in the level of AD, this may be reflected in a down turn in the demand for labour. The decline in AD could be due to:

• An economic downturn with lower domestic consumption and investment spending.
• Government policies designed to dampen demand.
• A decrease in the demand for Australia ’s exports due to slower growth in the economies of our major trading partners or less competitive Australian good and services in world markets.
• The effects of a global recession, such as the global downturn of recent years, which increased unemployment rates sharply across the world.

• Generally is economic growth is below 3%, then the unemployment rate starts to rise. When growth is about 3.5% unemployment stats to fall.
• There is also a time lag of 6 months for a change in economic growth to be reflected by a change in the unemployment rate.

• Australian government’s macroeconomic policy can influence the level of cyclical unemployment.

• Economic Growth Constraints

• Long term → influenced by the level of sustained economic growth achieved in an economy. If there are significant constraints on economic growth, the economy will struggle to create enough jobs to reduce the unemployment.
• 1980s → inflationary concerns + CAD → constrained economic growth → unemployment problem unemployment
• From mid 1990s, inflation was less of a constraint to economic growth, but CAD was still a major constraint.

• Rising participation Rates:

• Increase in LF participation rates → increase in rate of unemployment in the short term
• More people actively looking for work (previously not actively looking hence were hidden)
• Occurs in times of economic recovery, as discouraged job seekers start looking for work. Hence they renter the workforce.
• Hence during economic growth, level of unemployment only reduced slightly, as more people looking for jobs

• Structural Change:

• These changes cause create significant short term costs.
• A major cost is the loss of jobs in efficient industries and in area undergoing major reforms e.g. public utilities being privatised.
• Large tariff cuts → loss of jobs in manufacturing industries
• Long term → growth of more efficient industries from structural change → net benefit for labour market.

• Technological Change:

• Rapid technological change → unemployment in short term
• Improved products and methods of production → substitution of capital for labour → workers become redundant
• Unemployment caused by technological changed referred to as structural change
• Longer term → technological change create more jobs than they eliminate

• Productivity

• High productivity growth → slow unemployment growth, as less employees are reacquired per unit of out put
• Long term, high productivity growth→ Higher economic growth → lower rates of unemployment

• A Rapid Increase in Labour Costs

• Unemployment rises due to sudden increase in labour costs:

• Shortage of skilled labour → employers competition for limited pool of labour → forcing labour costs up wage inflation → force RA to increase IR
• Excessive wage demands → nominal wages rise faster than inflation and productivity increases → affect business profit levels. Businesses will then be forced to substitute capital for labour, increase the unemployment rate.
• Fair Work Australia increase award wages → greater costs of labour for employers. It may also be too high for some, in which case they will let some workers go.
• Substantial rise in labour on-costs. Additional costs of employing labour such as payroll tax, superannuation, sick leave, and holiday pay and workers compensation. This is affected by policy decisions. If these on-costs are too high, may discourage employers from hiring new workers

• Inflexibility of Labour Market

• Australia’s relatively high minimum wage rates make it less attractive for employers to hire less skilled workers → higher level of unemployment.
• Deregulation of labour market → lower minimum wages and a lower level of unemployment.

Polices Reducing Unemployment

• Macroeconomic policies used to sustain economic growth and avoid a recession,

• Goals of sustaining GDP growth within 3-4% band and keep inflation in 2-3% band has been central to macroeconomic policy since early 1990s.
• GFC caused a shift towards expansionary fiscal policy
• Government directly intervened in economy→ government spending stimulated aggregate demand

• Microeconomic reforms aim to increase economic growth and job creation, and target structural unemployment

• Main policies such as tariff reductions deregulation, national competition policy, privatisation and tax reform

• Labour market polices, aim to help individuals gain employment

• These polices available from government range from:

• Education and training programs for people who are out of work or at risk of losing jobs
• Measures to improve matching of unemployment persons to job vacancies
• Policies to increase the demand for labour, by making it more attractive for employers to hire workers such as through wage subsidies.

• Howard Government → encourages greater demand for labour by reducing regulation of the labour market. 2006 government exempted businesses with less than 100 employees from unfair dismissal laws.
• Howard government also aimed to improve in incentives for unemployed individuals to renter workforce such as ‘welfare to work’ polices. Making it more difficult to obtain income support payments if out of work.
• Governments can also improve the efficient with which individuals are able to find work, → reduce FRICTIONAL UNEMPLOYMENT. Rudd government created Job Services Australia, collection of competing employment agencies in contract with federal governments, for successfully placing unemployed into jobs.
• Active labour market programs. Such as subsidies for employers to hire employees, programs to help unemployed people acquire work skills, training and apprenticeships programs and individual assistance for employees to help them locate suitable training and jobs
• Global downturn → renewed attention onto labour market polices. COAG established $1.5 billion Jobs an d Training Compact → measures targeted at young unemployed people