Governments all over the world struggle in order to achieve sustained reduction in unemployment. A variety of strategies have been used over the last two decades, with mixed success.
Unemployment is caused by a range of short and long-term factors:
The level of economic growth: Unemployment is closely related with the overall level of economic growth. It is generally felt that unemployment starts rising when growth is around 3% or lower. On the other hand, when growth is around 4% or higher the level of unemployment falls. Generally a change in the level of economic growth takes a period of around six months to influence the level of unemployment. the slowdown in economic growth between 1995 and 1997 contributed to unemployment drifting upwards in the 9% range, while faster economic growth between1997 and 2000 brought it back down to 7%. The government has argued that to make significant progress on unemployment, Australia must sustain annual economic growth of 4% or more, indicating that unemployment unlikely to fall in 1999 – 00, given its estimate of 3% growth in this period.
The stance of macroeconomic policies: The government’s macroeconomic policy settings can influence the level of unemployment in the short to medium term, through their influence on the business cycle. Between 1992 and 1994 the Government had an expansionary macroeconomic policy, with large budget deficits and low interest rates, which were intended to boost economic activity and lower unemployment. the impact of these policies was felt through a substantial lift in economic activity by 1994 and a reduction in unemployment from over 11% to around 8.5% by mid 1995 . A shift towards tighter monetary and then tighter fiscal policy contributed to slower economic growth in 1996-97, which resulted in a slight increase in the level of unemployment. Interest rate reductions helped accelerate growth from early 1997, encouraging consumer spending and business investment.
Constraints on economic growth: Over the longer-term, unemployment is influenced by the level of sustained economic growth achieved in a country. If there are significant constraints on economic growth, this contributes to the unemployment problem by preventing the level of growth necessary to reduce unemployment. During the 1990s Australia’s current account deficit problems and to a much lesser extent inflationary concerns were significant constraints on economic growth, and have therefore contributed to the unemployment problem.
Rising participation rates: The rate of involuntary unemployment. Participation rates in Australia have been gradually increasing in recent decades, particularly reflecting the rising proportion of women in the labour force. Participation rates also rose during the early mid 1990s in response to improved job prospects after recession. This has contributed to the unemployment problem because of the limited number of jobs available for job seekers.
Structural change: The process of implementing changes often involves significant short-term costs. One of the most significant costs in the short-term is a loss of jobs in less efficient industries and in areas undergoing major reforms such as public utilities which are being privatised. Large tariff cuts have contributed to the loss of jobs in manufacturing industries, new technologies have allowed workers to be replaced in service industries and governments have reduced their workforces significantly.
Productivity: The productivity of labour is a significant factor affecting the decision of employers to increase or reduce employment. Low productivity tends to encourage employers to use capital in preference to labour in production. Despite improved performance in the 1990s, overall labour productivity in Australia is still only around average levels for industrialised countries.
Labour market: Inflexibility of the labour market and high minimum wages may result in a lack of equilibrium between demand and supply of labour. Prime minister Howard has argued that the tradition of high minimum wages in Australia is a factor behind Australia’s high level of unemployment. The Government argues that the labour market is too highly regulated, and that the price of high minimum wages is a higher level of unemployment.