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University of Wollongong
HSC Economics Student Conference
Tuesday 6 September 2016
Unemployment - Types Causes and Effects
Presenter- Peter Kennedy
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Head Teacher – Teaching & Learning Castle Hill High School
HSC Senior Marker
Economics Tutor – Macquarie University
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Unemployment – Types, Causes & Effects…
KEY DEFINITIONS...
Labour force status is a classification of the civilian population aged 15 years and over
into full-time employed, part-time employed, unemployed or not in the labour force.
People employed full time are those who usually work 35 hours or more a week (in all
jobs), and those who, although usually working less than 35 hours a week, worked 35
hours or more during the reference week.
People employed part time are those who usually work less than 35 hours a week (in
all jobs), and either did so during the reference week, or were not at work during the
reference week.
Unemployed refers to people who were not employed during the reference week and
had actively looked for work in the four weeks leading up to the reference week and
were available to start work during the reference week.
The unemployment rate is the number of unemployed people expressed as a proportion
of the labour force (i.e. employed plus unemployed).
People not in the labour force are those who were classified as neither employed nor
unemployed during the reference week.
Underemployed workers are employed people (who worked less than 35 hours in the
reference week) who want and are available for more hours of work than they currently
have.
The underemployment rate is the number of underemployed workers expressed as a
proportion of the labour force.
(A) TYPES AND CAUSES OF UNEMPLOYMENT
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The total level of unemployment existing at any point in time can be
decomposed into several types of unemployment, each of which has different
causes. The following are the main categories of unemployment.
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(i) Frictional, Structural and Seasonal Unemployment
Frictional Unemployment: this type of unemployment is caused by the search times needed for
workers to find jobs and for firms to find employees. Whether the workers are new entrants to the
labour force or existing members who have ‘quit’ or left jobs, it takes time for them to be offered
new jobs by employers and during these intervals the individuals are unemployed. Search activity,
carried out by both workers and firms, involves information – gathering, applications, interviews
and acceptance, all of which necessarily involve time.
Structural Unemployment: This type of unemployment is caused by changes in the structure of
the economy, which in turn are caused by either technological change or changes in the overall
pattern of demand. Structural change causes some sectors of the economy to contract and other
sectors to expand. Jobs are lost in the contracting sectors and created in the expanding sectors.
Unemployment now arises because of mismatches of skills and location. This means that those
made unemployed in the contracting sectors do not have the skills needed in the expanding
sectors or the locations of the expanding sectors where jobs are available is different from the
locations of the contracting sectors where the unemployed are located. To transfer to the new
jobs, the unemployed either have to undergo retraining, or have to move their place of residence.
These types of decisions are often difficult and require considerable time.
A Structural Unemployment and Job Polarisation –
The loss of middle skill and low skill jobs…..
Between 1966 and 2011 there has been substantial occupation changes including the emergence
of significant job polarisation with the loss of jobs that were high in routine task intensity or low
in the level of skill requirement. More specifically, the employment share of high skill jobs has increased
substantially, there has been a large a large decline in the share of middle skill jobs and
a small decline in the share of low skill jobs. Hence, there has been a distinctive polarisation with
the growth in high and low skill jobs but the decline in middle skill jobs in the 1980’s and 1990’s
while there was a general upskilling in the 1970’s and 2000’s.
With regard to the occupational composition of employment in Australia, over the past 30 years,
high growth rates have been observed in high skill occupations – managers and professional s in
particular , technicians to a lesser extent . Low growth rates were observed for middle skill
occupations of office / administration (clerical), production and operators / labourers, although for
office / administration the slower growth did not start until the 1980’s. There has been high
growth in low skill service jobs of sales, food and cleaning and, in particular, personal care.
Protective service sector jobs also have grown considerably, yet these occupations are probably
more correctly considered middle rather than low- skilled in Australia.
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Source: Jeff Borland and Michael Coelli, University of Melbourne , 2015
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There are many causes of structural unemployment, including poor educational levels, new
products, new technology, foreign competition, geographic differences, restricted entry into jobs
and changes in government priorities. Given the great dynamism of modern economies with
rapidly changing tastes and production techniques numerous sources of mismatching between
skills and jobs are likely to arise making a certain level of structural unemployment inevitable.
It is sometimes suggested that an important contributor to structural unemployment is the
minimum wage. Here the regulated minimum wage is above the productivity level of particular
groups of unskilled workers, which serves to work against them as they try to gain employment.
This is a common argument forwarded by members of the business community who attribute
Australia’s relatively high rate of youth unemployment to the level of junior wages that have to be
paid to school leavers as they are trained during their initial stage of employment.
Seasonal Unemployment: Seasonal unemployment is part of frictional unemployment but may
be categorised separately since specific industries or occupations are characterized by seasonal
work which may lead to unemployment. Examples may include workers employed during farm
harvest times or those working summer jobs such as in Christmas retailing or winter jobs in the
snowfields such as ski lift operators or instructors.
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Changing Labour Market Dynamics - Under – Utilised Young Workers….
Underemployment of young Australians is costing the economy up to $21 billion and up to 70 per
cent of university and TAFE students are accumulating HECS debts for jobs that won’t exist in 10
years, according to PwC. The PwC Young Workers Index has found that Australia has dropped
four places to 17th in OECD rankings for employment of under 25 year –olds. Australia now ranks
lower than all other OECD countries in the Asia Pacific. Modelling by PwC shows that boosting
our under 25s’ participation in employment, education or training to the same levels as that of
high-ranking Germany, would increase GDP by 3 per cent or $21 billion at today’s value.
The Foundation for Young Australian’s annual report found that despite young people staying in
education longer, they were still not getting the enterprising skills they needed to get a job. It’s
taking an average 4.7 years once they finish full-time education to find full – time work.
According to the foundation, in 2015, twenty five per cent of tertiary graduates were
unemployed or underemployed. In 2008, 84 per cent of university graduates were in full-time
work four months after leaving university by 2015, that figure has dropped to 65 per cent.
Source: PwC – Young Workers Index (2015) & Foundation for Young Australians (2015)
(ii) Cyclical (demand-deficient) and Wage – Induced Unemployment
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Cyclical (demand –deficient) Unemployment: This type of unemployment is caused by a
deficiency of aggregate demand for goods and services relative to the full employment level of
demand. The level of total demand in the economy is such that the volume of output satisfying this
demand does not require the full employment of labour. In other words, the economy is not
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generating enough jobs to employ all those wishing to work due to sub-optimal output because
aggregate demand is too low. Firms are not offering sufficient jobs to employ the entire labour
force because the demand for their output is too low. This type of unemployment is also termed
‘involuntary’ and is represented in the Keynesian Deflationary Gap model.
Cyclical unemployment is usually attributed directly to the lack of jobs caused by the business
cycle. Cyclical unemployment is typically caused by the lack of jobs created during a recession.
When real GDP falls many businesses cut back on production while others close down and new
employment becomes scarce with workers competing for a shrinking number of available jobs.
Sudden falls in consumption and investment lead to large jumps in the unemployment rate which
usually takes a longer period of time to come down again once the economy moves out of
recession and back into recovery mode.
The ‘Output Gap’ – an important indicator of cyclical unemployment
OECD data shows that the measured output gap for the Australian economy (output gaps are calculated as
actual GDP less potential GDP as a per cent of potential GDP) increased from -0.5 in 2009 to -1.5 in 2013
and -1.9 in 2015. The OECD forecast for Australia’s output gap is for it to fall slightly in 2016 to -1.8. This
is likely to coincide with a slight decrease in cyclical unemployment over the next year or so. Note, a
negative output gap means that there is spare capacity, or slack, in the economy due to weak demand.
Source: OECD 2013- 16
Wage – Induced Unemployment: This type is caused by workers demanding and obtaining
excessively high real wages, that is real wages above the level that would create full employment.
The main examples are the use of market power by strong trade unions to obtain higher wages
through the wage bargaining process, or a government’s use of power to raise legally determined
wage rates (such as minimum wages or award wages). It is argued here that the higher real wage
reduces the demand for labour by firms and results in some workers remaining employed and
being paid more while others become jobless and unpaid. From the perspective of full
employment, an excessive real wage is one that is too high to be compatible with the full
employment of labour.
(iii) Long Term and Hard Core Unemployment
Long term unemployment: Refers to those persons unemployed for over 12 months. This is
usually due to a lack of skills, training , education or the motivation to find secure and suitable
employment opportunities in the labour market. The long term unemployed are at risk of
developing welfare dependency where they rely on social security payments as there only source
of income.
A Unemployment is often a recurring experience for workers....
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By far the best predictor of whether someone is unemployed at any point in time is
whether they have experienced unemployment in the past.
Source: Myer, Lee and Wooden, Economic Record, March 2010
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Hard Core Unemployment: is a term used to refer to those people in the labour force who
experience chronic periods of unemployment or extended periods of long term unemployment.
Often these workers face particular personal difficulties, for example mental illness, emotional
problems, drug addiction or social dislocation issues that prevent them from securing
employment.
A Unemployment has a strong link with low educational attainment....
People with low educational attainment generally have poorer labour market
outcomes (compared to those who are better educated) and they are at greater
risk of experiencing persistent unemployment and welfare dependency.
Employment is the route out of disadvantage for most. But some job-poor
households (those working less than 35 hours per week) experience persistent
disadvantage.
Source: McLachlan R, Gilfillan G & Gordon J
Deep and Persistent Disadvantage in Australia
Productivity Commission, July 2013
(iv) Underemployment and Hidden Unemployment
According to the ABS, underemployment includes those members of the labour force that are
willing and able to do more work as well as people who are currently working but want to - and
can - work more hours. The underemployed are often persons working part – time who want to
work more hours or switch to full time employment. Alternatively, they may be full time
workers who have been moved back to part time hours while still desiring to work full time
Hidden Unemployment is where people have given up looking for work or receive support
from a spouse and are ineligible for welfare support or any ‘job search’ type of payment from
the government. The most common form of hidden unemployment is the discouraged worker
– a person who wants to work but who has given up searching for work because he or she
believes there will be no job offers for them.
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Discouraged workers’ are not the only source of hidden unemployment. Some observers have
noted that following the GFC, there has been an increasing incidence of experienced and highly
qualified workers who are between jobs and struggling to find their way back into employment.
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(B) Theories of Unemployment- the NAIRU, Okun’s law & Hysteresis
In the labour market there is a balance between the number of workers who are losing or leaving
jobs and the number of workers who are finding jobs. When the number of workers finding new
employment is equal to the number who are seeking work we have full employment in the labour
market and the rate of unemployment that corresponds to this situation is known as the natural
rate of unemployment.
The Monetarist version of the long-run Phillips curve presented a refinement of the natural rate
concept known as the non accelerating inflation rate of unemployment or the NAIRU. This is
the rate of unemployment for which there are no inflationary forces from excess demand in any
sectors of the economy. If the actual unemployment rate is forced below this crucial rate by an
expansion of aggregate demand for goods and services, the rate of inflation will begin to increase.
The greater the expansion in aggregate demand, the larger will be the excess-demand pressure
which will in turn lead to higher inflation and increasing inflationary expectations. The
unemployment rate corresponding with no excess- demand pressure on inflation is identified in this
model as the Non- Accelerating Inflation rate of Unemployment (NAIRU).
A Closer Look at the NAIRU Model of Unemployment…
Step1: First we need to look at the Phillips curve in the short run.
The short-run Philips curve is a curve showing the relationship between inflation and
unemployment, holding constant the expected inflation rate and the natural rate of
unemployment. Each of the points on the short-run Phillips curve (See Figure 1 - PC1 and PC2 )
shows a point which reflects the rate of unemployment and the inflation rate that will prevail
at a particular point in time, given that level of unemployment. If the unemployment rate falls,
inflation will rise and vice versa. Hence under these conditions, a trade- off was said to exist
between the inflation rate and the unemployment rate. This joint movement of the inflation rate
and the unemployment rate can be illustrated by a movement up the short-run Phillips curve
where lower levels of unemployment are followed by an increase in the inflation rate.
Alternatively, an increase in the level of unemployment will correspond to a lower level of
inflation as is indicated by a movement down the Phillips curve.
Step 2: Now we bring in the concepts of full employment, the natural rate of unemployment
and the long run Phillips curve.
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The unemployment rate at full employment is called the natural rate of unemployment.
Technically, full employment is a state in which all unemployment is frictional and structural and
there is no cyclical unemployment. Full employment is achieved when the economy is producing at
its long- run or trend level of output. The natural rate of unemployment varies because of
fluctuations in frictional and structural unemployment.
In terms of its link with inflation and inflationary expectations, the concept of a natural rate of
unemployment is most commonly developed through the ‘natural rate hypothesis’. This theory
was proposed independently in the mid- 1960’s by Edmund Phelps and by Milton Friedman.
According to the natural – rate hypothesis, full employment policies, based upon the incorrect
assumption that the Phillips curve does exist, will result in an accelerating rate of inflation.
Furthermore, it is suggested here that there is a unique level of unemployment around which
observed unemployment will fluctuate but that the economy will tend towards at any point in time.
This is depicted through the long – run Phillips curve model. The long – run Phillips curve
(LRPC) is always shown as a vertical line at the natural unemployment rate. The LRPC is always
depicted as a vertical line rising through a number of short – run Phillips curves (see Figure 1).
Each of these short –run Phillips curves corresponds to a different range of inflation rates for the
various levels of unemployment. In other words a higher short-run Philips curve implies a higher
expected rate of inflation for each level of unemployment. A decrease in inflation expectations will
lower the short-run Phillips curve, shifting it down by the amount of the fall in expected inflation.
Step 3: The NAIRU Model
As already noted, a more recent refinement to the natural rate of unemployment model is what is
termed the Non- Accelerating Inflation rate of Unemployment or the NAIRU. The unemployment
rate corresponding with no excess- demand pressure on inflation is identified in this model as the
NAIRU.
The NAIRU model of unemployment uses the adaptive expectations mechanism. Hence, it is
assumed here, that once the rate of inflation increases, higher inflationary expectations will feed
into higher money wage growth as workers seek to maintain their real wages. This in turn gives rise
to further inflation.
The N AIRU can be shown on the diagram provided as the level of unemployment corresponding to
the LRPC. Figure 1 depicts a separate Phillips curve for each expected rate of inflation and the
expected rate of inflation adapts to the previous periods actual inflation rate.
Assume the economy is initially has low inflation (P0), low inflationary expectations and an
unemployment rate equal to u*.Suppose the government attempts to reduce unemployment (from
u* down to u1 ) with expansionary policy and is willing to accept moderate inflation as a trade-off.
Expansionary fiscal (or monetary) policy will cause a multiplied expansion of output and a
reduction in the unemployment rate. Now consider the effects of expansionary policy when the
economy is initially at A. the increased demand for labour will reduce unemployment to u1 but now
the unemployment rate is below the NAIRU (U*- Long Run Phillips Curve), money wage growth will
increase and inflation will increase to P1on PC1. At this point inflation expectations will be revised
upwards and money wage bargaining will then reflect both the excess demand for labour (assuming
that aggregate demand is maintained) and the higher level of expected inflation. Thus inflation
expectations will begin to accelerate to P1 on PC2.
If policy maintains the economy at u1, inflation increases again and beyond P1. Reductions in
unemployment below u* imply not just a higher level of inflation but continually increasing levels of
inflation, that is accelerating inflation.
Hence, it is not realistic or feasible to attempt to reduce the unemployment rate below the NAIRU
because it is not only unsustainable but increasing and even accelerating inflation will be the main
consequence.
Step 4: What is the value of the NAIRU?
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As far as determining the actual value of the NAIRU this has become an increasingly complex
exercise involving elaborate specifications and econometric techniques. One recent study by two
academics from the University of Melbourne (Robert Dixon and Sarantis Tsiaplias) published in the
Economic Record (Dec 2009) found that the NAIRU varied over time and between 2001 and 2008
ranged from 4.5 per cent to 5 per cent.
Figure 1: The NAIRU and Short Run/Long Run Phillips Curves
LRPC = NAIRU
Okun’s Law & Hysteresis
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According to Olivier Blanchard and Jeffrey Sheen (2007), this has been the case in Australia
since 1983. The sum of the rate of labour force growth and of labour productivity growth was
approximately equal to 3.3% for each year between 1983 and 2006. Hence the importance of
maintaining a growth rate of above 3.5% for the Australian economy over this period in order to
reduce unemployment and prevent it from rising again.
The implicit message in the Okun’s Law equation is that growth in the aggregate production of
goods and services must be sufficient to generate enough extra jobs to provide for a growing
workforce, and to provide for the fact that each worker can produce a higher volume of output.
This is not to imply that an appropriate cure for unemployment is to reduce productivity growth
but rather to avoid increased unemployment, productivity growth must be used by firms to
increase the production of goods and services as opposed to save on the number of employed
workers. If output growth falls below the Okun’s Law bench mark, the unemployment rate will
increase. Alternatively, if output growth is above the bench mark rate then the unemployment rate
will fall.
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The relationship between output growth and the change in the unemployment rate is depicted in
the theory know as Okun’s Law (named after economist Arthur Okun). According to Okun’s
Law the annual growth rate of output has to be at least equal to the growth rate of the labour
force plus the growth rate of labour productivity in order to prevent unemployment from
rising.
For example, suppose the labour force grows at 1.9% per year and labour force productivity
(output per worker) grows at 1.4 % per year, then output must grow at:
1.9% + 1.4% = 3.3% per year
if the unemployment rate is to stay constant.
Hysteresis theory suggests that the natural rate of unemployment is not independent of actual
unemployment. This line of argument holds that the ‘natural rate’ depends on the history of
actual unemployment or that the rate of unemployment to which the economy eventually returns,
depends on the history of unemployment.
The hysteresis phenomenon is usually explained through one of two reasons. Firstly, that high
persistent unemployment has led some workers to remain unemployed for such a long time that
they have become unemployable due to losing skills, self esteem or labour market contacts. The
second version purports that high unemployment has led to a change in labour market
institutions, which has in turn led to an increase in the natural rate. More specifically,
governments offering more generous unemployment benefits have made it easier for the
unemployed to survive without constant employment which has fostered an increase in the natural
rate of unemployment.
While there would appear to be some degree of merit in each of these explanations it is difficult to
establish to what degree they can be used to explain the higher rates of natural unemployment
being experienced in modern economies. Some observers have argued that labour market
institutions are not that much different today to those that prevailed in the early 1970s when
unemployment was very low. This would tend to undermine the second line of argument and the
‘dependency’ assumption that is often used to criticise higher levels of welfare payments for the
unemployed.
A Australia’s Recent Unemployment Record – One to be Proud of?
Australia’s unemployment experience over the past two decades is worthy of both
celebration and concern. Following the recession of the early 1990s, unemployment
peaked in 1992 at 10.9%, then declined fairly consistently , so that in February 2008
unemployment was just below 4 per cent, its lowest level since 1974.
Unemployment then started to increase, reaching 5.8 per cent of the labour force between
June and August 2009 before declining to 5 per cent in December 2010 but increasing to 5.4
per cent by late 2012. While the increase in unemployment since the beginning of 2008 has
been significant, this is well below the increases in most other OECD countries. In mid-2012,
Australia had the 7th lowest unemployment rate in the OECD.
Partly reflecting the high level of part-time employment, Australia also has a high level of
underemployment – people who want to work longer hours than they do. In fact, Australia
has the highest head count rate of underemployment in the OECD (OECD, 2013), with the
result that labour force underutilisation in Australia is close to the OECD average.
There is another area in which Australia’s employment performance is very weak. On
standard measures of individual joblessness, Australia ranks 7th lowest in the OECD and
is 6 percentage points below the OECD average. When looking at the share of the working
age population living in jobless households, in contrast, Australia is the 5th highest in the
OECD and more than 4 percentage points above the OECD average. On the measure of
jobless households with children, Australia is again the 5th highest in the OECD and 5.5
percentage points above average.
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Source: Peter Whiteford
Social Policy Action Research Centre
Crawford School of Public Policy
The Australian National University 2013
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(C) Unemployment and Labour Force Underutilisation
…Recent trends in Australia’s Unemployment Rate…
In April 2016 Australia’s unemployment rate fell again to 5.7%.
Australia’s unemployment rate was 5.8% in February 2016
compared to 6.2% in February (2015 ).This was a slight
improvement on 2014 when the unemployment rate had reached
6.3% in November .
The labour force underutilisation rate (equal to the sum of the
unemployment rate and the underemployment rate) was measured
at 14.2% (male labour force underutilisation rate 12.3% while the
female labour force underutilisation rate was 16.4%,)of the
workforce in February 2016 compared to 14.9% by February 2015.
Labour Market Data –April 2016
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 Australia’s unemployment rate was flat at 5.7% in April, beating market
expectations.
 The total number of people with jobs rose by 10,800 in the month, the
Australian Bureau of Statistics , which was worse than expectations of a rise
of 12,000.
 Full-time employment fell by 9,300, while the number of part-time jobs was
up by 20,200.
 The participation rate, which refers to the number of people either
employed or actively looking for work, fell to 64.8%.
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The Australian labour market proved to be very resilient during the GFC with the rise in the
unemployment rate being contained to a modest 1.6%. The unemployment rate for the Australian
economy rose from a 4.2% low in 2007-08 to a peak of only 5.8% in 2008-09.The number of persons
unemployed rose by 189,100 persons, from 473,800 persons in 2007-08 to 662,900 persons in 2008-09
or 5.8% of the total labour force.
The Australian labour market was also quick to rebound following the GFC with the number of
unemployed persons falling from 662,900 to 598,400 representing an improvement in the
unemployment rate from a high of 5.8% to 5.1% by 2009-10. This trend continued in 2010-11 with
further gains in part time and full time employment and a reduction in the unemployment rate to 4.9% in
April 2011.
However by November 2013 it appeared that the ’party was over’ with the unemployment rate moving
back up to 5.8% after rising to 5.6% earlier in March 2013. By early 2014 it was clear that the labour
market was continuing to soften as in January the unemployment rate hit 6%, the highest it had been since
early 2003 and higher than at any point in time during the GFC. It was estimated that around 92,000 full –
time jobs had been lost during 2013 – clearly employment creation in Australian labour markets had stalled.
More specifically, ABS data has shown that Australia's unemployment rate increased by less than 0.1
percentage points to 6.0% in January 2014 based on unrounded estimates. The participation rate was unchanged
at 64.5% and employment decreased 3,700 to 11,459,500 with full-time employment decreasing by 7,100 to
7,953,000 and part-time employment increasing by 3,400 to 3,506,500.
A A Longer Term Perspective on Australian Unemployment....
There are sharp differences in the level of volatility of the unemployment rate across
the decades of the twentieth century. From Federation in 1901 to 1929, the
unemployment rate averaged around 5 per cent, with some significant ups and
downs.
The Great Depression of the 1930s witnessed a dramatic rise in unemployment,
peaking at nearly 20 per cent and this was followed by an equally dramatic fall from
the mid- 1930s to the middle of the Second World War. The period from 1942 to the
early 1970s saw unemployment rates that were relatively low and stable, falling
below 2 per cent during the immediate post – war period and again in the late 1960s.
From the early 1970s, unemployment drifted upwards with sharp peaks in the early
1980s (just over 10%) and the early 1990s (around 11.1% in 1992). Since 1993, the
trend has been downwards until by 2006 the unemployment rate dipped below 5 per
cent, a level last seen in the mid – 1970s.
From the early 1970s, unemployment drifted upwards with sharp peaks in the early
1980s (just over 10%) and the early 1990s (around 11.1% in 1992). Since 1993, the
trend has been downwards and by 2006 the unemployment rate had dipped below 5
per cent, a level last seen in the mid – 1970s.
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Source: Bhattacharya and Hatton, Economic Record, June 2011
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Long Term Unemployment
The percentage of long-term unemployed (people unemployed for one year or more) of ‘Long Term
Unemployed’ was 23% according to an Australian Bureau of Statistics (ABS) labour force survey for
January 2016.This was up from 19.6% in July 2012 and the 18% figure recorded in July 2010.
According to the ABS, the majority of unemployed people, (81%) were unemployed for less than one
year (short-term unemployed), with over a quarter of these (26%) having been unemployed for less
than four weeks. Of the short-term unemployed people, 13% reported that they had no difficulties in
finding another job.
It is worth noting that (according to ABS labour force data) of all unemployed people, 20% had never
worked before and 21% had worked previously, but not in the last two years. Four out of five
unemployed people (80%) had not received any offers of employment in the current period of
unemployment.
Long – Term Unemployment and Job Searching
"For long-term unemployed people the most commonly reported difficulties in finding a job was their
own health or a disability (18 per cent) and too many applicants for available jobs (14 per cent) while
34 per cent did not look for work.
Around 1.7 million people had started their current job in the last 12 months to July 2012. Nearly a
quarter of people (23 per cent) searched for less than a month before starting their job. Only five per
cent who had started a job had looked for work for one year or more.
Of those who had started a job in the last 12 months, 156,000 people had started their own business"
Source: Gligora, C. Director of Labour Force Surveys, ABS. December 2013
Youth Unemployment
In January 2016, the number of young people reportedly looking for full-time work (15 -24 years) was at
12.7% . During the period 1978 to 2013 Australia’s youth unemployment rate had averaged 13.6 % reaching
an all - time high of 20.3 % in October 1992 and a record low of 7.7% per cent in August 2008. For
comparisons of youth unemployment between countries the International Labour Organisation (ILO)
generally uses unemployed people between the ages of 15 and 24 years.
Labour Force Under-utilisation –an emerging issue!
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As observed by the Productivity Commission (2010), there is a growing level of criticism of the
accuracy of Australia’s unemployment data and the way we define and measure unemployment. More
specifically, it is claimed that ABS definitions of employment and unemployment have not changed for
decades and that there is a huge reserve of under - utilised workers that is creating a serious distortion
in the Australian labour market. When a broader interpretation of joblessness (for example, labour
force underutilization) is used, there is up to 1.7 million people who either want to work or want more
work as opposed to only around 710 ,700 as indicated by official unemployment figures (trend
estimate).
This has led to the calculation by the ABS of the labour force underutilisation rate (equal to the sum
of the unemployment rate and the underemployment rate) which was measured at 14.2% of the
workforce in January 2016 (in seasonally adjusted terms) compared to 14.9% in February 2015.
Underemployment – the general trend....
Between 2001 and the GFC of 2008, Australia’s labour market enjoyed falling underemployment
rates, from a peak of around 7.3% to a low point of near 5.8%. Underemployment then rose
peaking at around 7.8% in 2009 before falling back to 7% by 2011. However by February 2016
the underemployment rate was back up to 8.4% (above the GFC peak of 7.8% in trend terms).
In addition to unemployment and underemployment, the ABS also measures the extended
labour force underutilisation rate (see Figure 3). This includes an additional two groups of
people with marginal attachment to the labour force, namely:
(a) people who are actively looking for work and who could start within four weeks, but
are not available to start in the reference week; and
(b) discouraged job seekers.
Standard unemployment data simply compares the number of people who are employed (those
who have worked for at least an hour in the last week) with the number who are unemployed
(those who were looking for work in the past week but did not work for at least one hour).
However it fails to measure the degree of labour participation of various types of Australian
workers including older people, mothers with children trying to re-enter the workforce, people on
disability benefits, indigenous Australians in remote communities.
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Table 1: Six Different Ways of Measuring Unemployment and Underemployment
Labour Force Unemployment Rate
5.8% February 2016
The NAIRU
5 - 5.5% approx
Long Term Unemployment Rate
23 % Jan 2016
The Youth Unemployment Rate
12.65 % Jan 2016
Underemployment Rate
8.4% Feb 2016 (Seasonally adjusted)
Labour Force Under- Utilisation Rate
14.2% Feb 2016 (Seasonally adjusted)
All rates are expressed as a percentage of the workforce except for the Long Term
Unemployment Rate which is a percentage of the total unemployed.
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(D) Effects of Unemployment
The most commonly cited effect of unemployment is the opportunity cost of lost output and income.
When Real GDP is below the full employment level, national income will be lower than its potential as
will be living standards. In particular, the unemployed and their dependants will suffer economic and
social hardship due to relatively lower market income.
As market income is a primary determinant of the level of consumption that a householder will be able to
enjoy it is reasonable to assume that the unemployed will have less opportunity for spending and leisure.
Subsequently, unemployment is responsible for the formation of poverty traps and welfare
dependency.
In the economic sense, unemployment leads to a loss of human capital as labour not gainfully employed
does not contribute its skills and experience to the workforce. In this way unemployment leads to a
depreciation of human capital and the longer the duration of the unemployment experience the greater
the rate of depreciation. There is a personal and social cost here as the unemployed are also likely to
experience a loss of self – esteem and dignity. This may reduce their motivation to keep searching for
employment or undertake the necessary re-training and education to increase their skills in order to
increase their chances of being re- employed. Long term unemployment is seen as being particularly
damaging here as the likelihood of dependence on government welfare payments and income support is
significantly higher.
Attention is commonly drawn to the social costs of unemployment, particularly by economic agents
active in the welfare sector, the legal system and the education sector. The link between unemployment
and social issues such as drug dependency, alcoholism, domestic violence, family breakdown, mental
illness and risky or anti-social behaviour is well documented. These social problems are often 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.
A The Underutilisation of Labour – lost economic potential...
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The degree to which the available supply of labour is efficiently used is an
important economic and social issue. The unemployment rate, while widely used, is
an incomplete measure of labour underutilisation. Reflecting this, the ABS has
developed two broader measures for this purpose: the labour force underutilisation
rate (which covers the unemployed and underemployed) and the extended labour
force underutilisation rate (which covers underemployed workers; the unemployed;
and two groups of people marginally attached to the workforce)
Australia’s rate of labour underutilisation, using either of the broader ABS
measures, has declined considerably since the early 1990s, partly in response to the
strong growth of the economy. Much of this decline reflects a fall in the
unemployment rate.
The loss of output arising from frustrated job seekers and those available and
willing to work or to work more hours potentially represents a waste of the nation’s
economic potential. Reflecting this, governments around the world have become
increasingly focused on lessening barriers to workforce participation.
Page
Source: Banks. G., Advancing Australia’s Human Capital Agenda. Australian
Productivity Commission April (2010).
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Discouraged Workers – the unemployment problem we don’t see!
While the official ABS data is useful for making comparisons between the state of Australia’s labour
market and those of other economies, it does tend to mask some of the deeper seated problems that
continue to hinder the efficiency and equity of labour market outcomes. Issues such as the number of
‘discouraged workers’ who fail to be counted in official unemployment figures, mature-aged workers
who feel discriminated against by contemporary recruitment practices and women with children who
find it near impossible to negotiate more flexible work hours remain far from being resolved.
The issue of job insecurity and the risk of labour market participants experiencing underemployment,
has received heightened attention over recent years. Workers relying on casual or part- time work
arrangements make up a significant proportion of the Australian labour force. Data from the Household
Income and Labour Dynamics in Australia (HILDA) survey reveals that in the second half of 2010 about
32 per cent of all Australian employees were either employed on a casual or fixed term basis or were on
the level found by the HILDA survey in 2008, though it is difficult to ascertain as too what proportion of
these workers are disadvantaged.
The Stepping Stone Effect of Part Time
Employment…..
Part time employment increases the probability of future full- time
employment by approximately nine percentage points for males and
approximately six percentage points for females compared to those
who were initially not in the labour force.
However it does not appear to have the same ‘stepping stone’ effect
relative to unemployment.
Part – time employment helps maintain employment and also
provides an important avenue to social inclusion and helps build up
interpersonal skills and positive attitudes.
Page
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Source: Bathgate & Law(2014), Economic Record
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Unemployment, Labour Market Disadvantage & Social Exclusion.....
A Unemployment and Underemployment have a strong link with deep
social exclusion....
There are a number of indicators that are common to people experiencing deeper
social exclusion. The deeply excluded are more likely to have relatively low
levels of community interaction, are very likely to have a long-term medical
condition or disability and have characteristics that reduce their levels of
workforce participation which in turn contributes to lower economic resources.
Of the individuals aged 15 years plus who experienced deep social exclusion
between 2001 and 2010:
• just under a half had low levels of formal education
• close to 60 per cent were part of a jobless household
• just under 40 per cent were unemployed, underemployed or marginally
attached to the labour market
Source: McLachlan R, Gilfillan G & Gordon J
Deep and Persistent Disadvantage in Australia
Productivity Commission, July 2013
A A Final Thought - Reducing Unemployment Post Mining Boom..
Page
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The challenge ahead for policy makers is to have the economy generate more jobs in relative to the
adult population and increase the participation of various types of disadvantaged workers.
Older persons, mothers with or without dependent children who want to work, people on disability
benefits, indigenous Australians in remote communities, and inexperienced school leavers are
examples of community groups vulnerable to higher incidences of unemployment and
underemployment.
Does the current government have the political will or the moral courage to address the imbalances
already present in the Australian labour market or will budget constraints be used as an excuse for the
failure to act?
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