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Economic issues in the Australian economy

Unemployment

This tutorial was written by
Ken Edge
Head Teacher Social Science
Cardiff High School

Outcomes
Overview
Content
Review exercises
More

Outcomes

HSC Topic Three: Economic Issues is covered in the Board of Studies NSW Stage 6 Economics Syllabus (1999) on pages 37-39. The specific outcomes for this tutorial are:

A student:

H1 demonstrates understanding of economic terms, concepts and relationships
H2 analyses the economic role of individuals, firms, institutions and governments
H4 analyses the impact of global markets on the Australian and global economies
H7 evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments
H11 applies mathematical concepts in economic contexts.
Extract from Stage 6 Economic Syllabus. © Board of Studies, NSW, 1999.

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Being up to date and aware of contemporary issues

Students of Economics need to be aware of what is happening in the Australian Economy today and should, for instance, be aware of current employment statistics. There is an excellent web link to the Australian Bureau of Statistics in the section MORE on the bottom of this page - which contains a wealth of information.

Overview

During the 1980's and 1990's unemployment was one of Australia’s long term economic problems. The level of unemployment rose to 7% in January 2002. By the mid 2000’s the unemployment rate fell to very low levels as the Australian economy boomed and economic growth was high. By 2006 the unemployment rate had fallen to 5.1%. This was its lowest level since 1976. During 2007 and 2008 the unemployment rate fell below 5% and fell to just above 4%. The slowdown in growth in the Australian economy and the global recession caused an increase in unemployment and by July 2009, the unemployment rate had risen to 5.8%.

The growth of jobs in the labour market is closely linked to the level of economic activity (aggregate demand) in the economy.

The downturn in the US economy and global economies during 2007, 2008 and 2009 affected Australian exports, economic growth and projected unemployment levels.

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Content

  1. Measuring the labour force

    The Australian Bureau of Statistics (ABS) defines the labour force or workforce as people aged 15 years and over who are employed in full or part-time work and those who are actively seeking employment.

    People who are not in the labour force include full-time students, people who perform domestic duties, people who have retired and unemployed persons not actively seeking employment.

    Table 1 The Australian labour force, 2000 - 2007

    Full-time Employed Persons Part-time Employed Persons Unemployed persons Labour force
    2000 - 01 6 691 200 2 438 700 625 500 9 755 400
    June 2002 6 612 800 2 726 700 624 400 ??????
    2002 - 03 6,706.0 2,683.4 614.4 10,003.8
    2003 - 04 6,844.3 2,712.1 572.7 10,129.0
    004 - 05 7,038.5 2,787.9 540.5 10,366.8
    2005 - 06 7,182.6 2,881.7 527.1 10,591.5
    2006 - 07 7,393.3 2,941.2 489.0 10,823.5
    Source: ABS, Australian Economic Indicators, 1350.0 June 2009.

    Using the information from Table 1, the labour force can be calculated using the following relationships.

    Labour force = employed (part-time + full-time) + unemployed

    You will notice that the labour force figure is missing for June 2002.
    Test your skills and complete the first question in review activity two.

  2. The labour force participation rate

    The size of the labour force is influenced by a number of factors including the age and distribution of the population, migration and participation rates. In January 2010, the population of Australia was 22.14 million, with a working age population of 14.9 million.

    The labour force participation rate (LFPR) is the labour force expressed as a percentage of the working age population (civilian population aged 15 years and over).

    Equation showing the labour force participation rate

    Table 2 indicates the participation rates for males, females and all persons. One significant feature in the table is the difference in the participation rate between males and females.

    Table 2 Australian labour force participation rates, 1993 - 07

    Year Persons Males Females Population Aged 15 year plus
    1992 - 93 62.6 73.9 51.7 13 691 000
    1993 - 94 62.7 73.6 52.2 13 853 500
    1994 - 95 63.3 73.7 53.2 14 031 600
    1995 - 96 63.6 73.8 53.8 14 242 600
    1996 - 97 63.4 73.4 53.8 14 455 300
    1997 - 98 63.1 72.9 53.6 14 664 800
    1998 - 99 63.1 72.8 53.8 14 879 000
    1999 - 00 63.4 72.5 54.5 15 106 900
    2000 - 01 63.7 72.5 55.1 15 317 400
    June 2002 63.8 72.3 55.5 15 626 700
    2002 - 03 63.6 71.6 55.8 15,738.7
    2003 - 04 63.4 71.4 55.5 15,986.9
    2004 - 05 63.9 71.7 56.3 16,227.3
    2005 - 06 64.4 72.0 57.1 16,441.4
    2006 - 07 64.8 72.2 57.6 16,696.8
    Source: ABS, Australian Economic Indicators, 1350.0, June 2002.

    There are a number of factors that can affect the participation rate. The most important is the level of economic activity. In a recession, when job vacancies decrease, the participation rate falls as workers become disillusioned and give up seeking work. For example, in 1992-93 the participation rate fell to 62.6% as the unemployment rate increased to 11%. During the economic boom and high growth years of 2006-2007 the participation rate rose to 64.8%, but recession meant that by January 2010 it had fallen to 65.2%.

    There are a number of other factors that can affect the participation rate, including the number of students staying at school after reaching 15 years of age, the number married women seeking employment, or by people retiring from employment at an older age.

  3. The rate of unemployment

    To determine the rate of unemployment the ABS conducts regular surveys of the labour force. The unemployed are persons aged 15 years and over who are not employed during the survey week, or who have actively looked for work in the four week period leading up to the survey week.

    The rate of unemployment is then the percentage of the labour force that are actively seeking employment.

    Unemployment rate

  4. Types of unemployment

    To help the government develop effective microeconomic and macroeconomic policies for reducing the level of unemployment, it is useful to distinguish between the various types of unemployment. These are outlined as follows.

    • Structural unemployment
      Structural unemployment occurs because of issues relating to the labour market. With rapid developments in technology, workers may be displaced because their skills do not match with those required in the new industries. For example, a worker who is retrenched from a car manufacturer might find it difficult in the short run to find employment in growing industries such as property management or financial services.

      Also, real wage increases may be greater than productivity increases, resulting in capital equipment being substituted for more expensive labour. Most of Australia’s unemployment issues in the 1990s related to structural problems in the economy. Microeconomic reform and increased efficiencies, including more flexible labour market policies of the 1990s combined with high economic growth rates, reduced structural unemployment and the unemployment rate fell significantly.

    • Cyclical unemployment
      Cyclical unemployment occurs because of variations in the level of economic activity (business cycles). During times of boom (as in 2000 - 2001 and 2005 - 2007), cyclical unemployment decreases as more jobs become available and the demand for labour increases. During downturns and recessions (as in 1992 – 3, 2008-9), the level of aggregate demand weakens, demand for labour falls and so cyclical unemployment increases.

    • Frictional unemployment
      Frictional unemployment refers to and includes those workers who are temporarily unemployed because they are between jobs or new entrants to the labour market (eg. School leavers).

    • Hidden unemployment
      This includes people who have been discouraged from seeking employment due to adverse economic conditions, or who have given up trying to obtain work. If hidden unemployment increases, the participation rate will decrease. During the global recession 2009, many employees made agreements with employers to reduce working hours, which helped save jobs and meant the unemployment rate did not fall as much as predicted.

    • Seasonal unemployment
      Seasonal unemployment is the result of the seasonal nature of work in some industries, e.g. fruit picking.

    • Long-term unemployed
      These are workers who have been out of work for more than twelve months. This type of unemployment is usually the result of structural unemployment described above. The long-term unemployed do not always have the skills to match job vacancies.

    • Hard-core unemployed
      The hard-core unemployed includes those people who are considered unsuitable for employment due to personal characteristics.

    • Natural rate of unemployment
      It is not possible for the entire labour force to be employed at any one time. The natural rate of unemployment occurs when there is full employment in the economy (demand and supply for labour are in equilibrium). The natural rate of unemployment only includes frictional, structural, seasonal and hard-core unemployment. Cyclical unemployment is not included.

      The natural rate of unemployment is often referred to in Australia as the Non Accelerating Inflation Rate of Unemployment (NAIRU). The NAIRU is that level of unemployment that can be achieved using expansionary macroeconomic policy, without causing inflation. Since the unemployment at the NAIRU is structural unemployment, it follows that microeconomic policies are needed to reduce unemployment any further.

      The natural rate of unemployment can vary over time. In the late 1960s and 1970s the natural rate was between 1% and 2%. Currently, the natural rate of unemployment is considered to be around 5%. During the economic boom of 2005 – 2007 the natural rate of unemployment fell as structural unemployment was reduced.

Trends in Unemployment levels

Graph 1: Australia’s unemployment rate & LFPR

Labour force
Source: RBA ChartPack

Note in the chart above, in 1998, the annual average unemployment rate was 7.7%. Since then it has generally fallen;the annual unemployment rate was 4.2% in 2008 but rose in 2009 due to the GFC and recession, then falling slightly as recovery got underway.

Source: ABS

The level of unemployment is closely related to the business cycle and the level of aggregate demand. For example, during the economic expansion of the 2000s the unemployment rate declined to 4.1% by 2008. However, with the onset of the GFC and recession, the unemployment rate increased to 5.8% by July 2009.

High labour costs have also caused problems in the labour market. If employers are faced with a situation where real wage levels are too high, they will substitute capital for labour, causing job losses. Lack of flexibility in the labour market can have a similar effect. As production methods have changed due to competitive pressures of globalisation and new technologies, the labour market has become more flexible. For example, much production has moved to a ‘just in time’ focus of producing only enough goods and services to meet consumers needs, with no need to store inventory. As a result, demand for labour has changed, including more part time and flexible work arrangements. Successive changes to the industrial relations system beginning in the 1990s with the introduction of enterprise bargaining, through to the Work Choices system introduced by the Howard government, were designed to support a more flexible demand for labour. The experience of the 2008-9 downturn illustrated labour market flexibility under the Rudd Government’s Fair Work system, whereby jobs were saved via employer/employee agreements to reduce working hours.

Microeconomic reforms, structural changes and the introduction of new technologies altered the level of production and consumption in the manufacturing sector in the late 1980s and 1990s. The textile, clothing and footwear and motor vehicle industries were dramatically affected by these reforms and many jobs were lost. Governments need a range of measures to reduce structural unemployment, including assistance for job seekers provided by Job Services Australia.

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Review exercises

Activity 1

Read the following extracts:

Tortoise Approach is Just the Job

The economy of the USA, underpinned by a technology-sector boom, was the envy of industrialised economies in the late 1990s. Over the period 1997 to 2000, economic growth in the USA averaged 4.3%, well above the longer-term average of about 3%. At the same time, growth in payrolls (employment) averaged 250,000 a month, when rates of around 120,000 were considered normal.

Strong jobs growth had the desirable effect of pushing the unemployment rate to a 30-year low of 3.9% in October 2000.

But this proved fleeting. A combination of higher interest rates and the bursting of the tech bubble pushed the US into recession in 2001. The effect was to reverse six years of progress in a mere 18 months, as the unemployment rate rose to 6%.

This would represent the smallest gap between US and Australian unemployment rates in more than 12 years. The last time Australia had a lower unemployment rate than the US was in March 1983. Now the weakness of the labour market is considered a key risk to economic recovery.

Source: Craig, ‘Tortoise Approach is Just the Job’, Australian Financial Review 6 July 2002

Most challenging global economic conditions since the Great Depression
The global economy is experiencing the worst recession since the Great Depression, which has dragged the Australian economy into recession.
Real GDP is expected to contract slightly in 2009-10. This contraction is expected to be milder than almost any other advanced economy. An economic recovery is expected to gather pace from early 2010. The downturn will impact significantly on jobs, with employment contracting over 2009-10, and gradually growing in late 2010.

Major economic parameters

Table: Major economic parameters

The Hon Wayne Swan, Australian Treasurer, Australian Budget

Use the above three extracts to answer the following questions.

  1. What was the impact of the “technology sector boom” on the level of employment in the United States and Australia in the late 1990s?

    Answer

  2. Outline the economic significance of the comment “the smallest gap between US and Australian unemployment rates in more than 12 years”.

    Answer

  3. Explain why the Australian Treasurer was expecting unemployment to increase in 2010. Identify the type of unemployment expected and research what actually happened.

    Answer

Activity 2

  1. Use the information in Table 1 to calculate the labour force for June 2002.

    Answer

  2. Use the information from Table 1 and Table 2 to calculate the labour force participation rate for 2000-01.

    Answer

  3. Use the information from Table 1 to calculate the unemployment rate for 2001 - 02.

    Answer

Activity 3

Select the correct answer for the following true or false questions. Rewrite the correct answer for those that are false.

Questions Answers
a) Cyclical unemployment occurs because of declining levels of aggregate demand.

True False
b) The labour force is comprised of those who are in work or are actively seeking work.

True False
c) The level of economic growth does not affect the rate of unemployment.

True False
d) Structural unemployment can be caused by real wages rising faster than productivity.

True False
e) The labour force participation rate is the proportion of people looking for jobs.

True False
f) The rate of unemployment is the proportion of the labour force actively seeking employment.

True False
g) A person who works less than two hours a week is counted as unemployed.

True False
h) A recession will cause a rise in the participation rate.

True False
i) The natural rate of unemployment only includes structural unemployment.

True False
j) The long term unemployed are those people unemployed for more than twelve months. True False

Answers

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More

Review the Reserve Bank of Australia (external website) web site for media releases on economic management issues.

The Australian Bureau of Statistics. (external website) reviews unemployment figures each month. Access the web site and update the statistical information contained in the tutorial. For instance, if I click on the 'Labour Force' button on the left of the ABS home page I can see the following statistics for May 2009:

MAY KEY FIGURES

  Apr 2009 May 2009 Apr 09 to May 09 May 08 to May 09
Trend
Employed persons ('000) 10 789.3 10 788.1 -1.2 0.1%
Unemployed persons ('000) 638.0 654.9 16.9 39.8%
Unemployment rate (%) 5.6 5.7 0.1pts 1.6pts
Participation rate (%) 65.5 65.5 0.0pts 0.0pts
Seasonally Adjusted
Employed persons ('000) 10 794.8 10 793.1 -1.7 0.3%
Unemployed persons ('000) 624.0 651.2 27.2 37.7%
Unemployment rate (%) 5.5 5.7 0.2pts 1.5pts
Participation rate (%) 65.4 65.5 0.1pts 0.1pts

Employed Persons Unemployment Rate
Employed persons Unemployment rate

MAY KEY POINTS

TREND ESTIMATES (MONTHLY CHANGE)

SEASONALLY ADJUSTED ESTIMATES (MONTHLY CHANGE)

EMPLOYMENT
UNEMPLOYMENT
UNEMPLOYMENT RATE
PARTICIPATION RATE
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