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Economics

Home > Economics > Economic issues > Economic issues in the Australian economy - Unemployment

Outcomes
Overview
Content
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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.

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. 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 PersonsUnemployment Rate

MAY KEY POINTS

TREND ESTIMATES (MONTHLY CHANGE)

• EMPLOYMENT increased to 10,788,100
• UNEMPLOYMENT increased to 654,900
• UNEMPLOYMENT RATE remained at 5.7%
• PARTICIPATION RATE increased to 65.5%

SEASONALLY ADJUSTED ESTIMATES (MONTHLY CHANGE)

EMPLOYMENT

• decreased by 1,700 to 10,793,100. Full-time employment decreased by 26,200 to 7,643,100 and part-time employment increased by 24,500 to 3,150,000.

UNEMPLOYMENT

• increased by 27,200 to 651,200. The number of persons looking for full-time work increased by 30,000 to 482,600 and the number of persons looking for part-time work decreased by 2,800 to 168,600.

UNEMPLOYMENT RATE

• increased by 0.2 percentage points to 5.7%. The male unemployment rate increased by 0.3 percentage points to 5.9%, and the female unemployment rate increased by 0.1 percentage points to 5.4%.

PARTICIPATION RATE

• increased by 0.1 percentage point to 65.5%.

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 to below 5% and fell to just above 4%. The slowdown in growth in the Australian economy and the great recession caused unemployment to rise and by May 2009, the unemployment rate had risen to 5.7%

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 lebels.

Content

1. Measuring the labour force

   The Australian Bureau of Statistics (ABS) defines the labour force or workforce as people aged of 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, 1993 - 2007

   	Full-time Employed Persons	Part-time Employed Persons	Unemployed persons	Labour force
   1992 - 93	5 837 100	1 796 800	940 500	8 574 400
   1993 - 94	5 933 400	1 868 600	888 500	8 690 500
   1994 - 95	6 122 000	1 990 600	768 600	8 881 200
   1995 - 96	6 265 700	2 058 500	736 500	9 060 700
   1996 - 97	6 276 100	2 127 900	764 900	9 168 900
   1997 - 98	6 328 800	2 189 800	737 800	9 256 400
   1998 - 99	6 432 100	2 271 300	691 700	9 395 100
   1999 - 00	6 590 700	2 349 200	634 500	9 574 400
   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
   2004 - 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 September 2001, the population of Australia was 19.54 million, with a working age population of 15.4 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).

   

   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 leave the labour market. For example, in 1992-93 the participation rate fell to 62.6% and the unemployment rate increased 11%. During the economic boom and high growth years of 2006-2007 the participation rate rose to 68.4.

   During times of economic upswings there is an increase in the number of jobs and the participation rate. For example, in 2000 - 01 the participation rate was 63.7% while the unemployment rate decreased to 6.4%. This was partly due to the technology led global economic boom. A mining industry and export boom, especially in Western Australia  and Queensland increased male participation rates to 72.2 in 2006-07.

   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.

   

   
   
   
4. Types of unemployment

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

   • 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.

   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 1990's relate to structural problems in the economy. Microeconomic reform and increased efficiencies, especially with more flexible labour market policies during the era of Work Choices combined with high economic growth reduced structural unemployment and the unemployment rate fell significantly. The great recession of 2008 and 2009 increased cyclical unemployment.

   • 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. During downturns and recessions (as in 1992 - 3), the level of aggregate demand weakens and unemployment increases.

   • Frictional unemployment

   Frictional unemployment refers to and includes those workers who are temporarily unemployed because they are between jobs.

   • 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.

   • Seasonal unemployment

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

5. 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 is a socially accepted measure and only includes frictional, structural, seasonal and hard-core unemployment. Cyclical unemployment is not included.

   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.

6. Trends in Unemployment levels

   Graph 1: Australia’s unemployment rate

   

   Unemployment Rate

   

   For technical information see Endnote 1

   Source: ABS data available on request, Labour Force Survey

   Note in the chart above the percentage of the unemployed is on the right vertical axis.In 1998, the annual average unemployment rate was 7.7%. Since then it has generally fallen and the annual unemployment rate was 4.2% in 2008.

   Source: ABS

   The level of unemployment is closely related to the business cycle and the level of aggregate demand. For example, during the boom in the late 1980s the unemployment rate declined to under six per cent. However, with the tightening of monetary policy by the Reserve Bank to reduce inflationary pressures, the unemployment rate increased to over 10% in 1992. Since then the unemployment rate has gradually declined, reflecting higher levels of economic growth.

   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. As production methods changed due to globalisation, and new techniques to reduce production, inventory and costs were used, the labour force became more flexible. Production 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 changed, and included more part time and flexible work arrangements. Eventually a new industrial relations system called Work Choices was introduced by the Howard government to support a more flexible demand for labour.

   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, footwear and clothing and motor vehicle industries were dramatically affected by these reforms and many jobs were lost.

Review exercises

Activity 1