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Chapter 8
Unemployment
Total Australian Labour Force = Employed (part time + full time) + Unemployed
The Australian Bureau of Statistics (ABS) uses the following definitions to determine the persons who
are counted as part of the Australian labour force or workforce:
• The employed include persons aged 15 years and over who during the ABS reference week worked
for at least one hour per week for pay, profit, commission or payment in kind in a job, business
or on a farm; or worked for one hour or more without pay in a family business or on a farm; or
were employees who had a job but were not at work because they were on paid leave, on a shift
arrangement, on strike or locked out, or on workers’ compensation.
• Employers or own account workers (i.e. the self employed) who had a job, business or farm.
• The unemployed include persons 15 years and over who were not employed during the reference
week, but had actively looked for full time or part time work and were available for work, or were
waiting to start a new job at any time in the four weeks up to the end of the reference week.
Table 8.1: The Australian Labour Force 2003-04 to 2011-12
Those persons who are not classified as part of the Australian workforce include the following categories:
• Children under 15 years of age.
• Full time non working students above 15 years of age who are engaged in full time study.
• Unemployed persons who are not actively seeking either full time or part time employment.
As shown in Table 8.1, in 2011-12, the Australian labour force totalled 12,131,800 persons, of which
8,065,500 or 66.5% were employed full time; 3,435,000 or 28.3% were employed part time; and
631,300 or 5.2% were classified as unemployed. The size of Australia’s labour force is determined by
the following four specific factors: the size and growth rate of the population; net migration; the age
distribution of the population; and the participation rate of the working age population:
1. The size of the Australian population in 2011-12 was approximately 22,485,300 persons. The
civilian population over 15 years of age was 18,595,500 in 2011-12, but only 12,131,800 were
counted as part of the labour force (refer to Table 8.2). This meant that the participation rate in
2011-12 was 65.2%. Population growth (258,600 in 2010-11) is influenced by the rate of natural
increase and net migration. The population growth rate (1.2% in 2010-11) is equal to the sum of
the rate of natural increase (150,500 in 2010-11) plus net migration (108,100 in 2010-11) i.e.
2. The level of net migration adds to the skills base and size of the Australian labour force. The level
of net migration in 2010-11 was 108,100 less than half the migrant intake in 2008-09. This was
due to a reduction in the migration intake by the Australian government after the Global Financial
Crisis in 2008-09 which led to higher unemployment in the Australian economy.
3. The age distribution of the population has an effect on the potential size of the labour force
because more people in the 15 years to 64 years age group, as a proportion of the total population,
will increase the potential pool of workers. In 2010-11, there were 15,034,900 people in the 15 to
64 year age group, representing some 67.3% of the total Australian population of 22,328,900.
4. The participation rate of the working age population (15 to 64 years) refers to the percentage
of the working age population actually in the labour force (either employed full or part time or
unemployed but actively looking for work). The equation for the participation rate is as follows:
In 2011-12 the participation rate was 65.2% down from 65.6% in 2010-11 (see Table 8.2). The
participation rate varies with the level of economic activity, rising during booms (e.g. from 63.5%
in 2003-04 to 65.3% in 2007-08 and 2008-09) when more jobs are available. It tends to fall during
recessions or periods of low growth when unemployment rises and job vacancies fall (e.g. from
65.6% in 2010-11 to 65.2% in 2011-12). Two groups that have an impact on the participation
rate are young people looking for their first job (such as students and school leavers) and women
with young children returning to the labour force. The participation rate for males is higher than
for females but the participation rate for females has tended to increase over time (e.g. from 55.6%
in 2003-04 to 59.1% in 2010-11) whereas the participation rate for males has tended to remain
relatively stable at around 72%. Participation rates for males, females and persons were relatively
stable during the period of weaker labour demand associated with the Global Financial Crisis in
2008-09, but declined slightly in 2011-12 because of uneven growth in the Australian economy.
Unemployment refers to people who are willing and able to work, actively seeking work, but are unable
to find suitable employment. In Australia, unemployment is measured by a monthly Australian Bureau
of Statistics (ABS) telephone survey of the labour force. To be counted as unemployed by the ABS
labour force survey, a person must be available for work and fall into one of the two following categories:
1. Had actively looked for full time or part time work at any time in the four weeks up to the end of
the reference week and were available for work in the reference week; or
2. Were waiting to start a new job within four weeks from the end of the reference week and could
have started in the reference week if the job had been available then.
The unemployment rate is calculated as a percentage of the labour force, which includes all persons
employed (i.e. full time plus part time workers), plus all unemployed persons i.e.
In 2011-12 there were 8,065,500 persons employed full time, 3,435,000 persons employed part time,
and 631,300 persons classified as unemployed. This gave a total labour force of 12,131,800 persons.
The unemployment rate calculated by the ABS in June 2012 was therefore 5.2% i.e.
Unemployment Rate for June 2012 = 631,300 100
12,131,800 x 1 = 5.2%
% of Workforce
8
7
6
5
4
3
2
1
0
99-0 00-1 01-2 02-3 03-4 04-5 05-6 06-7 07-8 08-9 09-10 10-11 11-12
In 2008-09 the Global %Financial Crisis and recession had a major impact on the Australian labour
of Workforce
market, with unemployment rising from 4.2% in 2007-08 to 5.8% in 2008-09 due to the low rate of
economic growth of 1.3% (refer to Table 8.3). In 2008-09 many employers cut hours of work and
switched workers from full time to part time work. There were also major retrenchments in industries
affected by the GFC such as mining, manufacturing and finance. However with economic growth
of 2.3% in 2009-10 the unemployment rate fell back to 5.1% and to 4.9% in 2010-11. In 2011-
12 an uneven pattern of growth and structural change led to retrenchments in industries such as car
manufacturing, steel, retailing, building and construction and the unemployment rate rose to 5.2%.
Another trend in unemployment in Australia is the high incidence of long term unemployment (i.e.
persons unemployed for more than 12 months) and the increasing duration of unemployment. Long
term unemployment rose from 14.2% to 19.5% of the total number unemployed between 2007-08
and 2010-11 as shown in Table 8.3. The average duration of unemployment was around 56.3 weeks.
The major reasons for being unemployed between 2009-10 and 2011-12 are shown in Table 8.4. The
reasons for unemployment in 2011-12 included the following:
• Loss of job or being made redundant accounted for 35.7% of the total unemployed;
• Leaving a job accounted for 23.3% of the total unemployed;
Table 8.4: Unemployed Persons in Australia - Reason for Leaving Last Job 2009-12
2010-11 215,300
143,200 128,300
117,400 35.6% 23.7% 21.2% 19.4%
2011-12 225,400
146,900 141,200
117,400 35.7% 23.3% 22.4% 18.6%
Source: ABS (2012), Australian Economic Indicators, Catalogue 1350.0, July.
• Never having worked (looking for a first job) accounted for 22.4% of the total unemployed; and
• Being a former worker (re-entering the labour force) accounted for 18.6% of the total unemployed.
There was an increase in the percentage of job losers between 2007-08 and 2008-09 because of the
impact of the Global Financial Crisis. However the percentage of job leavers fell as workers placed more
emphasis on job security. The percentages of first time workers and former workers fell in 2008-09 as
some workers gave up looking for jobs as the labour market weakened due to the GFC. But jobs growth
occurred between 2009-10 and 2010-11 due to economic recovery, and there was a decline in job losses.
In 2011-12 an increase in job losses occurred due to the uneven pattern of growth in the Australian
economy and the negative impact of the high value of the Australian dollar on the competitiveness of
manufacturing firms such as Toyota, Holden Ford and Blue Scope Steel which retrenched workers.
Unemployment rates according to sex and age between 2005-06 and 2011-12 are shown in Table 8.5.
The unemployment rate for young (15 to 19 years) males and females looking for full time work was
four to five times the rate for males and females over twenty years of age. Young males (15-19 years)
had an unemployment rate of 21.7% in 2011-12 compared to 3.9% for males 20 years and over.
The corresponding unemployment rates for females were 26% and 5.4%. Young people therefore
experience more difficulty in securing employment because of a lack of skills, training and experience.
This leads to high rates of youth unemployment for 15-19 year olds seeking their first job.
The distribution of unemployment between Australian states changed between 2006 and 2008 as the
labour market reached full employment. Most states recorded falls in their unemployment rates in 2008
(see Table 8.6), with the lowest unemployment rates in the resource rich states of Western Australia
(3%) and Queensland (3.8%) which had strong labour demand due to the global resources boom.
Table 8.5: Unemployment Rate by Sex and Age Group 2005-2012 (annual average %)
Males Looking for Full Time Work Females Looking for Full Time Work
15-19 years 20+ years 15-19 years 20+ years
All states experienced strong employment growth in 2008, with the national average being 2.3% in the
year to September 2008, and the unemployment rate fell to 4.3% (see Table 8.6). The global resources
boom and the large rise in the terms of trade led to a reallocation of the economy’s resources (including
labour and capital), away from non resource rich states such as NSW, Victoria and South Australia,
to the resource rich states of Western Australia and Queensland, where mining accounts for a large
proportion of their state product. These states recorded higher economic and employment growth and
lower levels of unemployment than the non resource rich states between 2003 and 2008.
The impact of the Global Financial Crisis and recession in 2008 led to negative employment growth
and rising unemployment rates in all states in 2009, with the national unemployment rate increasing
from 4.3% in 2008 to 5.8% (see Table 8.6). Large rises in unemployment in Western Australia and
Queensland reflected a contraction in mining output, whilst in the larger states of NSW and Victoria it
was caused by a fall in employment in manufacturing and the financial sector. State unemployment rates
generally fell in 2010-11 due to a national economic recovery, but uneven growth and retrenchments in
manufacturing increased unemployment rates in Victoria (5.3%) and South Australia (5.9%) in 2012.
REVIEW QUESTIONS
MEASUREMENT AND RECENT TRENDS IN UNEMPLOYMENT
1. What is meant by the labour force? How is the size of the labour force measured by the ABS?
Which groups are included and not included in the Australian labour force?
2. Refer to Table 8.1 and discuss the changes in the composition of the Australian labour force
between 2003-04 and 2011-12.
3. Discuss the four main factors influencing the size of the Australian labour force.
4. What is the participation rate and how is it measured? What factors influence the participation
rate? Refer to Table 8.2 and compare the trends for male and female participation rates
between 2003-04 and 2011-12.
5. What is unemployment? How is it defined and measured by the ABS? What has been the trend
in the Australian unemployment rate in the 1970s, 1980s, 1990s and 2000s?
6. Discuss recent trends in long term unemployment and the main reasons for unemployment.
7. Discuss the reasons for the higher rates of unemployment experienced by young people.
8. Account for the trends in the unemployment rates of the states between 2008 and 2012.
Discuss the impact of the global financial crisis and recession on the labour market in 2008-09.
Figure 8.2: The Keynesian Deflationary Figure 8.3: The AD/AS Deflationary
or Unemployment Gap or Unemployment Gap
AS AD AS
AD 1
deflationary gap a
} AD
b
deflationary gap
a b
AS AD
AD 1
0 0
}
Wage Rate
DL SL
unemployment minimum or
W1 award wage
SL DL
0
Q L1 QL Q L2 Quantity of Labour
and footwear, steel and passenger motor vehicles have also been forced to reduce their workforces
because of tariff and quota cuts introduced by the government in 1988, 1991, 2000, 2005 and 2010.
Although some industries have contracted in manufacturing, new industries have been established and
others have expanded, creating new employment opportunities in the services sector. In the 1990s there
was also widespread reform of Public Trading Enterprises through deregulation and privatisation, which
led to an increase in workforce downsizing and the retrenchment of some labour in affected industries.
An important factor that may cause unemployment is the role of wage expectations in pushing up the
price of labour relative to capital. Rapid rises in real wage costs will reduce the demand for labour and
provide employers with the incentive to substitute capital for labour, causing a rise in what is known as
voluntary unemployment or wage induced unemployment. For example, if trade unions have large
bargaining power and win large wage increases, which may be inconsistent with industry’s capacity to
pay or productivity levels, businesses may cut wage costs by making some labour redundant.
This is illustrated in Figure 8.4 where the demand for labour (DL) in a competitive labour market is a
negative function of the wage rate and slopes downwards from left to right. The supply of labour (SL)
is a positive function of the wage rate and slopes upwards from left to right. If a minimum award wage
(or Modern Award) of W1 is established above the market equilibrium wage rate of W by wage fixing
tribunals or trade union bargaining power raising wages above equilibrium, unemployment of QL1QL2
will occur since the demand for labour (QL1) is less than the supply of labour (QL2) at wage rate W1.
Australian governments have tried to control wages growth through a system of enterprise wage
bargaining in the labour market. This has led to less reliance by workers on adjustments to the safety
net of the National Minimum Wage and Modern Awards set by Fair Work Australia and state industrial
tribunals for wage increases. With the introduction of enterprise bargaining in 1991 as a wage fixing
principle, and the spread of enterprise agreements in the labour market in the 1990s and 2000s, the
percentage of workers reliant on arbitrated awards for pay rises fell from 67% of employees in 1990
to around 15.2% by 2012. This has helped to link wage increases to improvements in productivity
that reflect individual enterprise and industry conditions. As a result, employers’ demand for labour
increased and this is one factor that led to a permanent lowering of unemployment in Australia in the
late 1990s and early to mid 2000s. The Howard government’s labour market reforms in the Workplace
Relations Amendment Act (WorkChoices) in 2006 sought to shift more workers away from awards to
individual agreements, arguing that this would stimulate employment and reduce unemployment.
The labour market is very dynamic with many factors influencing the flow of information between job
seekers and potential employers. A lack of efficiency in the labour market in matching labour skills with
the jobs available can influence the level of frictional unemployment. Rigidities in the labour market
like government regulations (e.g. superannuation, taxation, workers’ compensation, unfair dismissals
legislation and award conditions) can also reduce the hiring intentions (through higher ‘on costs’ of
labour) of employers, causing unemployment. Also if workers do not have access to education and
training they will be less skilled and in lower demand by employers for the jobs available. Unemployment
can therefore be caused by high ‘on costs’ of labour and a lack of skills, education and training.
Successive Australian governments have addressed the issue of improving the education, training and
skills of the labour force by implementing labour market programmes such as Building Australia’s Future
Workforce (2011), the Job Compact, the Job Network, the National Education Framework and Welfare
to Work. The National Training Authority was formed to increase apprenticeships to develop the skills of
young people (15 to 19 years) who have a higher incidence of unemployment than mature age workers.
The Non Accelerating Inflation Rate of Unemployment (NAIRU)
Full employment is where the quantity of labour demanded equals the quantity of labour supplied. The
unemployment rate at full employment is called the natural rate of unemployment. The natural rate
of unemployment fluctuates because of changes in the levels of frictional and structural unemployment
in the labour market. Some workers will be unemployed because they are in between jobs, and others
because they lack the skills necessary for the jobs available. In Australia, empirical research by Treasury
(2011) estimates the natural rate of unemployment at between 5% and 6% of the Australian workforce.
Figure 8.5 illustrates the concept of the natural rate of unemployment. The real wage rate is measured
on the vertical axis and the quantity of labour on the horizontal axis. The demand for labour (DL) is
a negative function of the real wage rate and the supply of labour (SL) is a positive function of the real
wage rate. The labour force is denoted by the vertical line LF. Full employment is where equilibrium
(E) occurs in the labour market at real wage W and labour quantity QL. The distance EU (QN - QL) is
equivalent to the natural rate of unemployment. Some workers are unemployed (due to frictional and
structural factors) because they are unable to find work at the equilibrium real wage rate of W.
Monetarist economists such as Milton Friedman used the natural rate of unemployment in the 1970s
to develop a concept called the non accelerating inflation rate of unemployment (NAIRU). This refers
to a rate of unemployment that is consistent with a constant inflation rate or no change in the inflation
rate. Figure 8.6 illustrates the Short Run Phillips’ Curve (SRPC) which shows the short run tradeoff
between the rates of inflation and unemployment. For example an economy may have 6% inflation and
Figure 8.5: The Natural Rate of Figure 8.6: The LRPC and the NAIRU
Unemployment
Real Wage LF Inflation % LRPC 1 LRPC
DL
6% A
E U
W
3% B
C
SRPC
0%
5% 6% SRPC1
SL DL NAIRU1 NAIRU Unemployment %
0
QL QN Q of L
These changes further deregulated the industrial relations system, with the government believing that
the new reforms would lead to further gains in employment and productivity, and a reduction in the
unemployment rate because of greater flexibility in wage and employment setting procedures.
With the election of the Rudd Labor government in 2007, the Workplace Relations Amendment (Transition
to Fairness) Act 2008 and the Fair Work Act 2009 were passed to strengthen the safety net of the workplace
relations system. This included the introduction of ten new National Employment Standards, Modern
Awards and annual adjustments to the National Minimum Wage by Fair Work Australia. Emphasis was
also placed on collective bargaining, with individual workplace agreements such as AWAs phased out.
The negotiation of enterprise agreements are subject to a Better Off Overall Test (BOOT) to ensure that
workers under enterprise agreements receive better than minimum conditions of employment, and have
an incentive to raise productivity to receive higher wages.
REVIEW QUESTIONS
THE TYPES, CAUSES AND EFFECTS OF UNEMPLOYMENT
1. Using examples, distinguish between cyclical, structural, frictional and seasonal unemployment.
2. What is long term unemployment? How does it differ to underemployment and hidden
unemployment? How does the ABS calculate the labour underutilisation rate?
3. Refer to Figures 8.2 and 8.3 and the text and explain how a deficiency in aggregate demand
can cause cyclical or involuntary unemployment to occur in the economy.
4. Using examples, explain how structural change can lead to structural unemployment.
5. Refer to Figure 8.4 and explain how excessive wage expectations might affect unemployment.
6. What is meant by the natural rate of unemployment? Refer to Figure 8.5 and explain how
unemployment can arise in the labour market when labour demand equals labour supply.
7. Refer to Figure 8.6 and explain the Non Accelerating Inflation Rate of Unemployment (NAIRU).
How can the government try to reduce the Non Accelerating Inflation Rate of Unemployment?
8. Discuss the main groups in society affected by high rates of unemployment and long term
unemployment. Why are certain groups more likely to experience unemployment than others?
9. Discuss the economic and social costs of unemployment in the Australian economy.
10. Discuss government policies that can be used to reduce the incidence of cyclical unemployment.
11. Discuss government policies to reduce the incidence of structural and long term unemployment.
12. Discuss the reasons for the skills shortage in Australia and the policies used by the Australian
government to address the skills shortage.
13. Discuss the government’s use of the Jobs and Training Compact to address the problem of rising
unemployment due to the impact of the Global Financial Crisis and recession on the Australian
labour market in 2009-10.
Refer to the table above of selected data for the Australian labour force between 2008-09
and 2011-12 and answer the questions below. Marks
3. Calculate the change in the unemployment rate between 2010-11 and 2011-12. (2)
In the lead up to and during the GFC the unemployment rate rose by a total of around 1.6% from
4.2% to 5.8% in Australia, compared with around a 2.75% rise in Canada, a 3.5% rise in New
Zealand and a 5.75% rise in the USA. Not only was the increase in Australia’s unemployment
rate relatively modest, but the subsequent recovery has been substantial with the unemployment
rate falling to 4.9% as at March 2011, lower than most of the major advanced economies.”
Explain recent trends in Australia’s unemployment rate and the relationship between changes in
economic growth, employment and the unemployment rate.
CHAPTER SUMMARY
UNEMPLOYMENT
1. Full employment of the labour force is a major goal of government economic policy.
2. The labour force consists of all persons employed (i.e. both full time and part time employees) plus
unemployed persons registered as actively seeking work.
3. According to the Australian Bureau of Statistics, persons over 15 years who are currently employed
for at least one hour per week, plus self employed persons and those unemployed but actively
seeking work are included in the Australian labour force.
4. The size of the labour force is determined by factors such as the size and growth of the population;
the age distribution of the population; and the participation rate of the working age population.
5. The unemployment rate is calculated as the percentage of the total labour force classified as
unemployed. In 2011-12 the unemployment rate in Australia was 5.2% of the labour force.
6. The unemployment rate peaked in the recession of the early 1990s when it was 11% of the labour
force. It fell from 11% in 1992 to an historic low of 4.2% in 2007-08, before rising to 5.8% in
2008-09 due to the impact of the Global Financial Crisis and recession.
Unemployment rates tend to be higher for young people 15 to 19 years because they may
lack the education, training and experience required by employers compared to older workers.
Unemployment rates tend to be lower in mining states such as Queensland and Western Australia
compared to states such as NSW and Victoria with lower levels of mining activity.
7. The main types of unemployment are classified as cyclical, structural, frictional, seasonal,
underemployment, long term, hidden and regional.
• Structural changes in production and technology may make some labour redundant because of
a mismatch between the labour skills demanded and the skills supplied by the labour force; and
• Excessive wage expectations may lead to rising wage costs for employers and a lower demand
for labour, causing employers to substitute capital for labour in production.
9. The natural rate of unemployment is where some workers remain unemployed due to frictional
and structural factors in the labour market, eventhough the demand and supply of labour are in
equilibrium in the labour market. The Non Accelerating Inflation Rate of Unemployment (NAIRU)
is the rate of unemployment that is consistent with a constant or non accelerating inflation rate.
10. Some of the main groups affected by unemployment include young people; workers with low levels
of education and skills; blue collar workers in manufacturing; migrants from non English speaking
backgrounds; and Aborigines and Torres Strait Islanders.
11. The economic effects of unemployment include the opportunity cost of lost output and income of the
unemployed and a depreciation of human capital as labour skills are lost. The unemployed also
suffer from lower incomes and a loss of self esteem the longer they are unemployed. Other costs
may include an increased tax burden on the employed to fund unemployment benefits and a rise
in cyclical expenditure by the government on welfare payments to the unemployed.
12. Unemployment also results in social costs to the community as the unemployed may experience
health problems; alcohol or drug dependency; and a breakdown in their family relationships.
Unemployment has also been linked to rising crime rates and anti-social behaviour by the
unemployed as they may become marginalised and detached from mainstream society.