Anne Trang

Economics Essay Unemployment

What are the causes and consequences of unemployment? Evaluate the
governments role in managing unemployment in Australia over the past 15 years.
An unemployed person is a person of working age, that is, 15 years or older,
who are actively looking for work but have not found any work (for at least an hour
per week) as yet. The unemployment rate is calculated by dividing the number of
unemployed persons over the total number of people in the labour force. This is
expressed as a percentage. Causes of unemployment include the level of economic
growth, the stance of macroeconomic policies, constraints on the economic
growth, rising participation rates, structural changes within the economy,
technological changes, the level of labour productivity in the economy, wage
growth and the flexibility of the labour market. Unemployment, if sustained at high
levels for a long period of time may have both adverse economic and social
effects. Therefore the government strives to keep the level of unemployment as
close as it can to the natural rate of unemployment (approx. 6% in Australia)
through macroeconomic and microeconomic policies. In Australia, the main
government policies used are microeconomic, involved in promoting structural
changes in the labour market.
Since the demand for labour is derived from the level of aggregate demand
for goods and services produced in an economy, the economic climate of both the
global and domestic economies are one of the main contributors to the level of
unemployment. For example, an economic downturn would lower both domestic
spending and investment levels meaning firms would produce less. Less production
means less labour is needed. This would cause a rise to occur in the level of
unemployment. If the global economy is in a recession, the demand for Australian
exports would dampen, and hence the level of aggregate demand would decrease.
If the economy is growing too fast, government policies may also result in reduced
aggregate demand. Reduced aggregate demand mean reduced demand for labour
and hence a rise in the unemployment level would arise. For example the
slowdown in economic activity in late 2000 cause the unemployment rate to
exceed 7%, but an improvement in economic growth in 2002, brought the level
back down to 6% - believed to be the natural rate of unemployment in the
Australian economy.
Changes in the level of aggregate demand usually affect cyclical
unemployment. Unemployment is a lagging indicator of economic growth as it
usually takes at least six months before the effects on unemployment is felt.
Generally, it is believed that economic growth has to be above 4% for the
unemployment rate to decrease.
Another reason why the economic climate is a major contributor to the level
of unemployment is because of its influence on the governments stance on
macroeconomic policies. If the economic growth is thought to be too high, the
government may tighten monetary policy or decrease government expenditure to
dampen demand. If the economy is in a recession, the government would use
expansionary policies to increase demand in the economy. For example in the early
1990s, when the Australian economy was in a recession, the government ran large
budget deficits and low interest rates to boost economic growth. This came to an
effect in 1994 where the unemployment rate fell from 11% to 8.5%. In 1996-97,
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the tightening of both monetary and fiscal policy lead to an increase of the rate to
9% in 1997. However, at times, for example, the mild tightening of policies may
not have such a dramatic impact as there may be greater factors attributing
coming from the external sector such as in 2002.
Another factor that affects the level of unemployment may be constraints to
sustained economic growth. For example inflation levels and worsening of the
current account deficit restricted economic growth in the 1980s and contributed to
the unemployment problem.
Rising participation levels inspired by strong economic growth and increased
flexibility for females in recent years has also influence the unemployment level.
Since there are now more people looking for work and unless they find a job
immediately, they would join the ranks of the unemployed, the rate of
unemployment would seem to decrease more slowly.
Structural changes that have occurred in the economy have created and
removed jobs. In the short term, jobs in inefficient industries, areas undergoing
major reforms such as the privatisation of state enterprises and industries were
there are major tariff cuts are lost. Hence, there will be an increase in the level of
unemployment. However, in the long term, the growth of more efficient industries
should contribute to a rise in job opportunities.
Another factor linked to structural change is technological advancements. In
the short term, as methods of production are continually improved, substitution of
capital in place of labour would occur causing some workers to become redundant.
In the long run, however, technological change may create more jobs as there will
be changing demand patterns. This would only help those that are redundant only
if it is provided that an adequate retraining program is put in place for them.
The productivity of labour also contributes to employment levels. If labour
productivity is low, employers may want to increase efficiency by substituting the
labour for capital. Hence, there wont be an improvement in the unemployment
rate. However, high productivity levels means a higher level of output from the
same number of workers. In this case, employers may not hire more workers, also
leading to no improvement in unemployment levels.
The mismatch of the skills demanded in the labour market and those that the
unemployed currently possess is also a contributing factor to unemployment, in
particular, structural unemployment. In the late 1990s there was a significant lack
of supply of skills required for jobs such as computer programming, nursing, etc
This indicates the need for people to be more prepared and equipped with more
skills when entering the labour market.
Wage rates would affect the decision of employers to employ more workers.
Hence, if wage growth is high, meaning cost of labour is high, employers would be
discouraged to open up job opportunities and hence an increase in the
unemployment rate would be experienced. If unions cause an outbreak in wage
increases that cut into the entrepreneurs profits, employers will either substitute
capital for labour or simply go out of business. Hence there will be an increase in
unemployment levels. The same affect would also occur if the Industrial Relations
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Commission decides to increase the Safety Net Wage to improve living standards
of low income workers of if there is a surge in labour on costs eg. insurance,
superannuation, etc
The above factor is also related to the inflexibility of the labour market
where, due to regulation, higher minimum wages result compared to if wages were
set simply through interaction of demand and supply for labour
Sustained high levels of unemployment can have both serious economic and
social effects in the economy. Economically, unemployment means that the
economy is not using its resources to its full capacity, meaning total output is lower
than what it could potentially be. This means lower household income and hence
expenditure, leading to lower sales and profits, leading to decrease in business
investment and production. This will induce all over again, a lower level of
employment.
A reduction in living standards in the long run will occur, as unemployed
persons will still continue to use resources without contributing to the production
process. A lower level of production in consumer goods means a decline in the
level of economic growth and standards of living, whilst a reduction in the level of
capital goods mean a lower capacity to produce in the future and hence a lower
rate of economic growth and development would occur in the future.
When people are unemployed for long periods of time they lose labour
market skills, self-esteem and experience making them less employable. High
unemployment levels also mean new members to the labour force such as school
leavers and university graduates would not have a chance to obtain labour market
skills after leaving their educational institutions.
Unemployment means falling income levels. This means less revenue for
governments. On top of this, the government would be forced to fund transfer
payments in the form of unemployment benefits as well as re-training programs.
This decrease in revenue alongside increase in government expenditure means a
deterioration in the governments budget will occur.
High unemployment means there is an excess supply of labour. This means
there will be a slower growth in wages.
Social consequences of unemployment include the development of increased
inequality experienced between low and high income earners. Young and unskilled
workers who also happen to be low income earners contribute largely to the pool of
unemployed persons. Loss of income for these people makes them relatively worse
off than high-income unemployed persons. This means there is redistribution of
income away from the bottom percentiles of income earners and hence a greater
income inequality would result.
Other social costs include increased levels of debt, homelessness and
housing problems, severe financial poverty, family tensions and breakdowns,
alienation from the rest of society, crime, reduced self-esteem and confidence,
poor health, psychological disorders, suicide and loss of work skills and loss of
touch with the working world. The economic side of these consequences is that
society would need to use more resources to deal with them. For example, money
will need to be spent on health and welfare services, police services, etcrather
than used to satisfy other community wants.
As it can be seen, high levels of unemployment have many negative impacts.
Therefore the Australian government strives to keep this level as close as possible
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to the natural level of unemployment by attacking the causes of unemployment.

Macroeconomic policies are used to deal with cyclical unemployment, such as
lowering interest rates, increasing public expenditure or tax cuts. However, the
main types of unemployment experienced in the Australian economy in the last 15
years have been due to structural factors. Therefore, the main policies that have
been used are microeconomic policies that sought to encourage structural changes
in the economy.
For example, in the early 1990s the Keating government introduced a policy
called Working Nation. This included labour market assistance, apprenticeships
and education and training programs to help people of the long-term unemployed
regain and attain new skills to become more employable.
These policies helped with the beginning of a long period of sustained growth
enabled the unemployment rate to be reduced from 10.7% in the late 1990s to
8.2% in 1996. The percentage of long-term unemployed persons also dropped from
34.4% in 1995 to 29.2% in 1997. However this increased again to 31.6% in 1998.
However, in the late 1990s, the Howard Government felt that under this
policy, most people after undergoing the training program simply rejoined the pool
of the unemployed again hence making the policy ineffective and costly. The
unemployment rate was starting to creep back up again to 9% in 1997. (This may
also have been due to increase in participation rates as economic prospects
improved.) The focus shifted to a broader market reformation that involved
deregulating the wage determination process, which was previously believed to be
inflexible and inhibiting to the improvement of productivity levels. To increase
flexibility in the labour market, the new policy included the growth of enterprise
bargaining, reductions in power of unions and the introduction of individual
employment contracts as well as the simplification of the award system. The
introduction of Job Network with competing employment agencies (private firms
which found jobs for the unemployed) was intended to increase the efficiency of
training programs and placement. The policy also included a toughening of the
welfare assistance criteria as well as the introduction of the Work for the Dole
scheme, which hoped to maintain and increase the skills of the unemployed
through their contribution to community projects.
Other microeconomic policies include privatisation, The National Competition
policy and tax reformation all hoped to enable Australia to achieve and sustain
faster economic growth in the longer term and hence accomplish a more
permanent reduction in unemployment levels.
These recent policies also combined with sustained levels of high economic
growth enabled the unemployment rate to reduce to 6.0% in 2000. The percentage
of long term unemployed was also reduced to 22.1% in 2002. This showed the
policys effectiveness with the help of the activity of the economy. In 2000-01, the
rate increased again to 7.1% and was reduced again to 6% in 2002. These
fluctuations were mainly due to cyclical factors.
Unemployment is major issue in terms of economic issues as it is costly not
only to the growth and development of the economy, but also the societal aspect
of the nation. Therefore, governments have given high priority in attacking the
causes of unemployment, in Australias case, the main cause being structural
factors. Policies to increase the level of employment of the last fifteen years have
been mixed in terms of their success. However, more recently, the policies coupled
with sustained economic growth have shown to be much effective as the
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unemployment level has been able to be sustained at the rate of 6.1% (February
2003).