Unemployment

Refers to a situation where individuals want to work but are unable to find a job, and as a result labour resources in an economy are not utilised. Unemployment in an economy is measured by the unemployment rate, which measures the proportion of the labour force that is not employed but actively seeking work.

The Labour Force
People who are 15 or 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.
Labour Force = employed (part –time + full-time) + unemployed

The Labour Force Participation Rate (LFPR)
This is the labour force expressed as a percentage of the working age population (civilian population aged 15 years and over).
LFPR = (labour force)/(working age population) x 100
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

The Unemployment Rate

The unemployment rate is then the percentage of the labour force that are actively seeking employment
Unemployment rate = (total number of unemployed persons)/(labour force) x 100

Factors that affect the Labour Force:
  • The size of the population; Net Birth Rate (Births – Deaths); Net Migration (Immigrants – Emigrants)
  • The Economic Business Cycle; People becoming discouraged and not actively seek work during a recession or a trough, this will reduce the total labour force. This is the same in reverse with a boom/peak encouraging more people to actively seek work increasing the total labour force
  • Government Policy – Will influence the participation rate; e.g. 17 school leaving age
  • The age distribution of the population; Can affect the participation rate - Those aged between 15-64

Causes of types of Unemployment
  • Cyclical Unemployment: The demand for labour is derived from the demand for the goods and services it produces. This means if the demand for goods and services rises, i.e. AD increases, then the demand for labour (jobs) rises. Thus, this unemployment is caused by a downturn in economic activity, because aggregate demand is not strong enough to create enough jobs for the people who are able and willing to work. The government can counteract/influence this cyclical unemployment through encouraging AD (Government expenditure [expansionary fiscal policy, encouraging “G” in AD] as well as other macroeconomic policies [monetary policy through encouraging “C”, through more people willing to buy goods and services such as housing/mortgages, and “I”, through more businesses willing to borrow money for invest, in AD through the reduction in the cash rate – where the RBA manipulates the cash rate to influence domestic interest rate]), because labour is a derived demand from the goods and services it produces, hence by encouraging AD, they can encourage employment over the short to medium term.  If the Government injects money into the economy it also has a multiplier effect on economic activity, through encouraging C. This will then cause an upturn in economic activity, causing an upswing in the business cycle and reducing unemployment as more G + S is demanded.
  • Structural unemployment: The skills of the unemployed are not needed for the job vacancies; workers may be displaced due to demand for skills changing due to developments in technology and other issues. Also, with capital being a substitute for labour, if real wage increases is greater than productivity increases, then capital may be used instead of more expensive labour. In Australia, particularly, we have very strong labour laws such as minimum wage and minimum requirements, which mean people may become unemployed due to the high costs of labour – firms will outsource labour to more cheaper areas (e.g. India, China), in order to be more competitive. This sits to the left of the NAIRU.
  • Seasonal: This is where people are unemployed based on the time demand of the time, due to seasonal/period of the year demand for their labour. For e.g. fruit pickers – fruit is seasonal meaning that fruit pickers are only needed for certain times of the year.
  • Frictional: This is where people are unemployed temporarily as they are moving between jobs or are new entrants to the labour market.
  • Hardcore: The hard-core unemployed include those people who are considered unsuitable for employment due to personal characteristics.
  • Hidden: People who have been discouraged from seeking employment due to adverse economic conditions, or who have given up trying to obtain work. If this increases, then the participation rate will decrease.
  • Long-term unemployment: There 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. This is bad because over time their skills will depreciate.
  • Underemployment: During the global recession 2009, many employees made agreements with employers to reduce working hours which saved many jobs. 

Causes – these link in with type of unemployment
  • 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 the recession, the unemployment rate increased to 5.8% by July of 2009
  • If real wages are higher than capital, they will substitute capital for labour causing job losses.
  • Lack of flexibility in the labour market, growth of causal/part time work. Change in industrial relations systems Work Choices aimed at increasing flexibility. More regulation under Fair Work Australia, it is argued, will reduce flexibility.
  • Microeconomic reform, through structural change can increase structural unemployment in short-term. Early 1990;s textile, clothing and footwear and motor vehicle industries impacted significantly with large job losses. 

Natural rate of unemployment

It is not possible for the entire labour force to be employed at anyone 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. When unemployment is above this level, it indicates a certain level of cyclical unemployment and this increase in economic growth will create jobs and reduce cyclical unemployment. 

Once cyclical unemployment is eliminated, additional economic growth will increasingly see firms raise wages to compete for existing workers rather than take on other people considered unsuitable for the jobs – hence inflationary pressure will build with no significant decrease in unemployment. Hence, 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.

The natural rate of unemployment can vary over time. In the late 1960s and 1970s the nautral rate was between 1% and 2%. Currently, the natural rate of unemployment is considred to be around 5%-6%. During the economic boom of 2005-2007 the natural rate of unemployment fell as structural unemployment was reduced.

Philips curve
The Philips Curve shows the relationship between unemployment and inflation – it shows the trend but does not dictate it.

The NAIRU (a.k.a. The Long Run Philips Curve): This is the non-accelerating inflation rate of unemployment. It is also known as the natural rate of unemployment – this means that regardless of what occurs in the economy there will always be a certain number of people unemployment. This is estimated to be about 4-6% of the labour force; this is due to structural, seasonal and frictional unemployment. To the right of the curve there is cyclical unemployment. To the left of the curve there is no cyclical unemployment, with all the unemployment being due to structural, seasonal and frictional unemployment. 

When the level of unemployment reaches the natural rate of unemployment (or the NAIRU), there is no cyclical unemployment. Any attempts by the government to encourage AD beyond the NAIRU, will have no impact on the level of unemployment but will result in higher inflation as shown through the movement from SRPC 1 to SRPC 2. IF the government wanted to reduce the natural rate of unemployment, microeconomic policy and labour policy would be needed to be used to influence the level of structural and frictional unemployment.

The reason why inflation and unemployment are linked is due to prices and wage inflation. Higher inflation means the increase in prices of goods and services is higher. Based on the idea of demand and supply, we know that as prices rise, there will be less demand for goods and services (i.e. a contraction in demand). If prices are higher, this means fewer consumers are willing to purchase the goods and services. Since the demand for labour is derived from the demand of the goods and services it provides, meaning that if less goods and services are demand less demand is present for labour (because businesses do not need that many people to make less goods and services.

Causes – these link in with types of unemployment
The level of economic growth –
  • The demand for labour is derived from the goods and services it produces
  • When economic growth is above 3.5% unemployment will fall (growth must exceed increases in net labour force growth and productivity growth)
  • 6 month time lag between change in growth and a fall in unemployment. E.g. after a lag of 6 months following negative growth in GDP -0.5% in December quarter 2008, unemployment rose from 4.2% to 5.8% by mid-2009
  • WHY? – Participation rate will grow with economic recovery. This is due to hidden unemployment. Increasing growth will encourage those who are classified as hidden unemployed to seek work. This time lag is because it takes people a while to find a job and hence they will become part of the unemployment rate, as they are now actively seeking work.  However, there may be a net effect on the unemployment rate as those who were originally seeking work would’ve found work as AD increased and economic activity increased.

Cyclical Unemployment

Keynes argued that cyclical unemployment arises when the equilibrium level of income, does not correspond with level of income that corresponds with the natural rate of unemployment. This can be shown by the gap between AS + AD  labelled as A –B, and is referred to as the deflationary gap in the diagram below.

The Keynesian Deflationary or Unemployment Gap
*ignore R -E

We have the capacity to produce more goods – not reaching the PPF. However, if we did reach that rate of supply there would be no demand for these goods. Hence there needs to be an increase in demand to match this.

Productivity of Labour:
  • Higher labour productivity; Short term – higher unemployment productivity can increase unemployment as less employees required per unit output; Long term – productivity – should increase economic growth which should lead to lower unemployment
  • Lower labour productivity; Short term – more employment; Long term – low growth and firms may fire labour and use capital

3% growth p.a.
  • Jobs created to compensate for 1) increases to labour force 2) increases to labour productivity
  • Okun’s Law explain the relationship between economic growth and unemployment, pg 185 (Dixon 2013) Australia needs economic growth rates of around 3.5% or higher in order to make progress on reducing unemployment. Okun’s law explains the relationship between economic growth and unemployment showing that to reduce unemployment the annual rate of economic growth must exceed the sum of percentage growth in productivity plus the increase in the size of the labour force in any one year.
  • Inadequate levels of training and investment: Skills shortages in some industries – may also be less people inclined to enter the industry
  • A rapid increases in labour costs: New on costs e.g. superannuation, insurance, or increases in minimum wages by FWA
  • Firms may swap labour for capital
  • Firms may fire people to cut costs
  • Inflexibility in the labour market
  • Argues the high minimum wage rates make it less attractive for firms to hire less skilled workers – argued a deregulation of the labour market may lead to higher unemployment

If you have a burning question, or would like to featured in some way in the "Ask them from me" segment, email me at: cc3493@gmail.com. If you do not want to be featured in the "Ask them from me" featured post, please let me know in the email :)
Location: Sydney NSW, Australia

Comments

Post a Comment

Popular posts from this blog

Essay: "Frank Hurley: The Man Who Made History" by Simon Nasht

Simon Nasht’s Frank Hurley: The Man Who Made History (2004) creates a discussion around the ethical and moral nature of Hurley’s work through its rediscovery made by the modern audience. Nasht questions the true role of photography, presenting two sides; one that photography is meant to be historic and a realistic snapshot of the subject and the other with a more artistic and emotional representation of the subject. Nasht presents the negative view towards Hurley’s work through the use of experts – which add to the arguments credibility – whom criticise Hurley’s photographs as “elaborate concoctions” rather than presenting the ‘real’ images that was necessary of a photographer and describe him as “a showman, a performer”. The description of his photographs reveal a perspective that his photos are overemphasised and exaggerated,   whilst also highlighting, through negative connotations of magic and fabrication, that there is a lack of realism in his work. Nasht further emphasises ...
Read more

Legal and Non-Legal Responses to Housing Affordability in Australia

Image
Legal and non-legal responses to housing affordability in Australia have been largely limited in their effectiveness due to issues such as a poor resource allocation, low accessibility and an inability to meet society’s needs. Legally, both State and Federal Governments are restrained, with the constitution giving power to the states to create  legislation for housing.  However state governments are constrained by the lack of funding with the necessity to negotiate with federal treasuries to obtain enough funds for projects – although the Federal Government does provide support to citizens through transfer payments and rent assistance – with house prices continuing to soar and a lack of  law reform in taxation regarding negative gearing andcapital gains ta x being another major issue. Non-legally, many non-government organisations (NGOs) have been limited by issues such as an inability to keep up with demand and not enough funding to meet the demands of society. ...
Read more

Legal Studies: Case Law

CASE NAME BASIC ISSUES SYLLABUS DOT POINT SYLLABUS THEME AND CHALLENGE R v Burrell [2006] NSWSC 581, 2006 ·        Murder conviction without a body ·        Rogue juror caused first trial to be aborted Lead to law reform (majority verdicts) ·        Exhausted appeal process ·        The role of juries, including verdicts ·        Appeals ·        Effectiveness of the criminal trial process ·        The criminal investigation process ·        Law reform ·        Issues of compliance… ·        Law balances the rights… ·        Law Reform Gang Rape Case No 2 - R v Bilal Skaf, R v Mohommed Sk...
Read more