Chapter 6 - Employment

Question 1

Define employed

Answer 1

To be employed for ABS purposes – one needs to be over 15 years of age and working more than 1 hour per week in return for some sort of measurable remuneration (such as wages)

Question 2

Define unemployed

Answer 2

When someone is over 15, without work or working for less than one hour per week and actively looking for (more) work
E.g voluntary charity work

Question 3

Explain full employment (ideally)

Answer 3

The idea situation for every government is where every person wanting a job is actively employed in the economy
This is rarely achieved in a market-based economy as the most efficient allocation of resources may actually require that some unemployment exists at any particular time – this is sometimes called natural rate of employment

Thought to be about 4.75 not certain

Question 4

Full employment through not directly stated is thought to be around

Answer 4

4.75% approx

NOT 0%

Question 5

Define full employment

Answer 5

that level of unemployment that exists when the government’s economic growth objective is achieved and where cyclical unemployment is non-existent

This means that the economy is growing at it’s maximum ‘sustainable’ rate – unemployment will be at it’s lowest point (generally 4.75%) and the economy will be considered to be at ‘full employment’
There are no exact figures that dictate ‘full employment’ – as then the gov’t would be subjected to constant criticism and further the structure of the economy is constantly changing causing shifts in what is considered an acceptable rate of unemployment

Question 6

What is the governments goal of “full employment”

Answer 6

The maximum sustainable rate of reduction in unemployment by lifting the pace at which economic growth can be maintained without running into inflationary and external pressures”

NAIRU- a healthy rate of Eco growth is between 3-4% per annum
(Will still be accompanied by some unemployment)

Question 7

Define the NAIRU - natural rate of unemployment

Answer 7

The non-accelerating inflation rate of unemployment which involves the attainment of the lowest unemployment rate possible before inflation begins to accelerate (aprox 4.75 U/E

Question 8

Explain the NAIRU

Answer 8

The NAIRU is sometimes reffered to as an economy’s ‘natural rate of employment’ where a healthy rate of economic growth (in the order of 3-4% per annum) will still be accompanied by some unemployment.
Indeed this ‘natural rate of unemployment’ is likely to be symptomatic of an efficient economy, where some levels of unemployment actually help to drive more efficient outcomes over time particularly if they are more transitory (temporary) in nature
e.g. it is healthy and natural for people to move from one job to another in order to enhance their careers and seek new challenges – which is good for efficiency.
In addition it is equally possible for people to make negative contributions to efficiency when they are employed, and it may be in the national best interest that they remain unemployed until education and training can boost their productivity and employability
Typically when an economy is at full employment level, this implies that unemployment cased by insufficient levels of AD (e.g. cyclical unemployment) is zero. Any (natural) unemployment that still exists will ordinarily be made up of a combination of the following types of unemployment:

Question 9

4 types of ‘natural unemployment’

Answer 9

Structural
Seasonal
Frictional
Hardcore

Question 10

Define structural unemployment

Answer 10

When the skills of the unemployed do not match the skills required by industry, resulting in unemployment

Question 11

Explain structural unemployment

Answer 11

Means that the ‘structure’ of the industry has changed or that the proportion of those aged 15 + have not ensured that they have adequate skills and training to secure jobs

E.g. micro-economic reforms forced firms to become more competitive resulting in restricting many organisations – this included outsourcing of tasks to foreign companies and the substitution of labour for capital – which resulted in a number of labour redundancies

Gov’t seeks to limit the extent and duration of structural unemployment via it’s use of budgetary policy – however it is quite limited in it’s ability to significantly reduce the unemployment rate below the natural (NAIRU) level

Any attempts to achieve very low rates of unemployment (below 5%) are likely to bring inflationary pressures and risk higher rates of unemployment in the medium to longer term

Question 12

Define seasonal unemployment + example

Answer 12

When a person is unemployed because their skills are only demanded during certain times of the year
E.g. fruit pickers + ski resorts

Question 13

Define frictional unemployment

Answer 13

When a person is unemployed for that period of time while they are moving from one job to another

Question 14

Define hardcore unemployment

Answer 14

When a person is unemployed due to a mental, physical or other characteristic that prevent them from receiving job offer

Question 15

The main type of unemployment that gov’ts are focused fixing is

Answer 15

Cyclical unemployment

Question 16

Define cyclical unemployment

Answer 16

unemployment that occurs when the economy is not operating at it’s full capacity due to a deficiency of AD

Question 17

Explain the labour force survey

Answer 17

The ABS collects labour force statistics via it’s monthly labour force survey – surveying approx. 0.32% of the population obtaining the ‘employment status’ of those surveyed. From these figure it extrapolates the figures to arrive at a labour force statistics that are typically representative for the entire country

Question 18

Define labour force

Answer 18

All those aged 15 and over who are willing and able to work; includes the employed and unemployed

Question 19

Define participation rate

Answer 19

The PERCENTAGE of the total working age population (0ver 15) that is a number of the labour force

Question 20

Difference between labour force and participation rate

Answer 20

Participation rate = The PERCENTAGE of the total working age population (0ver 15) that is a number of the labour force

Labour force = all those aged 15 and over who are willing and able to work; includes the employed and unemployed

Question 21

Define unemployment rate

Answer 21

The % of the labour force that is unemployed

Question 22

What is the unemployment rate

Answer 22

Unemployed
——————————— X 100
Employed + unemployed

Question 23

What is the participation rate

Answer 23

Labour force (employed + unemployed)
—————————————- X 100
Population over 15

Question 24

Explain the relationship between participation and unemployment rates

Answer 24

When examining the Relationship between participation and unemployment rates it is important to focus on how the change in participation rate can impact on the unemployment rate and then how a change in the unemployment rate can impact on the participation rate

An increase in the participation rate is likely to cause a short term increase in unemployment as the new job seekers (new entrants into the labour market) are immediately classified as unemployed until they find work

Over the longer term however higher participation rate can lead to a reduction in the unemployment rate - this is because an increase in the labour supply tends to exert downward oressure on wages (as there is greater competition for jobs) and an increase in labour productivity (as bigger labour supply can force existing employees to lift effort) as a result these 3 factors can increase the demand for labour creating additional employment and lowering the unemployment rate

On the other hand a decrease in the unemployment rate is likely to provoke a rise in the participation rate –this is because some job seekers become encouraged by the prospect of finding work and enter the labour force – workers who were previously classified as ‘discouraged job seekers’ are now more likely to seek employment as the likelihood of success is greater

Question 25

If LFPR in the short term ..

Answer 25

Unemployment rises as these job seekers may not find jobs straight away But in long term may increase supply of labour and reduce labour costs (downward pressure on labour costs) so firms may actually employ more

Question 26

If unemployment falls .. Participation rate will ..

Answer 26

Rise as people outside the labour force (feel) are more likely to find a jobs database enter the labour force

Question 27

Define hidden unemployment

Answer 27

Potential workers who are excluded from unemployment statics because they have become discouraged about their job prospects and are NOT ACTIVELY seeking employment- also referred to as discouraged workers

Question 28

Explain hidden unemployment/ discouraged workers

Answer 28

There is a group of potential job seekers who are not classified as members of the about force despite the fact they would like to work and would accept a job offer – they are excluded from unemployment statistics because they have become discouraged about their job prospects and are not actively seeking employment. In this respect they are referred to as ‘discouraged job seekers’ or ‘hidden unemployed’ Typically people in this situation include those who are considered too old by employers, those lacking in necessary skills (initially structurally unemployed, before they stop looking for work) and those who consider that labour market conditions are extremely poor

Question 29

Explain the unemployment and underutilisation rate

Answer 29

Unemployment figure does not capture the incidence of underemployment (or disguised unemployment) The underemployed are those indivduales that are classified as employed, but who are at least partly ‘unemployed’ in the sense that they prefer to be working more hours It is more important to understand the difference between these workers and those considered the ‘hidden unemployed’ They were the potential job seekers who were no longer actively seeking employment, usually because of poor labour market conditions – these typical individuals include those who are working part-time (or causally) when they prefer to work full time (more than 35 hours a week). Alternatively they may be underemployed because their employer is operating below full capacity due to a downturn in economic activity The existence of underemployment in Aus’t of nearly one million people highlights a real shortcoming of the gov’ts focus on unemployment statistics as a measure of it’s success in managing the economy or achieving ‘full employment’

Question 30

What is the underutilisation rate

Answer 30

UnEmployment + underemployment ------------------------------------ Labour force Represents the proportion of the labour force that is 'under-utilised'

Question 31

Define underemployed

Answer 31

The underemployment is those individuals that are classified as employed, but who are at least partly unemployed in the sense that they would prefer to be working more hours than they are currently working – also referred to as ‘disguised unemployment’

Question 32

Benefits of Pursuing full employment | LIVING STANDARDS

Answer 32

The federal government seeks to achieve full employment to improve living standards As more people move from unemployed to employed their income more than doubles and they have much greater ability to purchase g+s’s – in this sense employment helps to achieve ‘material living standards’ and boosts eco prosperity and welfare of Australians Increased employment (or reduction in unemployment) will also tend to improve quality of life or ‘ non-material living standards of those newly employed – people begin to enjoy the non-pecuniary benefits that employment brings. This includes increase sense of connection to the community and a higher self-esteem or self worth The pursuit of full employment also helps to avoid the real economic losses associated with unemployment in terms of lost production or output – with greater employment and lower unemployment there are ‘multiplier’ benefits to the economy in terms of higher incomes earned being spent on g+s’s which then creates additional employment opportunities and income generation overtime – thus the attainment of full employment helps the gov’t achieve it’s goal of strong + sustainable rate of eco growth. The benefit in terms of higher economic growth is heightened by the impact that lower unemployment rates have on the gov’t budget – the gov’t will receive more tax (revenue) which helps fund the provision a range of government provided goods and services Further the gov’t will be required to spend less on welfare payments (expenditure) – these factors will enable the gov’t to expand spending in other areas e.g. education + health improving living standards of Australians Alternatively the gov’t may prefer to allow the budget deficit to fall (or budget surplus increase) or to lower tax rates over time – theses measures will tend to provide further stimulus in the rate of eco growth Government efforts to re-train and re-skill unemployed persons will have clear benefits for eco growth. Gov’t funded training programs equip individuals with employable skills can help to alleviate any skill shortages that may exist in the economy – this will help to boost productivity, expand productive capacity and reduce pressures of inflation + assist in achieving strong + sustainable eco growth Full employment will also assist with the achievement of the gov’ts goal for ‘greater equity in the distribution of incomes’ fewer people will be relying on welfare, earning factor incomes, helping to reduce the size of the gini coefficient over time – and provide more people with the ability to purchases g+s’s. Further there is likely to be less incidence of poverty over the long term Social benefits can be derived from full employment including – less crime, social exclusion and homelessness as well as reduced incidence of pshological harm and general ill health that is more common in those who are unemployed particularly for long periods – full employment also reduces the extent of any ‘loss of skill’ that occurs when someone is unemployed for long periods

Question 33

Costs of perusing full employment

Answer 33

When perusing low levels of (cyclical) unemployment the gov’t will typically implement expansionary monetary policies and expansionary budgetary policys in order to expand the economy and increase the demand for labour While these polocies succeed in lowring the nemployment rate –it is difficult to know how low the unemployment rate can go before inflation is igniated (thus the gov’t does not have a presice level for NAIRU) Excessive growth in AD cause by expansionary policies will tend to result in higher increases in those parts of the economy operating at higher levels of capacity utilization – in addition cost pressures across the economy, may also start to build in the form of higher costs for capital and intermediate goods for these reason the gov’t is hesitant to seek an unemployment rate below 5% Both the pursuit and achievement of full employment will bing costs to businesses in the form of rising real unit labour costs. When unemployment sits at it’s full employment level it is likely to be associated with very high job vancancy rates and a excess demand for labour across many industries and occupations – this can depress labour productivity levels as workers knoe there is less risk of dismissal and inflate wages as some firms need to bid up the price of labour to attract workers Some firms will tend to face increased wage demands from workers (and their unions) who have greater economic bargaining strength when unemployment rates are low – these influences can lead to increased industrial disputation and lower productivity one more triggering inflationary pressures and causing long term damage to the Aus. economy.

Question 34

Explain aggregate demand - in relation to effect of employment

Answer 34

Demand factors affecting full employment include any factor that can exert pressure on AD or demand for labour in the economy Any factor that causes AD to increase will tend to will tend to contribute to the derived demand for labour exerting upward pressure on employment and downward pressure on the unemployment rate

Question 35

Explain aggregate supply affect on employment

Answer 35

Supply factors affecting full employment includes any factor that can exert pressure on employment levels via change in the costs of production or aggregate supply levels

Question 36

What are the impacts on living standards of not achieving the goal of full emp (3)

Answer 36

There will be less favour incomes and more transfer incomes due to greater proportions not being able to obtain paid work for more than 1 hour per week this will subsequently reduce consumption- lowering the amount of goods and services obtained per household thus they are materialistically worse off as they are forced to obtain fewer goods MLS down Also gov't expenditure will likely increase for welfare payments due to smaller proportions of tax revenues (smaller lf) May need to borrow money or increase tax rates