Unemployment

Question 1

unemployment (def)

Answer 1

Proportion of the labour force who are willing and able to work and are actively seeking work, unable to find it

Unemployment = no. of unemployed / total labour force

Question 2

labour force participation rate (def)

Answer 2

Labour force participation rate = labour force / working age pop. (15+)

Question 3

NAIRU %

Answer 3

4.5 - 5%

Question 4

unemployment rate %

Answer 4

3.5%

Question 5

underemployment rate %

Answer 5

6%

Question 6

NAIRU (def)

Answer 6

the level of unemployment at which there is no cyclical unemployment
The NAIRU includes all unemployment that is not cyclical

• Unemployment at NAIRU → increase growth → increase wage pressures → inflation
• Insufficient number of unemployed people to fill job vacancies
• Employees raise wages to compete for workers
• In order to reduce the NAIRU - restructuring/reskilling policies so workers can change jobs OR encouraging people back into the labour force

Question 7

Factors that determine the NAIRU (x9)

Answer 7

1. Government training
2. Ease of finding work
3. Unemployment benefits (reduce incentive to want to come back to work)
4. Long term unemployment (lose skills)
5. Wage rigidity (wages rigid → cannot adjust to changes in labour market conditions → imbalances between the supply and demand for labour)
6. Globalisation (increase competition → discourages businesses from raising prices → downwards pressure on wages
7. Becomes less costly to hire workers
8. Lower and more flexible wages → labour market can adjust
9. Globalisation (labour mobile → easier to find a job → reduces structural unemployment)
10. Globalisation (can cause a skills mismatch as the type of skills demanded may change due to closer integration)
11. Employee bargaining power (less bargaining power → lower wage growth → workers can hire more workers without increasing costs → lowers the NAIRU)

Question 8

Causes of unemployment (x9)

Answer 8

1. Low economic growth
2. Mismatch in skills / structural change
3. Inadequate opportunities for education/training
4. Wage rates too high
5. Participation rates - people want to benefit off welfare
6. High productivity growth
   Short term - less input for the same amount of output → fewer employees needed
   Long term - economy expands → demand for labour adjusts (might be more profitable to hire more workers)
7. Increases wage bargaining → increases wages → increase u/e
8. Stance of macroeconomic policies
9. Technological change
10. Inflexibility of labour market - hard to create jobs
11. Globalisation - more job opportunities (eg. TNC opening creates jobs), stimulate economic growth, transfer of skills (reduces structural)

Question 9

Effects of unemployment

Answer 9

1. Inefficient use of resources - not fully utilised
2. Larger budget deficit - spend on unemployment benefits
3. Inflation - see NAIRU
4. Raise wages to attract workers = cost-push inflation → can cause wages/price spiral
5. Crime
6. Inequality and inequitable distribution of income
7. Decrease standards of living
8. Poverty trap

Question 10

structural unemployment (2. in causes)

Answer 10

• 1990-2010s, global economy underwent extensive trade lib cuz introduction of asian economic cheap manufacturing powers.
• Increase in global trade exposure led to incresaed foreign competition in aus eco
• Led to closure of PMV and manufacturing (50k u/e, inefficient industry)
• Define structural u/e
• As a result, u/e: 5.8% (apr 14) -> 6.3% (jul 15)

Question 11

cyclical unemployment (1. in causes)

Answer 11

• Reduction in C + I -led e/g would pass over to increased cyclical u/e
• Cuz labour is derived demand, reduced e/g will reduce output demand = increased cyclical u/e
• Recessionary gap. u/e went from 5.1% feb 2020 to 7.5% in jul 2020.

Question 12

underemployment (causes/trends)

Answer 12

• General recovery in growth cuz of X performance (as above) has led to ^ in derived demand for labour
• Strong decrease in cyclical u/e (from 7.5%-3.5%) -> carried into a reduction in underemployment since there was a low level of u/e
• Underemployment was 13.8% 2020 to 5.8% 2023
• Trend of casualisation

Question 13

effect (DOI, effect 6)

Answer 13

• Low income earners are more likely to undergo retrenchment because their jobs are highly replaceable and not high-skill
• Therefore in periods of higher unemployment low Y earners are more likely to be laid off -> DOI worsens
• They depend on unemployment welfare benefits (which are generally less than low income jobs anyways)

Question 14

effect (worsening economic development, effect 5,7,8)

Answer 14

• When unemployment increases, national income decreases
• GNI/capita decreases -> material liviing standards decrease
• Crime increases
• Family breakdowns are more common + wellbeing of the nation decreases

Question 15

effect (lost output)

Answer 15

• Opportunity cost lost Output -> economy is operating BELOW PPF, not a full utilisation of resources
• Worsened by a Loss of Human Capital: long term unemployments = hysteresis (lose skills and motivation for work) Longer unemployed, more difficult it is to find job
• Reduction in standard in living: welfare payments amount is less than amount if individuals earned wage/income
• Short term decrease in eco growth: Low income groups = lower disposable income. This is a reduction of the income of groups with a HIGH MPC -> fall in total consumption in eco
• Increase in Taxation Burden: welfare payments increase