Economics_Unemployment

Explain the main causes of unemployment in Australia and discuss the use of government macroeconomic and microeconomic policies to reduce the rate of unemployment. 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 is measured by; the number of persons unemployed divided by the total labour force, x100. The 2012 figure is currently at 5.4%. The main types of unemployment include; structural, cyclical, frictional, seasonal, hidden and long term. The official unemployment can be inaccurate as it does not take into account “underemployment” and “hidden unemployed”. Underemployed people are people who have a job (part time/casual) and work limited hours, and they would like to work more. Hidden employed people have not been able to find work and have left the labour force. They would take up work if offered but may have barriers, whether it is looking after family or having a disability. Taking into account the combination of these two areas, we have the underutilisation rate, which as of August 2011, was 11.2%. There are many causes of unemployment. The demand for labour is a derived demand- which means the demand for labour is directly affected by the demand for goods and services that labour produces. If there is a downturn in aggregate demand in the economy, this may be reflected in a downturn in the demand for labour and increase unemployment. A decline in aggregate demand could be due to; an economic downturn, with lower consumption and investment spending, government policies designed to lower demand, a decrease in the demand for Australia’s exports due to slower growth in our major trading partners’ economies or less competitive Australian goods and services in the world market, and the effects of a global recession, which increased unemployment around the world. In the long term, unemployment is influenced by the level of sustained economic growth achieved in an economy. If there are significant constraints on economic growth, the economy will struggle to create jobs. Australia’s inflationary concerns and current account deficit problems are significant constraints on economic growth if not managed properly. The current account deficit in 2012 was 2.2% and our current inflation levels are 2.2%. At this present time they are well managed and are not constraining economic growth. An increase in the labour force participation rate will tend to raise the unemployment rate in the short term. This means that more people who previously were not looking for work start actively seeking work. This usually occurs in times of economic recovery when many discouraged job seekers, observe that employment opportunities are improving, and start looking for work. For this reason, they re-enter the labour market, and unless they obtain a job immediately, they join the unemployed. This means that unemployment may only be reduced slowly during times of economic growth. Structural Change often incurs significant short term costs. This can involve the loss of jobs in less efficient industries and in areas of undergoing major reforms, such as public enterprises becoming privatised. Large tariff cuts as an example have resulted in a loss of jobs in domestic manufacturing industries, due to imports becoming more attractive. However, in the long term, the growth of more efficient industries in Australia from structural change should result in benefits for the labour market. Rapid technological change can cause unemployment in the short term. Improved products and methods of production quite often result in the substitution of capital for labour and a change of work skills required, causing some workers to become redundant. Unemployment due to technological change is usually classified as structural unemployment. However, in the longer term, changing demand patterns may create more jobs then they eliminate, and some of these sacked workers may be re-employed in the future, providing they have suitable opportunities to be retrained. The productivity of labour is a significant factor affecting unemployment. Higher productivity growth will tend to slow employment growth, in the short term, because fewer employees are required per unit output. However in the long term higher productivity growth contributes to higher economic growth and therefore lower unemployment. Vice versa, lower productivity will lower unemployment in the short term and raise it in the future. Also worth a mention are the inadequate levels of training and investment. Over recent times, many occupational groups have experienced skills shortages, in areas such as tradespeople, health professionals and trained chefs. This suggests that there are gaps in Australia’s education and training system. Although, these gaps may also may be due to people choosing to enter the labour forces without undertaking sufficient education or training. Unemployment may also rise due to an increase in labour costs. The circumstances where this would occur include: A shortage of skilled labour may result in employers competing with each other for a smaller pool of labour, thus forcing up labour costs and making wage inflation and overheating the economy, prompting the reserve Bank to increase interest rates. A wages breakout caused by excessive wage demands. When nominal wages are rising too fast, outstripping inflation and productivity increase, they cut into business profit, resulting in business substituting capital for labour, or even reducing output, as labour costs are too high, and essentially jobs will be lost. Also a decision by fair work Australia to increase award wages might make it too expensive to keep all its labour employed. A substantial rise in labour on-costs, which is the costs added to having labour being superannuation, payroll tax, sick leave, holiday pay and workers compensation. This lowers demand for labour. Another reason of high labour costs can be inflexibility of the labour market. Our relatively high minimum wage level makes it less attractive for employers to higher lower skilled labour, contributing to higher levels of unemployment, and deregulation of the labour market might lead to lower minimum wages and a lower level of unemployment. Governments choose policies to reduce unemployment based on what they see as the main causes of unemployment. For example, if structural unemployment was seen to be growing, governments would implement policies that aim to train workers with new skills. Another example, if government believes that cyclical unemployment is the main reason people are out of work, it might implement policies to encourage stronger economic growth. The changing direction of government policy can reflect changing view on the causes of unemployment. The most important government strategy to reduce unemployment is to use macroeconomic policies to sustain economic growth and avoid a recession. The goals of sustaining economic growth, in the range of 3-4% of GDP, and keeping inflation within 2-3% target band, have been central to macroeconomic policy since the 1990’s. The downturn of the GFC in 2008-09 forced a dramatic shift towards expansion in fiscal policy, with government spending playing a key role in stimulating economic activity in the economy. The government directly intervened into the economy, to make up for the sharp fall in aggregate demand. Unemployment was predicted to reach 8.5% if government had not intervened in the economy, but remained only grew to about 6.5%. Another example of macroeconomic reform is monetary policy. The RBA can adjust interest rates to influence the rate of aggregate demand in an economy and therefore influence economic growth. During the GFC the RBA cut the cash rate by 25 basis points down to 3%, in the aim of stimulating spending and increasing economic growth. Australia faces an ongoing problem with structural unemployment. As a result, a key focus of government is microeconomic reform, especially labour market reform. By lifting the economy’s efficiency, competitiveness and productivity, microeconomic reform aims to increase economic growth and job creation over the long term. Microeconomic reform policies may include; tariff cuts, deregulation, national competition policy, privatisation and tax reform, and in particular, policies relating to the labour market- such as industrial relations, education and training and welfare to work initiatives- which are all intended to result in a higher level of employment growth over time. An example of microeconomic reform was the National Competition Policy. This privatised government owned enterprises such as Qantas. This gave previously public companies more of an opportunity to expand abroad and gave incentive to entrepreneurs to expand their business and become internationally competitive, which may involves increasing customer service, which in turn leads to an increase in employment. Another example of microeconomic reform is the removal of tariffs. In the short term, tariff reduction would cause an increase in unemployment, as domestic industries will find it harder to become competitive and will have to lay off workers but over time, workers will move to areas in which our country has comparative advantage. This will expand business and create job opportunities in the future. Bob