Unemployment

Target Rate: 4.5%

Definition: Refers to the people who are willing and able to work but cannot find a job.

• Can either be voluntary or involuntary

Unemployment Rate is the proportion of labour force who are willing and able to work, but are unable to find job.

• (Number of People who are unemployed / Labour Force) x 100

Labour Force Participation Rate:

• (Labour Force / Working Age Population) x 100

Limitations to Unemployment Rate & Labour Force Participation Rate

Does not account for hidden unemployment Does not account for underemployment Excludes people with disabilities

Key Words:

• Working Age Population: Part of the proportion that is of working age (>15)
• Labour Force: The portion of the working age population who are either working, or are actively are seeking work
• Participation Rate: The proportion of the working age proportion of the working age population who are either working, or actively seeking rate - Labour Force / Working Age Population
• Underemployment: People who wish to work longer hours but cannot/is not given it by their employer
• Disguised Unemployment: Underemployment
• Hidden Unemployed:
  • Discouraged Worker: Workers who choose not to participate in the labour force because previous efforts to find a job have been frustrated
• Non-Accelerating Inflation Rate of Unemployment:
  • NAIRU: Unemployment that can not be reduced by expanding aggregate demand (Full Employment)

Instead of hiring overseas people (working holidays), they employed Australian citizens. This is why unemployment decreased from 2020.

Types of Unemployment

Cyclical Unemployment

• Follows the cyclical movements of the business cycle
• Derive from the demand for final goods and services and follows fluctuation of the business cycle
• Can be 0 at peak of business cycle

Structural Unemployment

• When there is a mismatch of available and required skills in a sector of the economy
  • E.g. The replacement of labour by capital
• Causes:
  • Changes in technology
  • Changes in the demand for productive factors
  • Changes in the pattern of consumer demand
• Can be long term, especially for older workers
  • Older Workers -> Harder to learn new skills (Not as adaptive)
• Always exists in the economy

Frictional Unemployment

• Unemployment that occurs due to the job search that occurs when in transition between different jobs
• Is most likely to be short term
  • Typically you leave a job when you know there is another job to switch into
• Always will exist in the economy

Impacts of Unemployment

Lower Levels of Aggregate Expenditure, Investment, and Business Confidence

• UE indicates that resources are under-utilised
• There is a gap between actual GDP and potential GDP

Higher Welfare Payments

• Opportunity Cost: Potential expenditure on infrastructure, health, or education (MERIT GOODS)

Increased Social Problems

• E.g. Depression, Violence, Crime
• Lower amounts of income…

Impact on Distribution of Income

• Affects different groups of people differently
  • Dependent on factors including age, health status, education and geographical location
• Increases Income Inequality

Full Employment

• When an economy is at its maximum production capacity
• Considered to exist when there is zero cyclical unemployment
• When there are enough jobs for the people who are available and want to work.
• When the economy is at maximum production capacity

Natural Rate of Unemployment: Structural Unemployment + Frictional Unemployment -> Below 5%

NAIRU

• Key challenge for policymakers is to achieve a low rate of unemployment without fuelling excessive increases in wage growths and inflation.
• Economics call the lowest rate of unemployment that achieves this the ‘non accelerating inflation rate of unemployment’
• The NAIRU is the lowest unemployment rate that can be sustained without causing wage growth and inflation to rise
• There will e spare capacity in an economy when aggregate demand for goods and services is less that the economy’s capacity to produce them.
• A key indicator of spare capacity in an economy is the difference between the NAIRU and the unemployment rate - sometimes know as the unemployment rate gap

Implication of full employment

• Economy is nearing or at full capacity
• Can lead to oversupply of labour
• Creates inflationary pressure
  • Producers are unable to easily increase supply to meet demand

The Trade Off between Unemployment and Inflation

• Low unemployment is usually correlated with high inflation
  • Low Unemployment leads to inflationary pressure due to high levels of demand
• Higher unemployment is usually correlated with low inflation
  • Unemployment means that resources are under-utilised and therefore demand is lower
• Achieving the economic targets of low inflation and low unemployment would involve a trade-off as the two targets contradict each other.

This can be represented with the Phillips Curve.