Anne Trang
Economics Essay – Unemployment What are the causes and consequences of unemployment? Evaluate the government’s role in managing unemployment in Australia over the past 15 years. An unemployed person is a person of working age, that is, 15 years or older, who are actively looking for work but have not found any work (for at least an hour per week) as yet. The unemployment rate is calculated by dividing the number of unemployed persons over the total number of people in the labour force. This is epressed epressed as a percentage. !auses of unemployment include the level of economic growth, the stance of macroeconomic macroeconomic policies, constraints on the economic growth, rising participation rates, structural changes within the economy, technological changes, the level of labour productivity in the economy, wage growth and the "eibility of the labour market. #nemployment, if sustained at high levels for a long period of time may have both adverse a dverse economic and social e$ects. Therefore Therefore the government government strives to keep the level of unemployment as close as it can to the natural rate of unemployment (appro. (appro. %& in Australia) through macroeconomic macroeconomic and microeconomic microeconomic policies. 'n Australia, the main government government policies used are microeconomic, involved in promoting structural changes in the labour market. ince the demand for labour is derived from the level of aggregate demand for goods and services produced in an economy, the economic climate of both the global and domestic economies are one of the main contributors to the level of unemployment. or or eample, an economic downturn would lower both domestic spending and investment levels meaning *rms would produce less. +ess production means less labour is needed. This would cause a rise to occur in the level of unemployment. 'f the global economy is in a recession, the demand for Australian eports would dampen, and hence the level of aggregate demand would decrease. 'f the economy is growing too fast, fa st, government policies may also result in reduced aggregate demand. educed educed aggregate demand mean reduced demand for labour and hence a rise in the unemployment level would arise. or eample eample the slowdown in economic activity in late - cause the unemployment rate to eceed eceed /&, but an improvement in economic growth in --, brought the level back down to %& 0 believed to be the natural rate of unemployment in the Australian economy. !hanges in the level of aggregate demand usually a$ect cyclical unemployment. #nemployment #nemployment is a lagging indicator of economic growth as it usually takes at least si months before the e$ects on unemployment is felt. enerally, it is believed that economic growth has to be above 2& for the unemployment rate to decrease. Another reason why the economic climate is a ma3or contributor to the level of unemployment is because of its in"uence on the government4s stance on macroeconomic macroeconomic policies. 'f the economic growth is thought to be too high, the government government may tighten monetary policy or decrease government ependiture ependiture to dampen demand. 'f the economy is in a recession, the government would use epansionary policies to increase demand in the economy. or eample in the early 1s, when the Australian economy was in a recession, the government government ran large budget de*cits and low interest rates to boost economic growth. This came to an e$ect in 12 where the unemployment rate fell from 11& to 6.5&. 'n 1%0/, 1
Anne Trang
the tightening of both monetary and *scal policy lead to an increase of the rate to & in 1/. 7owever, at times, for eample, the mild tightening of policies may not have such a dramatic impact as there may be greater factors attributing coming from the eternal sector such as in --. Another factor that a$ects the level of unemployment may be constraints to sustained economic growth. or eample in"ation levels and worsening of the current account de*cit restricted economic growth in the 16s and contributed to the unemployment problem. ising participation levels inspired by strong economic growth and increased "eibility for females in recent years has also in"uence the unemployment level. ince there are now more people looking for work and unless they *nd a 3ob immediately, they would 3oin the ranks of the unemployed, the rate of unemployment would seem to decrease more slowly. tructural changes that have occurred in the economy have created and removed 3obs. 'n the short term, 3obs in ine8cient industries, areas undergoing ma3or reforms such as the privatisation of state enterprises and industries were there are ma3or tari$ cuts are lost. 7ence, there will be an increase in the level of unemployment. 7owever, in the long term, the growth of more e8cient industries should contribute to a rise in 3ob opportunities. Another factor linked to structural change is technological advancements. 'n the short term, as methods of production are continually improved, substitution of capital in place of labour would occur causing some workers to become redundant. 'n the long run, however, technological change may create more 3obs as there will be changing demand patterns. This would only help those that are redundant only if it is provided that an ade9uate retraining program is put in place for them. The productivity of labour also contributes to employment levels. 'f labour productivity is low, employers may want to increase e8ciency by substituting the labour for capital. 7ence, there won4t be an improvement in the unemployment rate. 7owever, high productivity levels means a higher level of output from the same number of workers. 'n this case, employers may not hire more workers, also leading to no improvement in unemployment levels. The mismatch of the skills demanded in the labour market and those that the unemployed currently possess is also a contributing factor to unemployment, in particular, structural unemployment. 'n the late 1s there was a signi*cant lack of supply of skills re9uired for 3obs such as computer programming, nursing, etc: This indicates the need for people to be more prepared and e9uipped with more skills when entering the labour market. ;age rates would a$ect the decision of employers to employ more workers. 7ence, if wage growth is high, meaning cost of labour is high, employers would be discouraged to open up 3ob opportunities and hence an increase in the unemployment rate would be eperienced. 'f unions cause an outbreak in wage increases that cut into the entrepreneur4s pro*ts, employers will either substitute capital for labour or simply go out of business. 7ence there will be an increase in unemployment levels. The same a$ect would also occur if the 'ndustrial elations -
Anne Trang
!ommission decides to increase the afety
n top of this, the government would be forced to fund transfer payments in the form of unemployment bene*ts as well as re0training programs. This decrease in revenue alongside increase in government ependiture means a deterioration in the government4s budget will occur. 7igh unemployment means there is an ecess supply of labour. This means there will be a slower growth in wages. ocial conse9uences of unemployment include the development of increased ine9uality eperienced between low and high income earners. ?oung and unskilled workers who also happen to be low income earners contribute largely to the pool of unemployed persons. +oss of income for these people makes them relatively worse o$ than high0income unemployed persons. This means there is redistribution of income away from the bottom percentiles of income earners and hence a greater income ine9uality would result. >ther social costs include increased levels of debt, homelessness and housing problems, severe *nancial poverty, family tensions and breakdowns, alienation from the rest of society, crime, reduced self0esteem and con*dence, poor health, psychological disorders, suicide and loss of work skills and loss of touch with the working world. The economic side of these conse9uences is that society would need to use more resources to deal with them. or eample, money will need to be spent on health and welfare services, police services, etc:rather than used to satisfy other community wants. As it can be seen, high levels of unemployment have many negative impacts. Therefore the Australian government strives to keep this level as close as possible @
Anne Trang
to the natural level of unemployment by attacking the causes of unemployment. acroeconomic policies are used to deal with cyclical unemployment, such as lowering interest rates, increasing public ependiture or ta cuts. 7owever, the main types of unemployment eperienced in the Australian economy in the last 15 years have been due to structural factors. Therefore, the main policies that have been used are microeconomic policies that sought to encourage structural changes in the economy. or eample, in the early 1s the Beating government introduced a policy called C;orking ther microeconomic policies include privatisation, The
Anne Trang
unemployment level has been able to be sustained at the rate of %.1& (ebruary -@).
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