The Different Types of Unemployment in the Economy and Policies

Describe the different types of unemployment in the economy and explain the government policies used to address them
Australia suffers from different types of unemployment in the economy, which is undesirable since Australia aims to achieve full employment; a major macroeconomic objective of the Australian Government. The main forms of unemployment which the Australian economy suffers from are cyclical, structural and long term unemployment. To address these main forms of unemployment in the economy, the Australian government has four main policies available to them to reduce unemployment. These include stimulatory monetary policy through cuts to interest rates, expansionary fiscal policy through an increase in government spending and/or cuts in taxes, industrial relations policy or wages policy to contain growth in aggregate wages and microeconomic reform policies to improve the economy’s resource allocation and productivity.
Currently Australia suffers from cyclical unemployment which is caused by a contraction in economic activity or aggregate demand. With a drop in aggregate demand, the derived demand for labour drops too. This causes a loss in jobs and workers are laid off as a result in the fall of demand for labour. An example of when cyclical unemployment rose significantly was in 2008-09 due to the GFC and lower rates of growth which caused a decline in GDP growth and spending within the economy. To counter-act cyclical unemployment, monetary and fiscal policy can be used to offset cyclical downturns in the economy and increasing levels of unemployment that accompany periods of slow economic activity. Through fiscal stimulus and the easing of monetary policy, aggregate demand has the potential to stimulate as there could be an increase in government spending, investment or even consumption. In turn this could increase the output of goods and services in the economy. Given that the demand for labour is derived from the demand of goods and services that it is used to produce, an increase in the output of goods and services in the economy would require increased levels of employment, which in turn should lead to a lowering of the level of the rate of unemployment. Going back to the GFC, the Australian government increased spending, whilst interest rates were cut which increased aggregate demand. Through this they were able to limit the rise in unemployment caused by the GFC.
Fiscal and monetary policies are however ineffective In terms of reducing structural unemployment. To address structural unemployment, more emphasis has to be placed on labour market reform policies such as government employment, education and training programs to help workers adjust to structural changes in the workplace. Structural employment results from a mismatch between the labour skills of employees and the job vacancies offered by employers, which is why a change in aggregate demand won’t affect structural unemployment. In 2006 a skills shortage arose due to a mismatch between the skills demanded by employers and the skills on offer from employees. Roughly 150,000 jobs during 2006 could not be filled nationwide due to this. A significant proportion of those jobs were from the mining boom states of Western Australia and Queensland. In addressing structural unemployment the labour market reform policies aim to make labour markets more flexible, and encourage more competitive work practices and higher levels of labour productivity. This is in turn should lead to higher levels of employment as employers have greater incentive to hire additional workers. Labour market deregulation and the movement towards decentralized wage determination, where firms and employees are able to negotiate wage increases on the basis of improved levels of productivity, has been the central component of Australia’s recent labour market reform agenda. Through the Workplace Relations Act 1996 and Workplace Relations Amendment Act 2008 there has been a deregulation in the industrial relations system which has seen further gains in employment and productivity, and a reduction in the unemployment rate because of greater flexibility in wage and employment setting procedures.
Another reason for the rate of structural unemployment is the lack of education, training and skills of workers demanded by employers for the jobs available. Some of the key Australian government policies for increasing workforce training and education have been the new Apprenticeships Centre’s to promote skills formation of apprentices by employers, expansion of school based apprenticeship systems to develop apprenticeship skills in school, funding for vocational and school education including the National Education Framework for School to raise literacy and numeracy standards and the Australian National Training Authority to improve the skill development of Australian workers. In implementing these policies, the Australian government has to increase funding on higher education, vocational education and training facilities. This can be seen in the 2008-09 where $11b was spent on these facilities with a further $5.9b spent on a new program called the Education Revolution, which involved long term reform plans to boost the quality of Australian education and training. The following budget also included the Jobs and Training Compact as a cost of $1.5b over five years in response to the rise in unemployment caused by the GFC. The $1.5b aims to be put towards eligible job seekers undertaking training, educational and training facilities for persons under 25 who wanted up-skill, retrenched workers who need assistance and assistance to communities and regions affected by the GFC.
Finally to address structural unemployment the Australian Government increase skilled labour migration between 2001 and 2009 but capped it due to the GFC. The migrants which were allowed to migrate occupied skills valuable to specific occupations and industries which suffered from a large number of vacancies. With this immigration also increase aggregate demand and hence the derived demand for labour, which in turn slightly helps the cyclical side of unemployment.
To address long term unemployment, the government has made a major change in the welfare and tax systems to strengthen the incentive and obligations of welfare recipients to seek paid casual, part-time or full time work. Long term unemployment which is characterised as someone being unemployed for over 12 months generally carries a heavy burden on the economy because it costs the government tax revenue and causes others in the economy to pay more tax to help cover the welfare. Recently to address this, the government in 2008-09 announced cuts in personal income tax during July 1st 2008 – July 1st 2010 to improve further incentives for individuals, including part time workers to participate in the workforce. In the 2011-12 budget, as a part of the Building Australia’s Future Workforce package, the Australian government announced measures to encourage participation and incentives in paid work for disadvantaged groups such as young people, single parents, people with disability and people in disadvantage locations; all of which make a big part of the long term unemployed. Such incentives included the Low Income Tax Offset. Following this in the 2012-13 budget, the federal government’s Building Australia’s Future Workforce skills package contained funding for over 50,000 new training places. Funding was also allocated to help mature age workers to up-skill and re-skill. Money was also allocated to help for child care assistance to increase parents’ workforce participation.
Like any economy, Australia suffers from numerous forms of unemployment. The main forms they suffer from are cyclical, structural and long term unemployment. To address these main forms of unemployment in the economy, the Australian government has actively involved itself in four main policies available to them to reduce unemployment. These four main policies include stimulatory monetary policy through cuts to interest rates, expansionary fiscal policy through an increase in government spending and/or cuts in taxes, industrial relations policy or wages policy to contain growth in aggregate wages and microeconomic reform policies to improve the economy’s resource allocation and productivity.