Unemployment in Australia and Policies to Reduce It

During the 1970’s-1990’s the increase in the rate of unemployment in Australia can be explained through the combination of increasing real wage rates and a slow rate of output growth. The reason behind such prolonged periods of high unemployment was due to our inability to reverse the effects of the sudden unemployment rate shocks fast enough (prolonged recovery periods) which resulted in Australia experiencing high levels of long-term unemployment. In May 1997, 30% of unemployed Australians had been out of work for over a year, this was roughly 240,000 people.
Since the 21st Century however, unemployment rates have decreased significantly and there has been a perceived decline in the natural rate of unemployment. This decline however may be misleading. Studies performed on recovery periods during the 1980’s and 1990’s have shown that although unemployment rates changed at a similar pace, employment growth and labour force participation rate in the 1990’s was much slower than that of the 1980’s. Essentially, the differences between employment growth rates during the 1980’s and 1990’s were due to hidden unemployment and the decline in rates of employment growth due to structural changes e.g. permanent downsizing. The reason why slower employment growth did not actually manifest itself into higher rates of unemployment in the 1990’s, is that growth in labour force participation rate (number of people who are looking for work) declined alongside employment growth. In other words, not only were there less employment opportunities but there were also less people actively seeking work. If the labour force participation rate had grown at the same rate as it had in the 1980’s the aggregate rate of unemployment for May 1997 would have been 12.5% rather than the actual figure of 8.8%. The same reasoning could be applied to explain our recent decline in the natural unemployment rate.

Policies to Reduce Australian Unemployment
1. Labour Market Programs Involving Retraining-
The idea behind these programs is to reduce the rate of structural unemployment. The plan is to retrain workers so that the skills they acquire will be aligned to the skills employers are looking for. In a labour market that is evolving rapidly those that are unemployed for long periods of time are unable to keep their skills up to date, which in turn makes it harder for them to get work. These programs are designed to reduce the chance of this occurring.

2. Work- for- the- Dole (unemployment benefits)
This program was introduced to help job seekers improve their employment prospects by providing them with opportunities for work experience in a number of different fields. Like the retraining programs the idea is to give the unemployed opportunities to acquire new skills so as to make them more attractive to potential employers.

3. Reduction in (the growth rate of) Real Wages
The rationale behind this policy is that a fall in the real wage rate implies that the price of output is increasing relative to money wages. To firms this means profits are rising which in turn means they will want to produce more. In order to do so they will require more labour. Hence, unemployment is likely to decrease. Conversely, as the real wage rate increases, labour becomes more expensive. Therefore, all other things equal, firms will reduce the amount of labour.

4. Reduction in Trade Union Power
This policy is based on the idea that Trade Unions (TU) work to increase workers rights and wages. However, it has already been noted that increasing wages means labour becomes more expensive and therefore firms will demand less; if demand for labour falls, unemployment will rise. Further it can be argued that in order to reduce unemployment amongst low skilled workers, their wages actually need to be reduced, relative to high skilled workers. TU’s are also thought to have an effect of decreasing total productivity. Decreased productivity means firms are not making as much money and therefore will not be able to increase human capital as much as they would if they were operating at full productivity. Reducing TU power means that they are less able to affect wages and productivity in such a way that actually increases the likeliness of unemployment.
References
Booth, A. (1984). A public choice model of trade union behaviour and membership. Economic Journal 94: 883–898. Dunlop, J.T. (1944). Wage determination under trade unions. New York: Macmillan. Farber, M.S. (1986). The analysis of union behaviour. In O. Ashenfelter and R. Layard (Eds.), Handbook of labour economics. Amsterdam: North-Holland. Harris, R.I.D. (1988). Technological change and regional development in the UK: Evidence from the SPRU database on innovations. Regional Studies 22: 364–374. Hitchens, D.W.M.N. and O 'Farrell, P.N. (1987). The comparative performance of small manufacturing firms in Northern Ireland and South East England. Regional Studies 21: 543–553. Lindbeck, A. and Snower, D.J. (1988). The insider-outsider theory of employment and unemployment. Cambridge, MA: MIT Press. McCormick, B. (1988). Measuring unemployment in the British labour market. University of Southampton. Mimeo.

References: Booth, A. (1984). A public choice model of trade union behaviour and membership. Economic Journal 94: 883–898.