Unemployment (8)

Define work

Human effort that produces goods and services

What is Australia's current unemployment rate

4.5% (June 2025)

What is the target range for unemployment rate

4 - 4.5%

Define and state the 3 categories of employment

1. Employed: People who completed at least one hour of paid work in a week.
2. Unemployed: People who are not employed but are actively seeking employment and are willing and able to start work if offered a job.
3. Not employed: People who are not in a paid job and are not looking for work. (Studying, caring for children, retired or permanently unable to work)

Define labour force and how is it calculated

The section of the population 15 years of age and above who are either working (employed) or actively seeking work (unemployed)
LF = Unemployed + Employed

Define participation rate and how is it calculated

The percentage of the working age population who are either in work or actively seeking work
Participation rate = Labour force/ Working age population x 100

Define unemployment rate and how is it calculated

The percentage of people who are willing and able to work but cannot find a job.
Unemployed / labour force x100

Define the underemployment rate and how is it calculated

A person who has part time or casual work but would prefer to have a full time job, or those working full time, who would like to work a second job or overtime to gain extra income.
Underemplyment rate = underemployed PT workers / labour force x100

Define underutilisation rate and how is it calculated

People who are not working but want to work and those how are working but want to work more.
Underutilisation rate = unemployment rate + underemployment rate

Define the working age population

The portion of the population aged between 15 and 67

Define structural unemployment

Occurs because of structural changes within the economy caused by either changes in technology or the pattern of demand for goods and services.

Describe Structural unemployment

• As industries grow and others decline there is a mismatch between knowledge and skills required, and those on offer in the supply side of the labour market
• Structural unemployment should be temporary as those who have been displaced can retrain, reskill and move on to another field
• Duration may be quite long

Define cyclical unemployment

Occurs with changes in economic activity over the business cycle

Describe cyclical unemployment during a trough/ downswing and boom/ upswing

During downswing/ trough

• Slowdown in economic activity
• Restrained spending on consumer durables, reduction in the level of business investment and lower business and consumer confidence
• Cyclical unemployment rises in occupations where income or revenue has fallen such as construction and hospitality
  During upswing/ boom
• Increase in economic activity
• Higher levels of spending on consumer durables, increased business investment and improved business and consumer confidence
• Cyclical unemployment decreases in occupations such as sales-oriented jobs like discretionary goods and motor vehicle retailing

Define Frictional unemployment

Represents the people who are temporarily unemployed as they change jobs; they have finished one job but have not started a new one.

Describe frictional unemployment

• Generally, takes time to move from one job to another
• Likely to be for a short duration
• Costs for individuals involved and for the economy but it is beneficial if the search process leads to better outcomes for workers and their employees
• Increased by delays in matching unemployed people to available jobs
• Improving the efficiency of job matching services can reduce frictional unemployment

Define seasonal unemployment

Occurs at predictable and regular times throughout the year because of the seasonal nature of some kinds of work.

Describe seasonal unemployment

• Part of frictional unemployment, but may be considered separate since some industries or occupations are characterised by the seasonal nature of work

Define hard core (Long term) unemployment

Used to refer to people in the labour force who experience regular or permanent periods of unemployment or long-term unemployment.

Describe hard core (long term) unemployment

• Could be difficult to get back into the workforce for variety of reasons, including social factors, demographic factors and unexpected exogenous events
• Results in loss of skills and knowledge, which continues to reduce ability to gain future employment

What is the natural rate if unemployment

The Minimum level of unemployment that can be achieved, given the current characteristics of the labour market.

What is the current estimated rate of natural rate of unemployment

4 - 4.5%

What are the 2 reasons for the natural rate of unemplyment

Reasons the Natural Rate of Unemployment is not 0%

1. The economy will always experience structural unemployment as the structure of the economy changes

• Some workers lose jobs due to changing technology and the decline of some industry sectors
• Example: Increased concern for the environment means a decline in timber milling

1. The economy will always experience frictional unemployment as workers leave jobs to search for one which is more suitable

• Result in them being unemployed for a period of time while they apply for other positions.
• Example: Internet has made it easier to search for new jobs making it more likely to switch jobs

What is the non accelerating inflation rate of unemployment (NAIRU)

Non-Accelerating Inflation Rate of Unemployment (NAIRU): The lowest unemployment rate that can be sustained without causing inflation to rise

What happens if unemployment is below 4.5%

Unemployment is below 4.5%

• Upward pressure on prices causes inflation to increase beyond the target
• Because more people are employed and earning income which increases consumption spending, causing upwards pressure on prices.

What is unemployment is above 4.5%

Unemployment is above 4.5%

• Downward pressure on prices is causing inflation to decrease below the target
• Because less people are employed and earning an income which decreases consumption spending cause a downward pressure on prices.

What are the 4 effects of unemployment: Economically

GDP gap, Standard of living, decline in labour market skills for long term employed and Cost to government

Explain GDP gap as an effect of unemployment economically

Unemployment means that the economy's resources are not being utilised to their full capacity
The economy is producing within its PPF at point B. At this point both goods have a high opportunity cost since resources are not allocated efficiently.
This means that total output is below where it could be if the economy utilised its resources to full capacity and was functioning on the PPF such as Point A.
This creates a GDP gap which is the difference between the actual and potential output and income in the economy.
In the PPF above the gap is the difference between actual output which lies within the PPF at point B and potential output at point A.
This gap represents the cost of unemployment in terms of lost output and income.
This will lead to lower household incomes, higher unemployment, reduced business investment and potential business failure.

Explain Lower standard of living as an effect of unemployment economically

• Affected households have less disposable income
• Limits their ability to afford essential and non - essential goods and services
• Results in a decrease in spending, decreasing the production and consumption of goods and services,
• Reduces sales revenue for businesses (can spend on research innovation, capital equipment and employment training)
• Results in lower levels of productivity and a slower rate of economic growth

Explain a decline in labour market skills for the long term unemployed as an effect of unemployment economically

• Decline in labour force skills as individuals out of work miss out on opportunities to practise and update their skills
• Rapid technological advancements and evolving industry practices widen this gap and outdate skills
• Those who are unemployed will lose their labour market skills, self-esteem, and experience and become less employable or unemployable
• Overall productivity and competitiveness of the labour force decrease, resulting in decreased economic growth
• These workers must upskill and retrain to re-enter the workforce
• Creates direct costs such as funding for training, materials and instructor and indirect costs like time unemployed (instead of doing productive work)
• Become government costs

Explain the cost to government as an effect of unemployment economically

• Decrease in income levels, which reduces revenue received from personal income tax
• Government provides unemployed people with transfer payments and funds training and labour market programs
• Causes budget deficit

What are the 2 effects of unemployment socially

Increase in inequality, and other social costs

Explain an increase in inequality as an effect of unemployment socially

• More frequent among lower income earners (young and unskilled)
• Become relatively worse off compared to higher income earners, contributing to poverty and overall inequality in income distribution

Name some other social costs of unemployment

• Severe financial hardship
• Increased levels of debt
• Homelessness and housing problems
• Family tension and breakdowns
• Boredom
• Increased social isolation
• Crime
• Erosion of confidence and self-esteem
• Poor physical health
• Poor mental health

Summarise inflation in 2020: Pandemic

• COVID-19 pandemic caused unemployment to rise above the target range, reaching 7.5% (July 2020)
• Lockdowns and border closures reduced production of goods and services and forced many businesses to close
• Employment opportunities, job vacancies and hours worked decreased across all sectors
• Workers, especially in tourism, hospitality and retail, were discouraged in applying for jobs
• As lockdowns eased, unemployment initially surged due to more people re-entering the labour force and applying for jobs
• Job Keeper provided $1500 per eligible employee per fortnight for 6 months to help businesses retain staff by lowering labour costs
• Without this support, unemployment would have been 10- 15%

Summarise inflation in 2021 - 2023: Recovery

• From Jan 2021, Australia's unemployment rate began to fall below the target
• It reached a 48-year low of 3.4% (Oct 2022)
• Decline was driven by increased consumer and business confidence, leading to more spending and higher labour demand
• Easing of lockdowns and border closures boosted employment in tourism, hospitality and retail
• Participation rate rose as more people aged 15+ joined the workforce
• Population growth contributed to an increase in the size of Australia's labour force
• Underemployment also declined due to more hours being worked across various sectors

Summarise unemployment in 2023 - 2024: Current

• Since 2023, Australia's unemployment rate has remained stable and within or below the target range
• Stability driven by strong labour demand and job growth across sectors like healthcare, technology and construction
• Ongoing post-pandemic recovery boosted business activity and job creation
• Global economic stability and higher demand for Australian exports supported employment in export-related industries
• Labour force participation increased as more individuals entered the job market

Define Phillips curve

An economic model showing that there is an inverse relationship or a trade-off between inflation and unemployment

Draw a graph on a piece of paper and explain the model answer on inflation and unemployment during a trough/ downswing

In a trough/ downswing, unemployment tends to increase from Ue1 to Ue2, as many consumers are unemployed, they do not have income to purchase goods and services, and as a result, the price of goods and services decreases. This leads to a decrease in the level of inflation in the economy from CPI1 to CPI2.
For example, the 2020 COVID recession led to an increase in unemployment from 5.2% (Mar 2020) to 7.4% (June 2020), resulting in a decrease in inflation from 2.2% (Mar 2020) to - 0.3% (June 2020)

Draw a graph on a piece of paper and explain the model answer on inflation and unemployment during a boom/ upswing

In a boom/ upswing unemployment tends to decrease from Ue1 to Ue2, as many consumers are employed, they have income to purchase goods and services, and as a result the price of goods and services increases. This leads to a increase in the level of inflation in the economy from CPI1 to CPI2.
For example, since 2022 the Australian economy has been recovering from the COVID pandemic which lead to a decrease in unemployment from 4.0% (Mar 2022) to 3.5% (Dec 2022). This resulted in an increase in inflation from 5.1% (Mar 2022) to 7.8% (Dec 2022)