Full Employment and Unemployment Notes

Goal of Full Employment

• The government aims for the lowest unemployment rate to maintain economic growth without causing inflation, ideally around 4-4.5%.

• Cyclical unemployment due to weak aggregate demand (AD), slow economic growth, or recession should be eliminated.

• A healthy economy will have some unemployment, confined to natural types like structural, seasonal, and frictional.

• Temporary unemployment can drive efficiency as people move to better jobs.

RBA Deputy Governor, Michelle Bullock Quote

• Full employment balances labor demand and supply, aligning with the inflation target.

• This employment level is sustainable for long-term price stability.

• Too much labor demand raises wages and inflation.

• Insufficient demand leads to spare capacity and downward pressure on wages and inflation.

• Price stability and full employment are intertwined.

Why Strive for Full Employment?

• Unemployment causes financial strain and affects well-being.

• Work provides dignity and purpose; unemployment harms mental and physical health, especially long-term.

• The young, less educated, and lower-income groups disproportionately suffer from unemployment.

• Improved employment outcomes are more beneficial than wage increases for these groups.

The NAIRU (Non-Accelerating Inflation Rate of Unemployment)

• Full employment is hard to observe directly; we infer it.

• NAIRU is a concept where there's a short-run trade-off between inflation and unemployment.

• Low unemployment can raise wage and price pressures, while high unemployment does the opposite.

• If unemployment is too low for too long, inflation expectations rise, making it harder to control inflation.

• NAIRU is the unemployment rate at which inflation neither rises nor falls.

• Statistical models use indicators like unemployment, wages, and inflation to estimate spare capacity in the labor market, as we can't directly observe NAIRU.

NAIRU Explained

• NAIRU is approximately 4-4.5% of the labor force.

• It's the lowest rate possible without causing inflation, also known as the natural level of unemployment.

• Non-Accelerating Inflation Rate of Unemployment (NAIRU): The lowest unemployment that doesn't significantly accelerate inflation.

• Example: If unemployment stays at 3% for long, cost inflation accelerates because:

  • Labor shortages cause wages to rise.

  • Businesses raise prices to protect profits, passing wage costs to consumers.

Goal of Full Employment Summary

• It's the lowest unemployment rate (around 4.0-4.5%) that doesn't accelerate inflation (NAIRU) or undermine other goals.

Achieving Full Employment Helps:

• Ensure output and incomes are close to capacity.

• Strengthen material and non-material living standards.

• Reduce income inequality.

• Strengthen the government's finances for community services.

Consequences of High Unemployment (e.g., 6%)

• Lower output and incomes due to wasted capacity.

• Lower living standards and greater inequality.

• Weakened government finances.

Consequences of Low Unemployment (e.g., 3%)

• Inflationary pressures reduce purchasing power.

• Undermines international competitiveness and trade balance.

Employment vs Unemployment

Employment:

• A person over 15, willing and able to work, with a paid job working more than one hour a week.

• Provides income and better living standards.

Unemployment:

• Aged 15 and over, actively seeking work but unable to find a job.

• Prevents contribution to national production.

• Often requires welfare payments, burdening taxpayers.

• Leads to uneven national incomes.

Classifications within the Labor Force (ABS)

Employed:

• Working full-time (35+ hours) or part-time (1+ hours) for pay, or 15+ hours in a family business without pay.

• Aged over 15.

• Includes those with a job but temporarily absent due to illness, strikes, holidays, etc.

Unemployed:

• Actively seeking full- or part-time work but unable to find it.

• Able and willing to work in the week before the survey.

• Aged over 15.

• Includes those waiting to return to work after being laid off.

Hidden Unemployment:

• Individuals who want a job but are discouraged and have stopped looking.

• Not actively looking for work, so not in official ABS statistics.

Underemployment:

• Having a job but not working to capacity.

• Example: part-time jobs with limited hours.

• The underemployment rate includes those seeking more work or more hours.

Frictional Unemployment:

• Natural unemployment type.

• Unemployment between finishing one job and starting another.

• Common in building trades and rural industries.

Long-Term Unemployment:

• Unable to find a job for 52+ weeks.

• Indicates labor market health; rises in recessions and falls in recoveries.

ABS Labour Force Survey

• Conducted monthly.

• Interviews approximately 0.7% of Australian households as a representative sample.

• Compiles statistics on:

  • Labor force size and growth

  • Employment and unemployment rates

  • Labor force underutilisation rate

  • Participation rate

  • Duration of unemployment

  • Annual change in aggregate hours worked

  • Number of job vacancies

Calculating Employment & Unemployment Rates

• Expressed as an actual number or a percentage of the total labor force.

Unemployment Rate Formula

$Unemployment \space Rate \space ($

Participation Rate

• Proportion of people aged 15+ who are in the labor force (employed or unemployed).

Labour force Underutilisation Rate

• The extent to which available labour is not working at its capacity.

• This is equal to the unemployment rate plus the underemployment rate.

Describing the Labor Market

Tight Labor Market – No Spare Capacity

• Low unemployment

• High labor demand

• Low available labor supply

• Labor shortages

• Upward pressure on wages

Loose Labor Market – Spare Capacity Available

• Higher unemployment

• Lower labor demand

• High labor supply

• Labor surplus

• Downward pressure on wage growth

Limitations of Unemployment Statistics

• Definitions of employment and unemployment are somewhat arbitrary and affect the result.

  • The cut-off point for employment is those who work more than one hour a week.

• The statistics fail to account for the hidden unemployed.

  • This category includes those who are discouraged from seeking jobs because of their feelings of hopelessness.

  • As they are not ‘actively looking for work’, they are not regarded as members of the labour force, nor are they classified as unemployed during normal surveys.

  • The inclusion of these people would cause a much higher level of unemployment than is currently reported.

  • For instance, the ABS has conducted a survey of hidden unemployment and found that their inclusion would have more than doubled the official unemployment rate

• Changes in the participation rates and other factors can affect the results.

  • A change in the participation rate, the duration of unemployment or the proportion of those in fulltime work, could have caused the unemployment rate to either look better or worse.

• Survey error.

  • With only around 0.7 per cent of Australia’s population being surveyed across different regions, industries and occupations, the likelihood of error in the results is higher than would be the case with a survey of all workers.

Types of unemployment

Cyclical unemployment

• Cause: weaker aggregate demand factors that slow spending on Australian-made goods & services.

Structural Unemployment

• Cause: changing aggregate supply conditions that alter the way goods/services are produced and/or whether firms close down

Causes of cyclical unemployment

• Weaker AD conditions raise cyclical unemployment: level of spending, production and economic activity collapse possibly leading to recession and cyclical unemployment. This is because falling levels of AD means that firms will notice rising stocks and fewer orders à will cut production, which weakens demand for resources (including labour) and raises the level of cyclical unemployment.

• Stronger AD conditions decreases cyclical unemployment: AD is accelerated, firms notice rising sales, falling stocks and greater orders for goods and services à businesses will try to lift output by employing more resources, including labour.

  • NOTE: once the pool of cyclical unemployment is eliminated, further falls in unemployment would not easily be possible à this would cause labour shortages, driving up wages and causing cost inflation.

  • AD FACTORS = consumer confidence, business confidence, disposable income, population growth, budgetary policy effects, interest rates, the exchange rate & overseas economic activity.

Causes of structural unemployment

• The BIGGEST SINGLE CAUSE of natural unemployment & accounts for most of Australia’s current unemployment rate.

• Occurs because of structural change where businesses alter the way they go about producing goods and services and try to cut costs of lift efficiency.

• FOR EXAMPLE:

  • Use of new technology

  • A mismatch of skills among the unemployed and job vacancies

  • Business closures and relocation due to high costs, poor profits and a lack of international competitiveness

• This represents that NON-ACCERLERATING INFLATION RATE OF UNEMPLOYMENT (NAIRU) – that is the lowest unemployment will not lead to increased conditions.