Economic Indicators: Unemployment Rate

Learning Goal

I can explain how unemployment is used as an economic indicator to measure the performance of an economy.

Key Terms

  • Unemployment Rate: The percentage of people in the labor force who are unemployed.

  • Labor Force: All the members of a particular organization or country who are able to work, viewed collectively.

  • Employed: Includes people who are in a paid job.

  • Unemployed: Includes people who are not in a paid job but who are actively looking for work.

  • Not in the Labor Force: Includes people not in a paid job and who are not looking for work.

Estimate of Working Hours for Employment Classification

According to the Australian Bureau of Statistics (ABS), a person only needs to be employed for one hour per week to be considered ‘employed.’ This includes all Australians aged 15 years and over, from teenagers to older people.

Unemployment Rate as an Economic Indicator

The unemployment rate is an important indicator of how well the Australian economy is performing. It represents the percentage of people in the labor force who are unemployed. Source 1 shows that Australia’s unemployment rate was over 10 percent at the beginning of the 1990s but in 2015 was just over 6 percent.

Consequences of High Unemployment

When the total unemployment rate in Australia is high, the government collects less revenue in the form of taxes and must also pay more to assist the unemployed in the form of social benefits and welfare programs. There are a range of other social consequences associated with high unemployment rates, such as a reduced standard of living, loss of skills from the workforce, and the possible psychological effects of not working (such as depression). It is useful to look at unemployment rates for various groups in society as an economic and social indicator of how well our economy is performing.

Causes of Unemployment

There are many causes of unemployment:

  • Weak goods and services production (and GDP)

  • Decreased spending

  • Increased competition from overseas

  • Introduction of labor saving technology

When production or GDP is weak and spending in the economy has decreased, businesses may cease to hire new staff or cut back on staff in order to save money and stay in business. Unemployment may also rise because of factors such as increased competition from overseas, making it difficult for Australian businesses to compete. Businesses may take their operations offshore (to other countries) or may close down. Labor-saving technology may also be introduced which may lead to unemployment, even if it is in the short term.

Youth Unemployment

The youth unemployment rate in Australia is over 13 percent – that’s more than double the general unemployment rate according to ABS figures released in 2015. Some geographical regions, however, suffer higher rates of youth unemployment. Technological change has contributed to youth unemployment. Jobs like working on a cash register, or becoming a sales assistant, a ling clerk or a typist are no longer as plentiful as they once were. This has meant that many young people have found it difficult to ‘get their foot in the door’ and gain much needed work experience. Professor Phil Lewis at the University of Canberra says,

Types of Unemployment

  • Cyclical Unemployment: Unemployment that occurs due to downturns in the economy. During recessions, demand for goods and services decreases, leading to job losses.

  • Seasonal Unemployment: Unemployment that happens when jobs are only available at certain times of the year, such as agricultural work, tourism, or holiday retail positions.

  • Structural Unemployment: Unemployment caused by a mismatch between workers' skills and the skills needed for available jobs, often due to technological advancements or changes in the economy.

  • Frictional Unemployment: Short-term unemployment that occurs when people are between jobs or are entering the workforce, such as recent graduates or individuals who voluntarily left their job to find a better one.

Limitations of Unemployment Rate

  1. Unemployment doesn’t account for discouraged workers

  2. Does not reflect underemployment

  3. Ignores regional or demographic differences

  4. Does not reflect job quality

  5. Misclassifies job seekers

Apply Your Knowledge: Unemployment Scenarios

  • Scenario 1: Sara, a recent marketing graduate taking a short break before starting work and actively searching for a job, is experiencing frictional unemployment.

  • Scenario 2: Factory workers who lost their jobs due to a decline in DVD demand and lack skills for new opportunities are facing structural unemployment.

  • Scenario 3: Employees laid off from a luxury goods company during a recession are experiencing cyclical unemployment.

  • Scenario 4: Tom, a lifeguard employed only during the summer, faces seasonal unemployment.