Employed person: a person who works at least 1 hour per week in paid employment or works 15 hours unpaid in a family business in the survey week.
Unemployed person: a person who works less than 1 hour per week or less than 15 unpaid hours in a family business and has actively looked for work during the past month.
Underemployment: a person is employed but is not working as many hours as they would like and/or need.
Labour force: total number of people over the age of 15, currently employed added to the total number of people over the age of 15, currently unemployed but actively engaged in seeking a job, also known as the ‘working population’.
Participation rate: the percentage of the population over the age of 15 that is in the labour force.
Civilian labour force: the sum of all people 15+ who are employed or unemployed and actively seeking work (i.e., the labour force) in the civilian population.
New entrants seeking work; Re-entrants; Lost last job; Quit last job; Laid off (temporarily): examples of the dynamics within the labour market.
Not in the labour force / Outside labour force / inactive population: people who are neither employed nor actively seeking work.
Labour force concepts: who is counted
Working-age population: people of working age (commonly 15+).
Labour force vs outside labour force: those in the labour force are either employed or unemployed and seeking work; those outside are inactive.
The civilian labour force excludes armed forces, and often excludes certain subgroups (e.g., students, retirees, discouraged workers).
In and out of labour: the structure
Working-age population → includes Employed and Unemployed (labour force).
Labour force → Employed + Unemployed (actively seeking).
Outside labour force (inactive) → those not in the labour force.
Significance of unemployment
Primary economic problem: unlimited wants with scarce resources; unemployment represents underutilisation of labour and spare capacity.
When unemployment is present, the economy operates below potential output (inside the Production Possibility Frontier, PPF).
The unemployment rate is a major economic indicator used to judge economic performance and informs policy.
High unemployment affects government policy: higher transfer payments (e.g., unemployment benefits) reduce revenue available for other spending; long-term unemployment leads to economic and social hardship.
How unemployment is measured (ABS methodology)
Measurement source: monthly ABS household survey of a random sample; includes people 15+.
Employed definition: worked at least 1 hour in paid work during the survey week or at least 15 hours unpaid in a family business.
Unemployed classification: if unemployed, they are asked whether they have looked for work in the last month; if yes, they are counted as unemployed and part of the labour force.
Criticisms of how unemployment is measured
Overstating unemployment (UE rate):
Respondents may report seeking employment to access benefits or due to misclassification (e.g., those engaged in illegal activities).
Understating unemployment:
Discouraged workers (those who would like to work but have stopped seeking) are not counted as unemployed.
All part-time workers are counted the same as full-time workers, masking underemployment.
Other measurement gaps:
No account of hours worked (involuntary leisure vs. leisure deprivation).
No earnings differentials across jobs, no treatment of duration of unemployment, job security, or job type.
Calculating key rates (formulas)
Unemployment rate:
u = rac{U}{L} imes 100
where U = number of unemployed people, L = labour force (employed + unemployed).
Participation rate:
p = rac{L}{N} imes 100
where N = population aged 15 and over (working-age population).
Full-time/Part-time employment distinction (for context): employed individuals are categorized as full-time or part-time within the employed total.
Underemployment rate (two common measures):
Definition A (share of employed who are underemployed):
ext{Underemployment rate} = rac{Ue}{E} imes 100
where Ue = number of underemployed people, E = number of employed people.
Definition B (underutilisation rate: unemployed + underemployed as a share of labour force):
ext{Underutilisation rate} = rac{U + Ue}{L} imes 100
where U = unemployed, Ue = underemployed, L = labour force.
Practice calculation concepts (from the slides)
Data categories used: civilian population over 15, employed (full-time and part-time), not in the labour force, unemployed, underemployed.
Practice steps:
Step 1: Labour force = Employed (full-time + part-time) + Unemployed.
Step 4: Underemployment rate = (Underemployed / Employed) × 100 (or use the alternative underutilisation rate as defined above).
Types of unemployment
The overall number of unemployed arises from three types of unemployment. Understanding the type helps policy makers.
The three types:
Frictional
Structural
Cyclical
The three types of unemployment
Frictional unemployment
Definition: unemployment caused by the normal search time required by people with marketable skills who are changing jobs, initially entering the labour force, or re-entering the labour force.
Characteristics: always present; can be positive for the economy as it allows skills to be moved to where they are needed; short-term.
Labour-market frictions: imperfect information; limited knowledge about vacancies; geographic constraints can hinder matches.
Examples:
Ski-resort workers in Victoria between seasons.
Farm labour during harvest and layoffs after harvest.
Short-term lay-offs in construction.
Graduates taking time to find best-fit opportunities.
Relocation delays for new jobs.
Seasonal jobs (e.g., ski resorts).
Structural unemployment
Definition: long-term or permanent unemployment resulting from a mismatch between the skills of workers and the skills demanded by employers.
Causes: changes in the structure of the economy (new technologies, shifts in demand, globalization); skill, age, location mismatches; need for retraining.
Market mechanism: labour market acts like any other market; wages adjust to equilibrate demand and supply, but mismatches persist.
Consequences: persistent unemployment in affected groups; higher training and retraining costs; geographic and skill mismatches.
Cyclical unemployment
Definition: unemployment arising from the business cycle – downturns reduce aggregate demand and production, leading to job losses.
Relationship to economy: rises when real GDP falls; falls when economy expands.
Historical reference: Australia experienced higher unemployment during the recessions of the 1980s and 1990s (>6%).
Interaction: because frictional and structural unemployment exist, cyclical unemployment explains fluctuations around the “natural” rate.
Causes of structural unemployment (detailed)
Minimum wages
Definition: legal lower bound on wages for specified groups.
Effect: can push wages above market-clearing levels, reducing demand for labour and causing unemployment among less-skilled workers.
Wages determined by the labour market; a minimum wage can interfere with price discovery and may act like a price floor.
Trade unions
Effect: can push wages above the equilibrium wage; firms may hire fewer workers to avoid costly strikes; higher wages reduce labour demand and can increase unemployment.
Technology and automation
Effect: shifts in production processes replace labour with capital; workers must retrain to meet new needs.
Changes in tastes, demand, and production structures
Examples: consumers switching to imported cars or newer products reduces demand for certain domestic jobs.
Education and skills mismatch
Education deficiencies can leave workers ill-equipped for evolving job requirements; retraining is needed.
Visual and market analogies
The labour market as a market for wages:
Equilibrium wage is determined by demand for and supply of labour.
Structural changes shift the demand or supply curves, creating unemployment even at wage that clears the market for some groups.
Cyclical unemployment (revisited)
Causes: directly tied to downturns in the business cycle; reduced output leads to lower demand for labour.
Policy relevance: macro stabilization policies aim to reduce cyclical unemployment by boosting aggregate demand.
The natural rate of unemployment and NAIRU
Full employment vs zero unemployment:
Full employment exists when the economy is operating at an unemployment rate equal to the sum of frictional and structural unemployment.
Cyclical unemployment is zero at full employment.
NAIRU (non-accelerating inflation rate of unemployment): the estimated rate of unemployment at which inflation is stable (does not accelerate or decelerate).
Current estimates (contextual): Australia’s natural rate has been discussed around 4.0–4.5% in recent years, with debate about exact level.
Important note: Economists cannot state with certainty the precise split between frictional and structural unemployment at any moment; NAIRU is an indicative target, not a precise measurement.
Phillips Curve
Core idea: inflation and unemployment have an inverse relationship.
Origin: William Phillips linked economic growth to inflation and employment levels.
Graphical representation: downward-sloping (inflation on the y-axis, unemployment on the x-axis), typically convex.
Interpretation: lowering unemployment can raise inflation and vice versa; a trade-off exists in the short run between inflation and unemployment.
Caution: the relationship can shift due to expectations, supply shocks, and policy regimes; the curve is not fixed in the long run.
Costs of unemployment
Two perspectives:
Economic costs
Social costs
Economic costs
Spare capacity means the economy operates below potential; output is below potential GDP, reducing growth and living standards.
Tax revenue declines (particularly income tax) while transfer payments rise, increasing fiscal pressure.
Prolonged unemployment can lead to lower wages and worse long-term career prospects for individuals.
Long-term unemployment can cause hysteresis, reducing future earning potential.
GDP Gap concept: the difference between potential GDP and actual GDP.
GDP Gap
Definition: the shortfall between potential GDP and actual GDP when unemployment is above the natural rate.
Consequence: lower living standards and slower growth.
Visual reference: depicted here in relation to the Production Possibility Frontier (PPF).
Social costs
Health impacts (physical and mental), greater hardship for youth and older workers, increasing skills mismatch costs.
Societal inequality and reduced equity.
Reducing unemployment: policy options
There are two broad policy categories:
Demand-side policies (AD-focused)
Supply-side policies (productivity and structure-focused)
Demand-side policies
Goal: increase aggregate demand to generate more jobs.
Mechanisms:
Fiscal policy (government spending and taxation): raise government spending or cut taxes to stimulate demand and create jobs.
Monetary policy (central bank actions, e.g., RBA cash rate): lower interest rates to encourage spending and investment, thereby increasing aggregate demand.
Examples
Infrastructure spending (e.g., Metronet in Perth) to create construction jobs.
Government spending on hospitals and schools to raise incomes and stimulate consumption.
Pandemic-related grants to support construction and other sectors.
Supply-side policies to reduce unemployment
Goals: raise the economy’s productive capacity and employment potential; reduce structural unemployment.
Common reforms and rationale:
Curtailing union power: move wages closer to the market-clearing level; can increase employment.
Reducing taxes on labour: lowers cost of hiring, increases demand for labour; payroll tax reductions as an example.
Reducing taxes on capital: encourages investment and growth, leading to job creation.
Reforming welfare benefits: large unemployment benefits can create an incentive to search less for work; reforms can reduce “cruising.”
Deregulating the labour market: greater flexibility to hire and fire can encourage firms to create more jobs and respond to changing conditions.
Training and education reforms: align skills with labour-market needs; improve retraining programs.
Data caveats and trends
ABS data includes seasonally adjusted and trend estimates; trend estimates can be subject to “trend breaks,” especially during extraordinary events (e.g., COVID-19).
Use caution when interpreting trend data; seasonally adjusted figures help compare across periods.
Full employment condition: u = u{ ext{frictional}} + u{ ext{structural}}, ext{ with } u_{ ext{cyclical}} = 0
Connections to broader concepts
Links to the economic problem: scarcity, choice, and allocation of resources.
Production Possibility Frontier (PPF): unemployment implies operating inside the PPF; GDP gap reflects underutilisation of resources.
Policy trade-offs: balancing inflation and unemployment (short-run Phillips curve vs. long-run neutrality).
Real-world relevance: policy choices affect macro outcomes (growth, inflation, employment) and social well-being; the role of institutions (unions, welfare, tax policy) shapes structural outcomes.
Ethical and practical considerations
Policy tensions: expanding demand can raise inflation if the economy is near potential output; supply-side reforms may improve long-run growth but have short-run costs.
Equity concerns: long-term unemployment disproportionately affects youth and older workers; education and retraining policies are critical to mitigate inequality.
Welfare reforms: need to balance reducing disincentives to work with providing genuine support for those in transition.
Automation and globalisation: structural shifts require proactive retraining and regional development strategies to avoid prolonged unemployment across groups.
Quick glossary of key terms
NAIRU: Non-Accelerating Inflation Rate of Unemployment — the unemployment rate at which inflation remains stable.
Fraser: not applicable here; focus remains on unemployment concepts and policy tools.
GDP Gap: Shortfall of actual GDP from potential GDP due to underutilised resources.
Frictional unemployment: Short-term unemployment due to normal job-search processes.
Structural unemployment: Long-term unemployment due to mismatches between skills and job requirements.
Cyclical unemployment: Unemployment tied to the business cycle fluctuations.
Underemployment: Employed but working fewer hours than desired.
Underutilisation: Combined measure of unemployment and underemployment relative to labour force.
Summary takeaway
Unemployment arises from three main channels (frictional, structural, cyclical) and has both economic and social costs.
The natural rate of unemployment (NAIRU) represents the level of unemployment when inflation is stable and cyclical unemployment is zero.
The Phillips Curve describes an inverse relationship between unemployment and inflation in the short run, with policy trade-offs to balance macro objectives.
Policy responses to unemployment are divided into demand-side and supply-side tools, each with distinct mechanisms, benefits, and potential drawbacks.
Accurate measurement and awareness of measurement limitations are essential for sound policy-making and interpretation of labour-market data.