Australian Economy – Unemployment Essay

Resource Description

Explain the causes of UNEMPLOYMENT and its effects on the Australian economy. (960 words approx 35 mins without graphs)

Unemployment arises when individuals want to work but are unable to find a job. The unemployment rate is determined by dividing the number of unemployed people by the labour force. The two main forms of unemployment in Australia are cyclical unemployment (affected by aggregate demand) and structural unemployment (the mismatch between the skills of the unemployed and skill required). Unemployment can be further categorised as seasonal, frictional (between jobs) and hidden, whilst underemployment, although not being factored into statistics, is a prevalent type of unemployment. Each form of unemployment is spurred by an array of causes including fluctuations in the business cycle, labour participation levels, structural changes to industries and insufficient training opportunities. The higher the unemployment rate, the higher it’s negative effects impact the economy, in particular by deteriorating budget balances, lowering wage growth and deepening social issues. As Australia’s unemployment rate has been consistently rising from its low of 4.9% in January 2019, the government needs to continue to employ macroeconomic solutions to combat these associated negative effects and to ensure economic prosperity. 

Downturns in the domestic and international business cycle (IBC) contribute to higher levels of cyclical unemployment. Labour is a derived demand, meaning when there is low economic growth, due to a downturn in aggregate demand for goods and services, less labour will subsequently be demanded. (Figure)

Okun’s Law states that to reduce unemployment the annual rate of economic growth must exceed the sum of percentage growth in productivity plus increase in the size of the labour force. The RBA states Australia needs economic growth above 3% to prevent rising unemployment. Following the Global Financial Crisis, GDP Growth fell below 2% causing unemployment to rise from 4% to 5.9%. Currently Australia is experiencing similarly weak economic conditions with October data showing Australia has just 1.4% GDP Growth. This low GDP Growth could be attributed to a slowing of the IBC caused by the trade wars between China and the USA. Downturns in the business cycle can also increase underemployment, which occurs when people who are employed want to work more hours. Currently there are over 1 million Australians identifying as underemployed. The rising underemployment and unemployment rates over the past year could also have occured due to rising participation rates and productivity levels. Australia’s participation rate has steadily