Australian Economy - Unemployment Essay (HSC) PDF

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This document encases the Australian Economy - Unemployment Essay (HSC), this is intended for year 12 Students studying HSC...

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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 f urther 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, i n 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 d  omestic and international business cycle (IBC) contribute to higher levels of cyclical unemployment. Labour is a d  erived 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%. C  urrently 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 t rade 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 c ould also have occured due to rising participation rates and productivity levels. Australia’s participation rate has s teadily

increased from 64.5% in 2016 to 66.5% in 2019 due   to a lift in immigration and job market conditions. Productivity levels are also sitting at 100 index points. Following Okun’s Law our meager annual rate of economic growth is not keeping pace with the changes in the participation rate and productivity growth hence our cyclical unemployment has grown. Structural changes to Australian industries alongside a downturn in retraining participants is another cause of unemployment. Recent changes in the patterns of demand, advancements in technology and trade reforms have contributed to higher structural unemployment. Structural change as a cause of unemployment is revealed in a 2017 study conducted by Employment Outlook, stating “⅔ of job losses in 2017 were due to the closing of the Personal Motor Vehicle (PMV) Industry caused by the removal of industry protections.” Structural changes to industries can typically result in a domino effect of unemployment, which must be combated by reskilling programs. The number of Australians involved in retraining programs has almost halved over the past 5 years according to “Australian Jobs 2018”. If people remain unskilled and if structural changes to industries continue to contribute to structural unemployment our level of unemployment can rise. The effects of unemployment can have severe impacts on the Australian economy. A prominent effect is its ability to deteriorate the budget balance. Falling incomes will generate less tax revenue, and simultaneously the government will be burdened with increased transfer payments to the unemployed, as well as the cost of retraining programs. Due to the closing of the PMV industry in 2017 the government allocated $155m into a Skills and Training Initiative a  nd welfare payments increased by over $200m. On top of this, the government lost tax revenue off the all up 50,000 people who became unemployed. A further effect of high unemployment means there is an excess of labour supply in the economy, which can lead to a fall in the equilibrium level of wages. (Figure). When individuals compete against a larger labour pool for employment their wage bargaining power diminishes. This can stall wage growth, a situation Australia is currently burdened with. As our unemployment has been rising, wage growth has plunged from its average of 4.5% between 2000-2011 to 2% in recent years. Lower wage growth can lead to less aggregate demand hence slowing the economy. The sole positive effect of high unemployment is its theoretical ability to control inflation,

however when weighed against the plethora of negative effects it is clear unemployment trends to negatively impact our economy. Finally, an increase in unemployment can deepen Australia’s social issues such as increased crime, drug abuse, mental health issues, suicides and family breakups. These social problems have an economic cost as more public funds must be directed towards welfare services, police services and correctional centres, rather than being used to satisfy other community wants. It is evident that the causes of unemployment are both structural and cyclical and can have severe effects on the Australian economy. The recent downturn in GDP growth and the structural changes to industries have all contributed to the recent growing rates of unemployment. Our rising unemployment and underemployment puts pressure on the government and RBA to continue to apply more expansionary policies to avoid the damaging effects, which are lower wage growth, a deteriorating budget balance and increased social costs. As economist Melinda Pitts stated; “Unemployment, if not subdued, can raze any economy and destroy countless livelihoods.”...