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7.

Unemployment
Definition
This term is used to describe idle factors of production. It is more
commonly associated with idle labour or employees without work.
Unemployment in Australia is defined as being out of work but actively
seeking work. Those actively seeking work include those who are:
Regularly checking newspaper ads.
Responding to newspaper advertisements.
Registered with an employment agency or the jobs network and
attending any job interviews that have been arranged.
Unemployment Rate
The unemployment rate is the percentage of the workforce unemployed.
It is calculated by epressing the unemployed as a percentage of the
workforce.
Unemployment Rate ! Unemployed " #orkforce
#hen calculating the above e$uation it is important to include the
unemployed as part of the workforce.
There are two sources of unemployment data in Australia. The Australian
%ureau of &tatistics do surveys of the unemployed and to be counted you
must be out of work but able to demonstrate that you are actively seeking
work. If a person has completed more than one hour of work they are not
counted as unemployed. The other measure is provided by the '(obs
)etwork* providers like +entrelink who record of the number of
unemployed who are registered with the agency.
Problems with the method used to measure unemployment
Underemployment: Underemployed workers are deemed to be fully
employed. Underemployment means that you are not working at full
capacity. This could mean that you are part,time but would like full,
time work- you are not working in an area that meets your
$ualifications- or you only work part of the year.
.idden Unemployed: Unemployment figures do not include the
hidden unemployed. These include housewives that would like to
work and discouraged workers /those who are no longer actively
seeking work0.
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Types of Unemployment
Structural Unemployment
This type of unemployment eists when the person unemployed does not
have the work skills necessary to get one of the jobs that are available.
This is often the result of a particular skill or trade being eliminated by
changes to the economy. The name comes from the fact that the structure
of the economy has changed which is what the economist called
structural change.
The structure of the economy included the industries and occupations that
make up the economy. The industries that make up the Australian
economy are called the industrial distribution. The occupations that make
up the Australian economy are called the occupational distribution.
Australia is the largest eporter of coal and there are many jobs for coal
miners. This industry is part of the structure of the Australian economy.
.owever this structure can change. If Australia signed the 2yoto 3rotocol
and agreed to stop burning coal the coal industry would close. There
would be no need for coal miners and their skills would be no longer
re$uired. The structure of the Australian economy would have changed
such that the coal miners are structurally unemployed.
#hen workers jobs are eliminated by technology it is often called
technological unemployment. Technological unemployment is also a type
of structural unemployment. 4amples of this could include a printer or
courier being replaced by information technology- a teller being replaced
by an AT5 and a spray painter being replaced by a robot. The skills of
the workers have been replaced by technology and are no longer re$uired.
6oung people often have difficulty in finding their first job and this has
been called youth unemployment. 7ften this is the result of the face that
the structure of the economy has changed and career entry jobs have been
abolished. 6outh generally lack work eperience. 5any of the traditional
career entry positions have been eliminated and higher $ualifications
generally are re$uired before people enter the workforce. 6outh
unemployment is also a type of structural unemployment.
Cyclical Unemployment
This type of unemployment occurs because of variations in the trade
cycle. 8uring periods of boom- where there is a high level of economic
activity there is strong demand for labour. 8uring periods of recession-
where there is a low level of economic activity- the demand for labour is
much lower and there is a much higher level of unemployment. All
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western economies have a trade cycle creating variations in the demand
for labour.
8uring periods of recession firms are forced to downsi:e their workforce.
This means that workers are retrenched or made redundant. (obs lost in
the recession are usually $uickly restored in the upswing and boom
periods. Unlike with structural unemployment the jobs will return for
those who are cyclically unemployed.
Seasonal Unemployment
This type of unemployment occurs because of seasonal variations in the
demand for labour. The &ki instructor is the obvious eample of a person
unemployed during the summer months and the beach lifesaver is
unemployed in the winter. ;ruit pickers are only employed in the harvest
periods. At other times these workers are unemployed. 7nce again these
jobs are not lost permanently and will return when the season returns.
Frictional Unemployment
#hen people change jobs they may be unemployed for a short period of
time. #orkers fre$uently take holidays in between changing jobs.
;rictional unemployment is also called temporary unemployment. This
type of unemployment is more severe during boom periods when it is
easy for people to change employment- and helps eplain why it is not
possible to have everyone in employment during boom periods. In
recessionary periods frictional unemployment disappears because
workers are scared that they will never find another job.
Hard Core Unemployment
&ome unemployment is impossible to remove. It will always be there and
thus it is called hard core. There are several reasons for hard core
unemployment.
)ot looking for work: There will always be some people who do not
want to work. This is the meaning of the term 'dole bludger*.
7ther interests: &ome people fund full,time interests or hobbies by
receiving unemployment benefits.
<ess employable: There are also people who are unsuitable for some
types of work. They may have a history of changing jobs or a criminal
record which makes them unsuitable for many jobs.
8isabilities: 3eople with disabilities may find it difficult to find
employment.
The hard core unemployed often fail to meet the definition of
unemployed because they are not always looking for work. They may
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become more motivated in boom periods when wages are high and more
jobs are available but are generally regarded as a social problem.
Hidden Unemployment
There are a number of reasons to eplain why the official rate of
unemployment is inaccurate. There are types of unemployment which are
not counted in the official figure.
8iscouraged #orkers: To be unemployed means to be actively
looking for work. #hen a person has applied for hundreds of
positions and been 'knocked back* each time they become
discouraged and stop looking for work. They are called
discouraged workers. %y not looking for work they cease to be
regarded as unemployed.
)ot Registered: 7ne measure of official unemployment includes
the total of all persons registered with an employment service as
out of work. This measure is now more difficult to make as a result
of the new (obs )etwork. The problem with this measurement is
that not all unemployed persons register with an employment
service. 5arried women /who are not entitled to benefits0 school
leavers /who do not know the system0 aborigines /that live in
remote areas0 and professionals and skilled workers /who look for
jobs in the newspaper0 tends not to register as unemployed with an
employment service. An official rate of unemployment based on
persons registered with an employment service is likely to
understate unemployment.
Underemployment: Another type of hidden unemployment is called
underemployment. This problem occurs for a number of reasons.
;irstly a person that has one hours work per week is regarded as
employed. 7ne hours work is clearly insufficient to support oneself
and the person is clearly unemployed but they are not counted.
&econdly during periods of high unemployment it is $uite common
for a highly eperienced or trained person to take a position below
their ability. #here a trained doctor works as a factory worker- this
is called underemployment. Underemployment also affects the self,
employed where three people do the work of one person as a result
of reduced work due to lower levels of demand.
on!"term Unemployment
Those people who are unemployed for a period of twelve months or
longer are called long term unemployed. These people tend to lose skills
and work discipline and develop characteristics like drug addiction-
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which makes them less employable as the duration of their
unemployment continues.
The #atural Rate of Unemployment
&ome types of unemployment will always eist. 3eople will always be
temporarily unemployed between jobs. &ome jobs are seasonal in nature
and will result in unemployment at certain time of the year. There will
always be some structural changes occurring as a result of changes to
technology or government policy etc. It is natural and even healthy for
some unemployment to eist. This unemployment is called the natural
level or rate of unemployment. In Australia at present most economists
agree that the natural rate is around >? unemployment. An economy is
said to be at full employment if the unemployment rate has fallen to this
level.
The natural rate of unemployment includes structural- frictional and hard,
core unemployed but not the cyclically unemployed. An economy is not
at full employment if cyclical unemployment eists. 5acroeconomic
policies could stimulate the economy to remove this type of
unemployment and therefore it is not natural for it to eist.
.owever the economic managers need to avoid stimulating the economy
when it is at full employment. Trying to stimulate the economy to remove
natural unemployment will only create labour shortages and inflation. ;or
this reason the natural rate of unemployment is also called the )on
Accelerating Inflation Rate of Unemployment /)AIRU0.
The natural rate of unemployment can be lowered but this re$uires supply
side policies. The only way to reduce the natural rate of unemployment is
via retraining and microeconomic reform to create the kind of industries
that suit the skills of the unemployed.
4am @uestions
5ultiple +hoice @uestions
1. #hen a worker is redundant this is an eample of:
a0 +yclical unemployment.
b0 &tructural unemployment
c0 &easonal unemployment.
d0 .idden unemployment.
A
9. A discouraged worker is an eample of:
a0 +yclical unemployment.
b0 &tructural unemployment
c0 &easonal unemployment.
d0 .idden unemployment.
=. #hen a worker is retrenched this is an eample of:
a0 +yclical unemployment.
b0 &tructural unemployment
c0 &easonal unemployment.
d0 .idden unemployment.
>. A fruit picker is likely to eperience:
a0 +yclical unemployment.
b0 &tructural unemployment
c0 &easonal unemployment.
d0 .idden unemployment.
&hort Answer @uestions
1. 4plain the meaning of the term ')AIRU*.
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9. 8oes full employment mean that everyone has a jobC 4plainD
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=. #hat causes hidden unemploymentC
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>. #hy does structural change cause unemploymentC
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A. #hat causes youth unemploymentC
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The Causes of Unemployment in $ustralia
The e%el of &conomic 'rowth
#hen the level of economic activity declines and lower rates of economic
growth are eperienced then there is less demand for labour. <abour is a
factor of production and its demand is derived from the demand for goods
and services. The concept of derived demand refers to the fact that a
decrease in the demand for goods and services will result in a decrease in
the demand for the factors of production used to make them.
In Australia rates of economic growth above >? have been associated
with stable or rising employment. 7nce growth rates fall below =?-
unemployment eventually starts to increase. There is a close correlation
between unemployment rates and the rate of economic growth.
Globalisation is a process in which all the world economies are more
interdependent and have closer links. In a globalised world decreases in
aggregate demand in +hina or the U& will impact on growth rates in
Australia. +hanges to world growth are often a cause of increased
unemployment in Australia.
Structural Chan!e
&tructural change occurs when there is a change to the industries
/industrial distribution0 and occupations /occupational distribution0 that
make up the economy. &tructural change can occur as a result of changes
to government policy- technological change- changes in fashion or taste or
the pattern of consumer demand or changes in the world economy. These
changes create large shifts in the industries and jobs that make up the
economy. Industries that eperience falling demand will contract and
employment levels in the associated occupations will fall creating
structural unemployment.
H
In a globalised world many industries are having trouble competing with
low labour cost countries and many jobs have been lost in high labour
cost countries. )ew technology has enabled greater fragmentation of the
production process and firms are increasingly switching labour intensive
components to low labour cost countries. 7utsourcing to low labour cost
countries is also increasingly common. ;or eample- India has a booming
call centre industry that caters for firms in many countries.
Technological change has transformed offices and factories and changed
the pattern of consumer demand. +omputers and robotics have
transformed the workplace and replaced many skills. The labour market
re$uires people who are trained with this new technology. +onsumers
have been offered products with numerous innovations and improvements
which is constantly changing the demand for eisting products. This new
technology has also changed the nature of the labour market and
abolished a lot of career entry lower skilled jobs. ;or eample bank
tellers have been replaced with AT5Is and 4;T37&. This has increased
youth unemployment and has increased the minimum level of education
re$uired before a young person can gain their first job.
Reforms and improvements to the Australian economy have also
contributed to structural change and unemployment. These so called
microeconomic reforms have resulted created significant changes in
traditional manufacturing industries like steel- cars and tetiles. 5any
jobs have been lost in the Australian tetile industry in the last decade and
the trend continues. Growth in new efficient eport industries will absorb
some of the unemployed.
'o%ernment Policies
Government industrial relations policies have had a significant impact on
the level of employment. +hanges to unfair dismissal laws for small
business have made it much easier to hire and fire employees. This has
increased the willingness of small business to employ people and has
contributed to lower rates of unemployment. .owever Australia industrial
relations laws have also contributed towards increasing casualisation of
the workforce and this has made many workers more vulnerable to any
downturn in the demand for labour. Industrial relations policies have
reduced labour costs in some cases however Australia remains a high
wage cost country and this reduces our international competitiveness in
labour intensive industries.
Government policies also directly affect labour costs. Government
agencies have the power to set award conditions and wages. Government
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policies also affect labour on,costs which are the additional costs to a
firm associated with hiring workers. Government policies determine the
level of payroll ta- superannuation- sick leave- holiday pay and workers
compensation. If wage costs and labour on,costs increase sharply
employers will lose profits and they may be motivated to reduce their
workforce to cut these costs.
5acroeconomic policies also have a significant influence on
unemployment.
In the years 1JJ9 K 1JJ> the Australian government had epansionary
policy which helped reduce unemployment after the recession in 1JJ1.
Unemployment increased in 1JJE K 1JJF as policy was tightened. <ow
interest rates helped stimulate demand in the latter part of the decade and
this helped keep unemployment at around the natural rate. There has been
little change to this policy position and unemployment has fallen to
historically low levels.
Chan!es in the abour (ar)et
.igher labour market participation will increase the rate of
unemployment. The participation rate is the percentage of the working
age population that are either working or actively looking for work.
3articipation rates tend to increase when discouraged workers start to
look for work again. This tends to happen at the early stage of economic
recovery and tends to make the unemployment rate a lagged indicator of
economic recovery. 3articipation rates in Australia have gradually
increased in the last few decades. Greater participation by women in the
workforce is one reason for this trend.
<ow levels of labour productivity will also increase unemployment.
<abour productivity is a measure of the efficiency of labour. It is
measured by determining the amount of output that a given amount of
labour can produce. If labour is inefficient compared to capital then firms
will be motivated to substitute capital for labour by introducing new
technology. Recent improvements in labour productivity- has been a
contributing factor to historically low unemployment rates in Australia.
<ack of education and training and apprenticeships can cause
unemployment in future years. 4mployers have been very short sighted in
Australia in regard to training. 8uring periods of low demand few
apprenticeships are offered. This reduces the career opportunities of
young people and creates youth unemployment. #hen aggregate demand
increases firms want to increase production $uickly and re$uired skilled
workers. <ocal youth remain untrained so instead firms recruit skilled
1L
workers from overseas. This shortsighted policy leaves a pool of
untrained workers in Australia.
;inally- a rapid increase in wage costs as a result of union demands can
cause unemployment. Trade unions may engage in collective bargaining
to improve the working conditions of workers. If they are successful and
wage costs increase firms may respond by reducing employment.
4tended Response
*hat are the causes and types of unemployment+
Rule 1: 8efine the terms in the $uestion: unemployment- unemployment
rate
Rule 9: Identify M define related concepts: types and causes of
unemployment. &tructural- cyclical- and low level of training
Rule =: <ink introduced terms to the $uestion: <ow level of economic
growth will cause unemployment to increase.
Rule F: Use eamples to communicate additional meaning: ;or eample
technological change has reduced the need for bank tellers.
Rule >: 8raw logical conclusions: There are numerous causes of
unemployment.
The &ffects of Unemployment
,. &conomic &ffects
-pportunity Cost
Unemployment means that resources are not being used to their full
capacity. The opportunity cost of unemployment is the goods and services
that the unemployed could have produced. <ower output also means
lower incomes- consumption- sales and profits. .ouseholds and society
are missing out on goods and services that would normally be available.
This can be shown on a production possibility frontier. The society has
moved to an inferior point in the diagram.
ower i%in! Standards
The standard of living is determined by the value of the goods and
services consumed by a society. The unemployed are not producing goods
M services but they are consuming them. This means that the standard of
living for society must decline as a result of unemployment. This initially
affects the unemployed who have little spending power. 4ventually others
are affected as a result of lower demand and incomes and living standards
generally may fall.
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Decline in abour (ar)et S)ills for the on!"term Unemployed
#hen workers have been unemployed for long periods of time they lose
work skills and become less employable. &hort,term unemployment can
turn into long term unemployment as the skills of the unemployed
continue to decline. Unemployed workers often re$uire considerable
training before they become productive members of the workforce.
Costs to the 'o%ernment
Government ependiture often increases significantly during periods of
high unemployment. Initially the unemployed will re$uire some form of
social security payments to enable them to survive. This can place a large
drain on government spending if the level of unemployment is large.
&econdly the unemployed often re$uire considerable training before they
can re,enter the workforce. This often re$uires the government to provide
education and training facilities and programs to deal with
unemployment. ;inally governments may need to offer firms financial
incentives to employ the unemployed. This policy has been successfully
used with both youth and long term unemployment.
ower *a!e 'rowth
7ne of the few benefits of higher unemployment rates is often lower
increases in money wages. 8uring periods of high unemployment
workers have less bargaining power and are lucky to have a job.
.. Social &ffects
/ncreased /ne0uality
Unemployment usually creates a sharp distinction between rich and poor.
Those workers that are more likely to be unemployed are often the
youngest- least eperienced and casual members of the workforce. 5ore
valuable permanent employees are least likely to become unemployed.
The Australian labour market is often seen as two separate markets: a
primary market for full time permanent employees and a secondary
market for casuals and part time employees. The latter market is where
unemployment is highest. The unemployed often live in poverty and are
dependent on social security payments.
-ther Social &ffects
&evere financial hardship M poverty.
Increased levels of debt.
.omelessness M housing problems.
;amily tensions M breakdown.
%oredom.
Alienation from the rest of society.
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Increased social isolation.
+rime.
4rosion of confidence M self,esteem.
<oss of work skills.
3oor health- psychological disorders M suicide.
Policies to Reduce Unemployment
4ach type of unemployment re$uires a different solution.
Structural Unemployment: Re$uires retraining schemes that give the
unemployed the opportunity to gain the necessary skills for the jobs that
are available. Government ependiture needs to be set aside for this
purpose. The jobs lost will never return and these people will be
unemployed until they are retrained for a job that is available. Industry
policy needs to develop new industries that will provide jobs to replace
the ones that have been lost. 5icroeconomic reform to improve the
efficiency of Australian industry would also be important.
1outh Unemployment2 Re$uires incentive schemes for business to
motivate them to employ and train young people. &ubsidies for employers
and assistance with education and training will make it more attractive for
employers to engage young people. 6outh may also need special training
programs that provide them with work skills. Training in typing and
computers or office work may make young people more employable.
&ome courses provide assistance with writing resumes and attending
interviews. &chools have been forced to introduce more vocational
courses like Retail &tudies to improve the career prospects of school
leavers.
on!"term Unemployment: The skills of the long,term unemployed are
lost over time and they often develop characteristics that make them less
employable. ;or this reason it is necessary for government to offer
incentive packages to employers who employ these people. Retraining
and other support services are also essential for this group of people.
Cyclical Unemployment: Re$uires policies to stimulate the level of
aggregate demand. This type of unemployment occurs in periods of
deflation when the level of aggregate demand is low. 4pansionary fiscal
and monetary policy which increases the level of aggregate demand is
re$uired.
Increases in government spending- lower taes and interest rates will
stimulate consumption and investment. This additional spending on goods
1=
and services will increase the demand for the factors of production used
to make them /derived demand0 which will increase employment.
Hard"core Unemployment: This has been reduced by the work for the
dole schemes. Unemployed persons have to work for their benefits by
undertaking community projects like tree planting and rubbish removal.
This has served two functions. If the unemployed have to work for their
allowance they may as well seek a better paid part time job. In addition
the hard,core unemployed gained work skills and discipline that makes
them more employable. 8iscouraged workers are given more confidence
and team leaders can provide support and motivation.
Seasonal Unemployment: This type of unemployment can be solved by
training that provides multi,skilling. The ski instructor can learn to be a
beach life saver so as to have income over the summer months. ;ruit
pickers can learn to undertake other farm activities like repairing fences.
Recent Unemployment Trends
It is important for students to be aware of the current trends in
unemployment as eam $uestions on economic policy may re$uire this
information. This information is constantly changing as new data and
graphs are released each month. The study guide will provide recent
information. ;or the latest figures see the following web site:
www.abs.!o%.au
;or your own information research the following $uestions:
1. #hat is the current rate of unemploymentC
9. .ow does this compare with recent yearsC
=. #hat factors have caused this trend to occurC
>. .as the Australian government introduced any policies to deal with
unemploymentC
4am @uestions
&hort Answer @uestions
1. 8efine the following terms: natural increase- workforce-
economically active- participation rate- geographical mobility-
occupational mobility- migration- emigration- unemployment-
unemployment rate- industrial distribution- occupational distribution-
)AIRU.
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9. #hat are the causes of unemploymentC
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=. #hat are the effects of unemploymentC
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>. #hat policies can be used to reduce unemploymentC
1A
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1E