TYPES AND CAUSES of Unemployment & 2024 Insights

Syllabus Topic

HSC Topic Three - Economic Issues

Unemployment

• types and causes

  - cyclical

  - structural

  - frictional

  - seasonal

  - underemployment

  - hidden

  - long term

INTRODUCTION

Unemployment is a crucial economic indicator that reflects the health of a nation’s job market and overall economy. In Australia, understanding the various types and causes of unemployment is essential for addressing this multifaceted issue. There are mainly three types of unemployment, being cyclical, structural, and frictional. Various types of unemployment can overlap and can’t often be directly measured, but they’re useful in understanding specifics about unemployment trends and their nature.

CYCLICAL UNEMPLOYMENT

• Definition: associated with changes in economic activity over the business cycle.

• Characteristics: Occurs during economic downturns due to reduced demand for goods and services, leading businesses to lay off workers or hire fewer new employees. The opposite occurs when demand strengthens.

• Duration: Medium term (one to 12 months).

• Examples: Unemployment rate increases during recessions and decreases during economic booms, such as the early 1990s recession and the global financial crisis.

• Implications: Suggests the economy is operating below potential; more job competition may result in lower wage increases and lower inflation.

• Policies to improve it: Stimulating aggregate demand through expansionary monetary policy can help reduce cyclical unemployment.

• Current trends: The current cyclical trends in the economy indicated a near recession when entering 2024 with a GDP growth rate of just 0.1%, but in the first quarter this grew at a rate of 1.4% and is expected to grow, albeit slowly, to 2.3% by the end of 2025. Household demand, however, is still weak owing to rising costs of living with inflation reaching 4% in June. Unemployment in the meantime has increased from 4% in May 2024 to 4.1% in June in seasonally adjusted terms.

STRUCTURAL UNEMPLOYMENT

• Definition: Structural unemployment arises from a mismatch between available jobs and jobseekers' skills or geographic locations.

• Characteristics: Workers may be unemployed due to declining industries or skills becoming obsolete due to technological advancements.

• Examples: Decline in routine manual jobs in the manufacturing industry due to automation and technological progress.

• Duration: Longer-lasting, often leading to long-term unemployment (over 12 months).

• Implications: Exists even in good economic conditions and typically does not influence wages or inflation.

• Policies: Best addressed through policies focusing on skill development and labour supply.

• Trends: Australia's job market is changing due to technological advancements and industry shifts. Automation and AI are replacing many manual jobs, especially in manufacturing and telecommunications, as shown by Telstra's recent cuts of 2,800 jobs. New sectors like IT, healthcare, and renewable energy are growing, creating jobs that require advanced skills. This shift highlights the need for reskilling workers. Geographic mismatches persist, with urban areas having more job opportunities than regional ones. Government initiatives are supporting continuous education and vocational training to help workers adapt.

FRICTIONAL UNEMPLOYMENT

• Definition: Frictional unemployment occurs as people move between jobs or transition in and out of the labour force.
• Characteristics: Necessary for a flexible labour market, allowing for efficient labour allocation, but involves temporary periods of unemployment during job search.
• Duration: Generally short term (less than one month).
• Implications: Occurs at all business cycle points and usually does not affect wages or inflation.

UNDEREMPLOYMENT

• Occurs when people are employed but want and are available to work more hours. Includes part-time workers seeking more hours and full-time workers temporarily working part-time.

HIDDEN UNEMPLOYMENT

• Involves people not counted as unemployed in official statistics but who would work if given the opportunity, such as discouraged workers who have stopped looking for jobs.

SEASONAL UNEMPLOYMENT

• Happens due to seasonal patterns affecting jobs, like ski instructors or fruit pickers. The ABS adjusts labour market statistics to remove these seasonal patterns.

LONG TERM UNEMPLOYMENT

• Happens when people have been unemployed for an extended period of time, over 12 months.

SOURCES

RBA: Unemployment Its measurement and types

Investopedia: Cyclical Unemployment

Investopedia: Structural Unemployment

Investopedia: Frictional Unemployment                   

The Age: 1990s Recession

RBA: The Global Financial Crisis

KPMG: Australia Economic Outlook: Q2 2024

AI Group: Australian forecasts – growth to remain subdued in the short term

The Guardian: Australia’s inflation rises to 4%, stoking concern interest rates could increase again

ABS: ABS Labour Force Results - January 2024

ABC News: Telstra's mass sacking is a worrying glimpse at the cracks appearing in the jobs market

Investopedia: Underemployment: Definition, Causes, and Example

Investopedia: Disguised Unemployment: Definition and Different Types

Investopedia: Seasonality