Why despite a booming economy does Australia have a stubbornly high unemployment rate of around 6% What microeconomic reforms and welfare reforms might help reduce our NAIRU? It is said that unemployed face high marginal tax rates and other disincentives to working. Discuss. Although Australia’s unemployment rate is at the lowest level it has been for thirteen years (Mellish, 2003), the unemployment rate has generally been stuck between six and eight percent for the best part of a decade (See Figure 1).
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At the same time, Australia’s macroeconomic performance has been good according to world standards (Quiggin, 2003). Figure 1: Chart of Trend Unemployment Rate – Australian Bureau of Statistics (ABS) Figure 1 demonstrates that the trend unemployment rate fell rapidly from 10. 7% in August 1993 to 8. 1% in July 1995. The trend estimate then rose slowly, reaching 8. 4% in February 1997, before falling to 6. 1% in September 2000. After rising to 6. 9% in September 2001, the trend estimate has generally fallen to stand at 5. 7% in October 2003 (ABS, 2003).
High unemployment rates can be explained through the three types of unemployment, structural, frictional and cyclical, through the causes of each of these and the phenomenon of hysteresis. The overall trend of increase in unemployment since the fifties is primarily due to structural unemployment deriving from the vast changes in the labour market (as discussed in question 6 of Labour Market Studies Assignment 2). The fact that the unemployment rate in Australia is stubbornly stuck around 6% is best explained through the theory that unemployment has an equilibrium, or natural, rate (Friedman and Phelps, 1968).
The natural rate is defined as the unemployment rate where there is neither excess demand nor supply in the overall labour market, and as the unemployment rate that will occur in the long run if the actual and expected rates of inflation are equal (McConnell, Brue and Macpherson, 2003). The NAIRU (Non-Accelerating Inflation Rate of Unemployment) is another term for the natural rate of unemployment. The NAIRU is defined as the unemployment rate consistent with maintaining stable inflation.
Inflation will tend to rise if the unemployment rate falls below the natural rate and if the unemployment rate rises above the natural rate, inflation tends to fall (Walsh, 1998). Reforms and initiatives to reduce Australia’s NAIRU There are various microeconomic and welfare reforms that may help to reduce our NAIRU. Several suggested reforms and initiatives will be discussed. Firstly the market for unskilled workers is over-regulated and the process of legislating for minimum wages is facilitating high unemployment (McConnell et al, 2003).
If minimum wages slipped further behind, additional opportunities would be available for the unemployed and young or inexperienced individuals would be provided with an entry point to the labour market. Secondly, the government should implement policies and systems that entice or enforce individuals to move to where there are job opportunities or to retain and gain the skills for available positions. This would address the mismatch between the skills required for vacant jobs and geographical mismatch, both causes of structural unemployment (McConnell, et al, 2003).
A third initiative that could reduce the NAIRU involves improving the effectiveness and efficiency of the education system in Australia through increased spending in schools, colleges and universities. Creating new jobs through faster growth is the beginning, but people have to be able to perform the jobs and therefore require education (Fraser, 1997). Unskilled workers are more likely to be unemployed that skilled workers and increased participation in education produces a more highly skilled and adaptable workforce (Donath, 1991).
A fourth initiative to improve the NAIRU entails increasing the rate of participation in further and higher education. A study by the Australian Bureau of Statistics examines the factors that influence an individual’s chances of becoming unemployed. While the study revealed that men born in the same year will have similar chances of unemployment, when men were divided up between those who did not complete high school (unskilled) and those who received a post school qualification (skilled), unemployment was much higher among unskilled men (Gittins, 2003).
Fifthly, programs must be implemented to break the cycle of hysteresis. Each time there is a recession, there are more people without work for longer periods. The reasons for hysteresis are that the Long-Term Unemployed (LTU) have a lowered probability of finding work. Such individuals lose their skills, making them less employable or employers use their unemployed status as a sign that they are unemployable. The rejections from employers reduce self-esteem and the individuals decrease their job searching effort (Junankar, 1999).
In conjunction with improvements in general education, more effective training programs and state-subsidised jobs need to be implemented to address the skills gap and self-esteem issues of the long-term unemployed. Further, employers and employees need to embrace the concept of ongoing learning to increase versatility and employability. In particular, employers must be educated regarding the benefits of training staff for increased adaptability and the rewards for doing so in terms of increased productivity. Continuation of industrial relations reforms will also assist in improving the NAIRU.
Reducing the regulations governing the employment relationship (such as unfair dismissal) is likely to encourage employers (particularly small businesses) to hire and therefore create additional jobs (Covick, 1997). Implementation of policies to encourage mutual obligation may also assist in reducing the NAIRU. Although the McClure report outlines a rationale for removing the idea of obligation placed on individual recipients out of a central place in policy (Kinnear, 2002), it is important that the voluntarily unemployed receiving benefits participate in finding employment if we are succeed in reducing the NAIRU.
Finally, in conjunction with encouraging mutual obligation it is essential that disincentives to work be addressed. This includes reviewing our generous welfare system, examining the taxation system and marginal tax rates and particularly the way in which benefits and the tax system interact. The next section will examine disincentives to working and suggested reforms.