5.5 The economic factors influencing changes in Australia’s labour market

Trade union membership (%)

Notes: 1. pre-2004 series: includes Owner Managers of Incorporated Enterprises (OMIEs), 2. 2004+ series: excludes OMIEs, 3.

The ABS plans to produce historically comparable estimates for the pre-2004 period, excluding OMIEs, in the future.

Source: ABS, Trade union membership, see https://www.abs.gov.au/statistics/labour/earnings-and-working-conditions/trade-uni on-membership/latest-release. 5.3 Activities

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Trade union membership by sex

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Track your results and progress Find all this and MORE in jacPLUS 5.3 Exercise 5.3 Quick quiz 5.3 Exercise 1. Examine Table 5.2 showing hypothetical population data for a nation: (5 marks) TABLE 5.2 Population data for a country Indicator Data Total population 20 000 000 Total number of persons aged over 15 years 15 000 000 Number of people employed 10 000 000 Number of people unemployed 500 000 The underemployment rate (%) 5 UNCORRECTED PAGE PROOFS

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Men (pre-2004) Women (pre-2004) Total (pre-2004) Men (2004+) Women (2004+) Total (2004+)

For each of the following labour market indicators, define the measure and then use the data to calculate each of the following (showing the formula used and your basic working): a. size of the labour force b. unemployment rate c. employment rate d. participation rate in the labour force e. the underutilisation rate. 2. Before answering the questions that follow, examine Figure 5.13 about changes in hours worked. FIGURE 5.13 Index with a base of 100 points showing changes in the number of hours worked and employment — Australia Index Source: ABS, see https://www.abs.gov.au/articles/insights-hours-worked-february-2022. a. Referring to statistics drawn from the graph, describe the overall trend in hours worked since May 2020. (2 marks) b. Explain whether this trend indicates a stronger or weaker labour market and whether this overall trend in hours worked represents a change in the demand for labour, or a change in the availability or supply of labour. (2 marks) c. Outline a likely reason for the big drop in the index of hours worked in April 2020. (1 mark) 3. In the year to June 2008, wages grew by 4.3 per cent whereas in March 2021 they grew by just 1.4 per cent. Contrast the likely labour market conditions for these two periods. (2 marks) 4. Explain why it is beneficial for a country to have a labour force with higher levels of educational attainment. (2 marks) 5. Explain how the fall in Australia’s labour force productivity would be likely to affect our material living standards. (2 marks) Fully worked solutions and sample responses are available in your digital formats. UNCORRECTED PAGE PROOFS

90

Jan-20Feb-20Mar-20Apr-20May-20Jun-20Jul-20Aug-20Sep-20 Oct-20

Nov-20Dec-20Jan-21Feb-21Mar-21Apr-21May-21Jun-21Jul-21Aug-21Sep-21Oct-21Nov-21Dec-21Jan-22Feb-22 Hours Employed

5.4 The reasons why changes in Australia’s labour market are important

KEY KNOWLEDGE

• the reasons the issue of changes in the labour market are important Source: VCE Economics Study Design (2023−2027) extracts © VCAA; reproduced by permission. There are lots of reasons why it is important to understand the dramatic changes that have taken place in Australia’s labour market. However, the main idea is that developments in the labour market have significant effects on the performance of the economy and, hence, on living standards. While some of the short- and long-term changes have been positive and should enhance society’s wellbeing, unfortunately this is not always the case. 5.4.1 Changes in the labour market affect material living standards Material living standards relate to levels of real disposable income and per capita consumption. The labour market affects material living standards in at least three ways. The connection between levels of employment, unemployment, hours, participation, and income: We have seen that there have been many changes in Australia’s labour market. When it is strong as in 2021–22, and the ABS indicators show rapid rises in employment, falling unemployment, increased labour force participation and rising hours worked, so it is usually safe to say that average incomes, consumption, and material living standards should be increasing. In contrast, when the labour market is weak as during COVID-19 in 2020, and there are rises in unemployment and reduced hours worked, consumption falls. People are worse off. In other words, it is far better to be employed, working extra hours and perhaps on average weekly full-time earnings of $1813 or even on the minimum wage of $772.60 per week (till July 2022), than being unemployed on meagre welfare benefits of around $300–350 per week. Reliance on government welfare certainly leads to reduced levels of per capita consumption and material living standards. The connection between unemployment and inequality in income distribution: The number of hours worked per week, along with unemployment and participation rates, greatly affect the level of a person’s income. In addition, these drivers influence how evenly or unevenly Australia’s total income is shared between people and the extent of social and economic inequality. As just mentioned, when a person becomes unemployed and is forced onto government welfare benefits, their level and share of the nation’s income, goods, and services shrinks dramatically. Research suggests that many of those making up Australia’s lowest 20 per cent of income earners are unemployed, have limited hours, or are unable to participate in work because they are too old or too young. These people are likely to make up the 13.6 per cent of the population living below the poverty line. The connection between employment, education, productivity, and potential incomes: The quantity and quality of labour resources available limits the country’s productive capacity and its potential GDP and income. So, when the size of the workforce and labour market is growing, perhaps because of immigration of working aged individuals, or an increase in the participation rate as seen recently, this helps to expand Australia’s productive capacity. Thinking of the production possibility diagram, having a larger PPF means that it is possible to produce more goods and services and hence enjoy higher average incomes. Furthermore, if the labour force is also becoming more efficient and has strong productivity growth due to improved educational attainment and skills (perhaps as a result of encouraging skilled immigration or improved levels of educational attainment), this UNCORRECTED PAGE PROOFS also helps to grow the nation’s PPF and potential incomes.

5.4.2 The effect of changes on the availability of labour resources and potential GDP

Non-material living standards refer to the quality of daily life (rather than the quantity of goods and services purchased and consumed). It may reflect general happiness, low stress levels, having adequate leisure time, job satisfaction, quality personal relationships, good mental and physical health outcomes, long life expectancy, the absence of social isolation, opportunities for cultural enrichment, low crime rates, good social cohesion and sense of inclusiveness. For example, when there are positive changes in Australia’s labour market that reduce unemployment, grow job opportunities, increase incomes, and reduce the number of people on welfare, nonmaterial living standards are likely to improve. However, as seen during the COVID-19-induced recession in 2020, when there were weak labour market conditions and an increase in the number of people on inadequate government welfare benefits, non-material livings standards were seriously undermined (e.g. reduced mental health, increased social isolation, unhappiness, feelings of failure, and high stress levels reflecting being unable to pay bills including mortgages).

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Track your results and progress Find all this and MORE in jacPLUS 5.4 Exercise 5.4 Quick quiz 5.4 Exercise 1. Identify and outline the main ways in which particular changes in the labour market can affect overall living standards. (4 marks) 2. Explain how an increase in average hours worked would be likely to affect each of the following: a. Material living standards b. Non-material living standards. 3. Explain how a lower female participation rate in the labour force, relative to that for males, would be likely to affect each of the following: a. Material living standards b. Non-material living standards. 4. Explain how Australia’s high underemployment rate in 2021–22 would be likely to affect each of the following: a. Material living standards b. Non-material living standards. 5. Examine Fiigure 5.14 that shows the percentage change in average number of hours worked across the ten equal-sized deciles (i.e. each representing 10 per cent of the total population) during Australia’s COVID-19 UNCORRECTED PAGE PROOFS recession in 2020. Here, decile 1 consists of the 10 per cent of the population with the lowest income, decile 2 is the next lowest and so on, with decile 10 made up of the population with the highest income.

FIGURE 5.14 The distribution of reduced hours worked during Australia’s 2020 COVID-19recession

0 Decile in distribution of weekly earnings

–10 –15 –20 –25 –30

Per cent change in actual weekly hours worked –5 1 2 3 4 5 6 7 8 Lower income 9 10 deciles

Higher income deciles Source: Copied directly from Wiley, Online Library (but slightly modified labelling), see ”https://onlinelibrary.wiley.com/doi/full/10.1111/1467-8462.12386” The Australian Labour Market and the Early Impact of COVID‐19: An Assessment - Borland - 2020 - Australian Economic Review Wiley Online Library a. Referring to graph data, identify and outline the groups making up part of the total population that suffered the greatest reduction in the number of hours worked during the recession. (1 mark) b. Giving reasons, explain how this would be likely to affect the living standards of those making up the groups you identified in part (a) above, relative to income earners in other deciles. (2 marks) Fully worked solutions and sample responses are available in your digital formats. 5.5 The economic factors influencing changes in Australia’s labour market KEY KNOWLEDGE • the economic factors influencing changes in the labour market Source: VCE Economics Study Design (2023−2027) extracts © VCAA; reproduced by permission. There are many economic factors that help to bring about some of the changes that we have noted in Australia’s labour market. In this section, we will examine just a few of the more important causes or drivers of change. 5.5.1 Factors that have influenced the growth in the size of the labour market The size of Australia’s labour market has grown rapidly from a mere 2.3 million people in 1932, to 5.7 million in 1972, and 13.5 million in 2022. The size of the labour force affects the nation’s productive capacity and potential level of GDP and income. Over time, there are two sources of population growth that feed through to expand the labour force — natural increase in population growth and net migration. This is illustrated in Fiigure 5.15. The rate of natural increase in populationUNCORRECTED PAGE PROOFS The rate of natural increase in Australia’s population reflects the excess of births over deaths. Overall, births have exceeded deaths by around 140 000 per year. This has helped to grow our population and, after children reach working age, has expanded the labour force. Despite the reduction in the average size of families over

time (a drop from over 5 children in 1875 to under 2 in 2022), the growth in the size of the labour force has been assisted by an increase in life expectancy, a rise in the retirement and pension access age, and by an increase in the female labour force participation rate.

FIGURE 5.15 Sources of Australia’s population growth and hence change in Australia’s labour force

Components of annual population change(a) a. Annual components calculated at the end of each quarter. Total growth Natural increase Net overseas migration Sep-01Sep-02Sep-03Sep-04Sep-05Sep-06Sep-07Sep-08Sep-09Sep-10Sep-11Sep-12Sep-13Sep-14Sep-15Sep-16Sep-17Sep-18Sep-19Sep-20Sep-21 –100 000 100 000 200 000 300 000 400 000 500 000 Source: ABS, see https://www.abs.gov.au/statistics/people/population/national-state-and-territory-population/latest-release. The rate of net migration The dominant source of population growth has been net migration; that is, the excess of immigrants coming in versus those leaving. As shown in Fiigure 5.16, with the exception of World War I, the Great Depression, World 0 UNCORRECTED PAGE PROOFS War II and the 2020 COVID-19 pandemic (when our international borders were closed), there has been a greater number of migrants entering Australia than leaving, typically by between 100 000 and 300 000 a year. In fact, since the late 1940s the Australian government has encouraged immigration and given priority to those with useful skills. Recently, they have made up around 65 per cent of all entrants. In addition, migrants are usually younger and hence most participate in the labour force, significantly growing the nation’s productive capacity.

WW1 Great Depression WW2 Start of post-war migration program COVID-19 pandemic Source: ABS, see https://www.abs.gov.au/statistics/people/population/overseas-migration/2020-21. 5.5.2 Factors that have influenced changes to the unemployment and employment rates Figure 5.17 shows that Australia’s unemployment rate has moved up and down. However, generally the unemployment rate has been higher than the government’s ideal rate of between 4.0 to 4.5 per cent of the labour force. This acceptable unemployment zone corresponds with the government’s goal of full employment (i.e. the lowest rate of unemployment that doesn’t cause inflation to accelerate significantly). FIGURE 5.17 Recent changes in Australia’s unemployment rate Higher cyclical unemployment in the recession UNCORRECTED PAGE PROOFS

Government’s goal of full employment 1861 1881 1901 1921 1941 1961 1981 2001 2021 4.5 Net overseas migration (NOM) zero line

Source: ABS, see https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/ mar-2022.

4 a. Estimates from 1972 are year ending June, prior to this they are year ending December. Estimates for 2020–21 are preliminary. See revision status on the methodology page.Natural unemployment (mostly structural unemployment)3.5

Mar-12Sep-12Mar-13Sep-13Mar-14Sep-14Mar-15Sep-15Mar-16Sep-16Mar-17Sep-17Mar-18Sep-18Mar-19Sep-19Mar-20Sep-20Mar-21Sep-21Mar-22 24 People Jacaranda Key Concepts in VCE Economics Units 1 & 2 Twelfth Edition

Australia’s unemployment rate and labour market conditions are influenced by two sets of factors: • Cyclical unemployment is caused by generally weaker aggregate demand factors that slow spending on

Australian-made goods and services. • Natural unemployment (especially structural unemployment) is caused by changing aggregate supply conditions that alter the way goods and services are produced and/or whether firms expand or close down.

The causes of cyclical unemployment

The general rule is that Australia’s level of cyclical unemployment rises and falls with the overall strength of aggregate demand conditions that affect the pace of economic activity. These changeable aggregate demand factors might include consumer confidence, business confidence, disposable income, government spending, interest rates and overseas economic activity. • When aggregate demand factors are weaker and slow the level of spending (AD = C + I + G + net X) as in 2020–21, cyclical unemployment will rise. This is because with less spending, firms cut production. This weakens the demand for resources including labour. • In reverse, when aggregate demand factors are stronger and spending accelerates (e.g. 2021–22), businesses will lift their output by employing more resources, including labour, which lowers cyclical unemployment. The causes of natural unemployment Despite periods of cyclical unemployment, the main type of unemployment in Australia is natural unemployment. Natural unemployment consists of four types: • structural unemployment (the most important cause) • frictional unemployment • seasonal unemployment • hardcore unemployment. Currently, these four types of natural unemployment make up around 4.0–4.5 per cent of the labour force (representing the government’s goal or target in this area). This target figure represents the lowest unemployment rate that will not increase inflation. Natural unemployment is caused by changing aggregate supply conditions. Unlike cyclical unemployment that can occur only in a recession, some natural unemployment exists all the time, even in healthy economies. Let us look more closely at the four main types or causes of natural unemployment. 1. Structural unemployment Structural unemployment is easily the biggest single cause of natural unemployment and accounts for most of Australia’s current unemployment rate. It occurs because of structural change where businesses alter the way they go about producing goods and services and try to cut costs or lift efficiency. Structural change can arise from the following causes: • Use of new technology — The replacement of labour with new technology and automated machines can lead to higher structural unemployment in an industry. For instance, the past 20 years especially have seen the widespread adoption of robotics in the manufacture of cars and household UNCORRECTED PAGE PROOFS appliances, the increased use of electronic data processing and communications (in banking ATMs, stock management, transportation, and warehousing), and the rise in online buying (adversely affecting