5.3 Measures of Australia’s changing labour market

KEY KNOWLEDGE

• the definition of the labour market

Source: VCE Economics Study Design (2023−2027) extracts © VCAA; reproduced by permission.

5.2.1 Definition of the labour market Labour is perhaps the most important resource for any economy and, in combination with other inputs, is essential (directly or indirectly) for producing goods and services. It involves the mental talents and physical power of different types of workers (e.g. engineers, doctors, electricians, teachers, mechanics, artists, builders, assembly line operators, and administrators). Like other commodities, it is bought and sold in markets. The labour market is an institution where those from the household sector who are able and willing to work, supply labour (S) to the business sector wanting to buy or demand labour (D) so they can produce goods and services. Together, sellers and buyers negotiate wages (W) or the equilibrium price. In reality, there is not just one labour market because, in fact, there are many types of workers, each with different skills and abilities who are employed in different industries and businesses around the country. There is a labour market for each of these. So, for example, there is the market for accountants, and ones for different health professionals, drivers, café staff including barristers, and company CEOs. In addition to the key roles played by households and businesses in the labour market, the Australian government also has some influence in influencing wages through the Fair Work Commission (FWC). 5.2.2 The nature and operation of the labour market When thinking of the labour market, it is useful to recall some microeconomics involving demand–supply (D-S) diagrams like that in Fiigure 5.1, representing the labour market. For simplicity, we will start by assuming there is only one generic type of labour with no differentiation of skill, and that there is no government regulation or interference in the free operation of this market.

FIGURE 5.1 The labour market where buyers and sellers of labour negotiate the equilibrium wage or price of labour Wage per hour ($) Equilibrium wage (W) 0 Equilibrium quantity (Q)

S of labour Australia’s labour market D for labour Market shortage Market surplus UNCORRECTED PAGE PROOFS Quantity of labour (‘000)

Referring to Fiigure 5.1, take a look at the following features: • The demand for labour — You may recall from our earlier work that the law of demand states that the quantity of a commodity purchased depends on its price, or in the case of labour, the wage. This is why the

demand line in Fiigure 5.1 has a downward or negative slope. In other words, the D for labour expands as the price or wage falls or, in reverse, contracts as the wage rises. • The supply of labour — Again, you may recall from earlier studies that the law of supply states that the quantity of a commodity made available depends on its price or, in this case, the wage. This is why the supply line in Fiigure 5.1 has an upward or positive slope. In other words, the S of labour expands as the price or wage rises or, in reverse, S contracts as the wage falls. • The equilibrium wage in the labour market — Referring to Fiigure 5.1, the actual equilibrium wage (W) paid for labour is established at the point where the quantity of labour demanded and quantity of labour supplied are exactly equal. In this situation, there is neither a market surplus nor a market shortage (i.e. D = S). In using Fiigure 5.1, we initially assumed that apart from wages (the price of labour) all other influences on the quantity of labour demanded or supplied in the market were fixed. However, we know that non-price factors (or in this case, non-wage factors) can vary from day to day. These can shift the position of the whole demand and/or supply line, altering the equilibrium wage and conditions in the labour market.

FIGURE 5.2 How changes in the non-price factors of demand and supply of labour can bring about higher or lower wages in the labour market

Part A — Changing non-price demand factors for labour can change wages Original wage Part B — Changing non-price supply factors for labour can change wages S Wage per hour ($) D0 Quantity of labour (Q) S0 S1 S2 Wage per hour ($) Original wage D1 D2 Q1 0 Q1 Quantity of labour (Q)

D1 Referring now to Fiigure 5.2, notice what happens when non-price factors affecting the demand and/or supply change in the labour market: • Changes in non-price factors affecting the demand for labour — Changes in non-price factors determined whether the quantity of labour demanded by employers at any given wage will increase or decrease, shifting the position of the whole demand line. Figure 5.2 (part A) shows the effect on the equilibrium wage of changes in non-price factors. These can move the whole demand line for labour horizontally to the right (called an increase in demand leading to a higher wage), or horizontally to the left (called a decrease in demand leading to a lower wage) of the original demand line. Non-price demand factors could include the following: • Changes in the level of consumer demand for goods and services (for instance, a rise in the demand for goods and services means that firms will need to buy more labour so there is an increase in the derived demand for labour, pushing up the equilibrium wage) • The number of businesses wanting to buy labour (for example, if there are more businesses starting up, more labour will be needed, so demand and hence the equilibrium wage will tend to increase) 0 UNCORRECTED PAGE PROOFS • The efficiency of labour (for example, if workers are more efficient and produce more output per hour, fewer staff will be needed to make a given level of output, decreasing the demand for labour and the equilibrium wage) • The level of business profitability (for instance, if business profits are up, firms will expand and need more staff, increasing the demand for labour and pushing the wage upwards)

• Whether there are substitutes for labour available (for example, in making goods, often machines can be used as a substitute for labour, reducing demand and depressing the equilibrium wage) • Government policy (for instance, if the government uses cash subsidies paid to businesses that make certain types of goods or services, this can increase profits and cause firms to expand, strengthening the demand for labour and pushing up the equilibrium wage). • Changes in non-price factors affecting the supply for labour — Changes in non-price factors determined whether the quantity of labour supplied by households at any given wage will increase or • decrease, shifting the position of the whole supply line for labour. Figure 5.2 (part B) shows the effects on the equilibrium wage of changes in non-price supply conditions. These can move the whole supply line horizontally to the right (called an increase in supply that depresses wages) or to the left (called a decrease in supply that increases wages) of the original supply line. Non-price supply factors might include the following: • Demographics, population structure, and the participation rate of the population in the labour force (for instance, a country with an ageing population where there are more people nearing retirement will tend to have a decrease in the supply of labour, pushing up the equilibrium wage) • Net immigration rates (for example, an increase in immigration will tend to increase the supply of labour and keep the equilibrium wage lower) • The rate of natural increase in population (for instance, a slowdown in a country’s birth rate will reduce the supply of labour some years later, driving up the equilibrium wage) • People’s work–life balance (for example, not everyone wants to work full-time and so an increase in those preferring to work part-time to improve their work–life balance, and have more time for recreation, would tend to reduce the actual supply of labour and cause the equilibrium wage to be higher than otherwise) • Government policy (by tightening welfare access and increasing the pension access age, the government could increase the supply of labour and keep the equilibrium wage lower) • Restrictions on entry into occupations (for example, some occupations have special entry requirements and special standards of experience or training limiting the supply of labour, pushing up the equilibrium wage) • Trade unions (for instance, the formation of trade unions and the use of industrial strikes, and refusal to work as a way of strengthening their bargaining position in wage negotiations with employers, would clearly limit the supply of labour and tend to push up the equilibrium wage). Types of labour market conditions — When non-wage factors shift the position of the whole demand and/or supply line, the equilibrium wage will either rise or fall, altering labour market conditions. • Stronger labour market conditions: Stronger labour market conditions develop when the demand for labour rises relative to the supply. These conditions might be caused by rising economic activity or the onset of a boom. Here, wages tend to increase faster, people work longer hours and labour shortages appear. • Weaker labour market conditions: Weaker labour market conditions develop when the demand for labour falls relative to the supply. This may be caused by a slowdown or recession. Under these conditions, wages rise more slowly or perhaps even fall, and people work fewer hours or become unemployed. • Ideal labour market conditions: Ideally, labour market conditions should neither be too strong causing labour shortages and perhaps wage-price inflation, nor should they be too weak where unemployment and lower incomes depress living standards. With this in mind, the Australian seeks to achieve its goal of full employment. This is defined as the lowest rate of unemployment (perhaps somewhere around 4.0 to 4.5 per cent of the labour force) that does not cause the inflation rate to increase. This means that labour market conditions are too strong when the unemployment rate is below 4.0 per cent. In contrast, UNCORRECTED PAGE PROOFS conditions are too weak when the unemployment rate is above 4.5 per cent, since there is wasted or spare productive capacity available in the economy.

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5.2 Exercise 1. Define the term, labour market. (1 mark) 2. Explain how the labour market operates to determine wages and working conditions. (4 marks) 3. Using Table 5.1, identify whether the item is a factor that affects the demand or the supply of labour. In addition, indicate in which direction the event would be likely to change wages in the labour market (assuming other things remain unchanged). (8 marks)

TABLE 5.1 Some factors that can affect the demand and supply of labour

Item or event Will it primarily affect the demand or the supply of labour? Explain.

In which direction would the item or event be likely to change wages? a. Workers at the steel mill go on strike b. The government raises the pension access age from 67 to 70 years c. The closing of Australia’s borders to immigration, due to the COVID-19 pandemic d. The average age of Australia’s population continues to rise e. The is a global recession f. Labour productivity UNCORRECTED PAGE PROOFS increases quickly by an average of over 2 per cent a year

g. There is a fall in the level of business bankruptcies

h. There is a rise in Australia’s birth rate

4. Explain what is meant by each of the following terms: a. Weak labour market conditions b. Strong labour market conditions c. Ideal labour market conditions. (3 marks) 5. If a country’s annual rate of GDP growth was −0.5 per cent and inflation was 1.2 per cent, identify and outline the likely labour market conditions that you would expect to exist. (2 marks) Fully worked solutions and sample responses are available in your digital formats. 5.3 Measures of Australia’s changing labour market KEY KNOWLEDGE • the relevant measures and statistical indicators of the labour market Source: VCE Economics Study Design (2023−2027) extracts © VCAA; reproduced by permission. From our earlier studies, you may recall that Australia’s domestic macroeconomic conditions involving economic activity are always changing. To monitor these developments and to help guide government policy, the Australian Bureau of Statistics (ABS) uses its monthly labour force survey to track labour market conditions. For example, when the pace of economic activity quickens and firms hire more staff and increase hours of employment, labour market conditions get stronger (i.e. the demand for labour rises relative to its supply). In reverse, when the economy slides into a recession and firms cut staff, labour market conditions become weaker (i.e. the demand for labour falls relative to its supply). In fact, labour market indicators tell us a lot about how the economy is travelling. 5.3.1 The ABS labour force survey of labour market conditions Each month, the ABS undertakes its labour force survey where it collects data, to shed light on changing labour market conditions: • size and growth of the labour force (made up of both those employed and those unemployed) • the number of persons employed • the number of persons unemployed and the unemployment rate • the number of persons underemployed and the underemployment rate • the labour force participation rate • the number of long-term unemployed persons • the annual change in aggregate hours worked • the number of job vacancies. UNCORRECTED PAGE PROOFS These indicators tell us about trends in the demand for labour relative to its supply. But what exactly do all these terms mean?

Agreed definitions are an essential starting point for all surveys. According to the ABS, Australia’s labour force is defined as all individuals aged 15 or over, who are able and willing to work. It includes all those who have jobs and are employed (see definition of employed below), plus all those who are unemployed (see definition of unemployed below).

The labour force size = the number of people employed + the number of people unemployed

For example, if the number employed was 10 million and the number unemployed was 1 million, the labour force size would be equal to 11 million people. Employed persons In compiling these statistics, the ABS defines employed persons as meeting the following criteria: • aged over 15 years • working either full-time (35 or more hours per week) or part-time for more than one hour per week for pay (or as a special case, more than 15 hours a week in a family business when not being paid). It includes those who have a job but may be prevented from working because of illness, strikes, holidays or other similar interruptions. Unemployed persons Unemployed persons are defined as those: • aged over 15 years • actively looking for full- or part-time work but unable to find it • able and willing to take up a job in the week prior to the survey period. It includes those waiting to resume work after being laid off or stood down without pay.

Calculating employment and unemployment rates

Australia’s employment and unemployment numbers can be expressed in two ways: 1. Figures can be presented as an actual number. For example, in March 2022, 13 389 900 persons were employed, and 551 300 persons were unemployed out of a total labour force of 13 941 200 persons. 2. Figures can be expressed as a rate or percentage of the total labour force — for example, in March 2022, around 96.0 per cent of the labour force was employed, while 4.0 per cent was unemployed. The following formulae can be used for these calculations:

The unemployment rate (%)=

Number of people unemployed × 100 Total number of people in the labour force

For example, if there were 1.0 million people unemployed out of a total labour force of 10 million, then the unemployment rate would be 10.0 per cent.

The employment rate (%)=

Number of people unemployed × 100 Total number of people in the labour force

For example, if there were 9.0 million people employed out of a total labour force of 10 million, then the employment rate would be 90.0 per cent. Participation rate The participation rate is the proportion of all people aged 15 years and over who are in the labour force (i.e. UNCORRECTED PAGE PROOFS including all those employed plus those unemployed according to the previous definitions). The participation rate affects the supply of labour resources available. If other things remain equal, a rise in the participation rate tends to increase the unemployment rate, while a fall in the participation rate puts downward pressure on the unemployment rate.

The relationship between the rates of participation and unemployment also work the other way round where the unemployment rate affects the participation rate. For instance, a rise in the unemployment rate tends to cause a fall in the participation rate because some job seekers become discouraged by their lack of success and give up actively looking for work; they become part of the hidden unemployment problem not captured in the unemployment statistics.

Australia’s participation rate for March 2022 was a near high of 66.4 per cent. This rate can be calculated as follows:

The participation rate (%) =

Total number of people in the labour force × 100 Total number of people 15 or over in the population

For example, if the labour force size was 8.0 million and the number of people aged 15 and over was 10 million, then the participation rate in the labour force would be 80.0 per cent. Job vacancies Job vacancies refer to the number of positions advertised by employers that are unfilled. When the economy is growing quickly and firms are expanding output, job vacancies rise. Businesses are hiring workers. However, in a slowdown, job vacancies fall as firms need fewer staff. Underemployment or disguised unemployment Underemployment (also called disguised unemployment) is where individuals are classified as employed because they have jobs (i.e. they work more than just 1 hour per week) but, nevertheless, are partly unemployed because they are not working to capacity (i.e. normally 35 hours per week) and would like more hours. This applies to those in part-time jobs with limited hours. In a sense, the existence of underemployment disguises or under-reports the problem of unemployment, particularly given the trend nowadays towards a rise in the proportion of those in part-time work. Higher underemployment numbers indicate weaker labour market conditions where the demand for labour is limited relative to the supply. It is typical of a period of recession. Underutilisation rate The underutilisation rate is the extent to which the available supply of labour is not working at its capacity. This is equal to the unemployment rate plus the underemployment rate. The underutilisation rate is an important indicator of labour market conditions. For instance, when there is a downturn or recession, the underutilisation rate rises because more people are unemployed and working fewer hours, whereas in a recovery the underutilisation rate typically falls. The underutilisation rate (%) = Unemployment rate (%) + Underemployment rate (%) For example, if the unemployment rate was 4.0 per cent and the underemployment rate was 5.0 per cent then the underutilisation rate would be 9.0 per cent. The economy would appear to have considerable unused capacity. Hidden unemployment Hidden unemployment includes people who would like work but who are discouraged from seeking jobs for various reasons, such as a repeated failure to find work. They have left the labour force and are therefore no longer ‘actively looking for work’. For this reason, they are no longer counted in the labour force and, hence, differ from those who make up the disguised or underemployed who are still part of the workforce. UNCORRECTED PAGE PROOFS Long-term unemployment Long-term unemployment is where individuals have been unable to get a job for 52 weeks or more. This measure also tells us about the state of the labour market. For instance, when conditions weaken during a recession there is a rise in long-term unemployment, whereas in a recovery numbers slowly fall.

Aggregate hours worked The change in aggregate hours worked also provides a useful guide to labour market conditions. If there is a rise in hours worked, this shows an increase in the demand for labour that occurs during a period of expansion, whereas a fall in hours is a sign that output is slowing and firms need less labour.

5.3.2 Australia’s changing labour market

The ABS provides a huge array of statistical information about Australia’s changing labour market over both the short- and long-terms. In this section, we will check out changes in a selection of these important indicators including the following: • The unemployment rate • Employment growth • The participation rate • The underemployment rate • Hours worked • Changes in employment by industry • Changes in labour productivity • Changes in wages • Changes in the proportion of the labour force that is unionised • Changes in the educational attainment of Australia’s labour force by age group with a university degree. The unemployment rate Despite the great range of labour market indicators, the most quoted one is the unemployment rate. The unemployment rate represents the proportion of all those aged 15 and over who are actively looking for paid work (i.e. who are in the labour force) but are unable to get a job. Figure 5.3 shows that unemployment rates for the period 1966 and 2022 have varied considerably between about 1.8 per cent and 11.0 per cent, with slightly higher rates for females. FIGURE 5.3 Changes in Australia’s unemployment rate by gender, and overall UNCORRECTED PAGE PROOFS

Source: ABS, Historical charts, Chart 1, see https://www.abs.gov.au/articles/historical-charts-1966.

Aug-66Aug-68Aug-70Aug-72Aug-74Aug-76Aug-78Aug-80Aug-82Aug-84Aug-86Aug-88Aug-90Aug-92Aug-94Aug-96Aug-98Aug-00Aug-02Aug-04Aug-06Aug-08Aug-10Aug-12Aug-14Aug-16Aug-18Aug-20Aug-22

There is a close relationship between the unemployment rate and the level of economic activity. For example, when activity slows (1981, 1991 and 2020) and the demand for labour falls and unemployment rises. In reverse, when activity is stronger (e.g. 1968 and 2022) and the demand for labour improves, unemployment falls. Even so, we will see later that aggregate supply factors have also affected the unemployment rate.

Employment growth Employment represents the number of people aged 15 and over who are in the labour force and have paid jobs of at least one hour or more per week.

Changes in employment reflect the demand for labour and so, amongst other factors, will be affected by changes in the level of economic activity. Figure 5.4 shows an impressive overall rise in employment between 1966 and 2022, although male employment numbers have risen faster than those for females. Even so, you might notice the tiny dips in the lines that correspond with periods of recession where the level of unemployment rose.

FIGURE 5.4 Australia’s employment growth by gender, and overall ‘000 Source: ABS, Historical charts, Chart 2, see https://www.abs.gov.au/articles/historical-charts-1966. The participation rate The participation rate represents the proportion of the population aged 15 and over who are in the labour force (i.e. either employed or unemployed). Participation affects the supply of labour. As shown in Fiigure 5.5, there are a couple of developments to note here with the male participation rate coming down from 84 per cent in UNCORRECTED PAGE PROOFS 1966 to around 71 per cent in 2022. Contrasting this decline, female participation in the labour force increased from 36 to 62 per cent — more than enough to offset the fall for males. Overall, the participation rate was up Aug-66Aug-68Aug-70Aug-72Aug-74Aug-76Aug-78Aug-80Aug-82Aug-84Aug-86Aug-88Aug-90Aug-92Aug-94Aug-96Aug-98Aug-00Aug-02Aug-04Aug-06Aug-08Aug-10Aug-12Aug-14Aug-16Aug-18Aug-20Aug-22from 60 to an all-time recent high of 66 per cent.

Source: ABS, Historical charts, Chart 4, see https://www.abs.gov.au/articles/historical-charts-1966. The underemployment rate The underemployment rate represents the number of workers who have a job but who would like more hours of work, expressed as a percentage of the labour force. It involves some of those working part-time and is one indicator of unused productive capacity. The underemployment rate rises in recessions when the demand for labour is weak, and falls in a boom when demand is stronger. It is a worry that, overall, there has been an upward trend in the underemployment rate between 1980 and 2020. This is shown in Figure 5.6. FIGURE 5.6 Changes in Australia’s underemployment rate 0 1980 Percentage of labour force that is underemployed. Underemployed workers are employed people (both full-time and part-time) who would prefer, and are available for, more hours of work than they currently have. 1985 1990 1995 2000 2005 2010 2015 2020 4 6 8 10 2 UNCORRECTED PAGE PROOFS

Source: CEDA, see https://www.ceda.com.au/NewsAndResources/Opinion/Economy/Australia-s-labour-market-is-strong-butAug-66Aug-68Aug-70Aug-72Aug-74Aug-76Aug-78Aug-80Aug-82Aug-84Aug-86Aug-88Aug-90Aug-92Aug-94Aug-96Aug-98Aug-00Aug-02Aug-04Aug-06Aug-08Aug-10Aug-12Aug-14Aug-16Aug-18Aug-20Aug-22slack-rema.

People Males Females

The number of hours worked is an indicator of the demand for labour by firms. Figure 5.7 reveals that there has been considerable change from year to year, but especially highlights the impact of the COVID-19 recession in 2020 and the subsequent recovery in 2021–22.

FIGURE 5.7 Changes in monthly hours worked — Australia (in percentage terms and in the number of hours)

15

10

5

0

–5

–10

Mar-12Sep-12Mar-13Sep-13Mar-14Sep-14 Sep-15Mar-15 Mar-16Sep-16Mar-17Sep-17Mar-18Sep-18 Sep-19Mar-19 Mar-20Sep-20Mar-21Sep-21Mar-22

1500 1550 1600 1650 Millions1700 1750 1800 1850 Monthly hours worked in all jobs, seasonally adjusted Yearly change (%) Hours worked (m) Source: ABS, Labour Force Australia, see https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-for ce-australia/latest-release. Changes in employment by industry Not all industries expand at the same rate. As a result, there has been a change in the patterns of Australia’s employment. Over the last 120 years, Fiigure 5.8 (part 1) shows the relative decline in primary industry (agriculture and mining), the growth and then decline of manufacturing, and the expansion of service industries. In more detail, Fiigure 5.8 (part 2) indicates that employment in some industries like healthcarel, public administration, and scientific and technical areas, have grown faster than others over the period. However, manufacturing has shrunk. Again, this reflects the rate of growth in consumer demand for Australian-made goods and services and the derived demand for labour that is used to produce these. Changes in labour productivity Labour productivity or efficiency is judged by looking at the value of output or GDP that is gained from an hour of work (i.e. labour productivity = real GDP -:- number of hours worked). When labour productivity is growing strongly, production costs for businesses and consumer inflation are lower than otherwise. It also means that the economy’s potential output, employment, income and hence living standards are higher. Figure 5.9 traces changes in Australia’s productivity over the last few decades. Looking at this graph, it is difficult to ignore the dramatic slowdown in annual productivity growth (see the decline in the broken trendline). UNCORRECTED PAGE PROOFS

Part 1-Changes in Australia’s employment by industry sector, 1900–01 to 2020–21

80 76

32 16

3 Primary Manufacturing Services

14 28 21 54

59 10 20 30Percentage of the labour force employed 40 50 60 70 1900-01 1950-51 2020-21 Part 2-Changes in Australia’s employment numbers by industry, November 2016 and November 2021 0 400 000 Agriculture, forestry and fishing 800 000 1 200 000 1 600 000 2 000 000 Nov-21 Nov-16 Mining Manufacturing Electricity, gas, water and waste services Construction Wholesale trade Retail trade Accommodation and food services Transport, postal and warehousing Information media and telecommunications Financial and insurance services Rental, hiring and real estate services Professional, scientific and technical services Administrative and support services Public administration and safety Education and training Health care and social assistance Arts and recreation services Other services Source: Part 1– data derived from ABS, https://www.abs.gov.au/ausstats/abs@.nsf/previousproducts/1301.0feature%20article142001; https://www.bitre.gov.au/sites/default/files/report_136_CHAPTER_6_WEB_FA.pdf; and other. Part 2 — data derived from ABS, see https://lmip.gov.au/default.aspx?LMIP/LFR_SAFOUR/LFR_Employment_Industry_TimeSeries. 0 UNCORRECTED PAGE PROOFS