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Unemployment, inequality and public responsibility

By William Mitchell - posted Friday, 2 August 2002

Australia’s long period of full employment that followed World War 2 came to an end in 1975 when the federal government abandoned its responsibility for maintaining demand at levels sufficient to ensure that employment growth absorbed the growing labour force.

Subsequent discretionary monetary and fiscal policy decisions have meant that the Australian economy, like most others, has been prevented from generating enough jobs to employ the available labour.

The same policy decisions have also not allowed the economy to generate enough hours of work to match the preferences of the employed. The result has been persistently high unemployment and rising levels of underemployment. In 1972 there were more job vacancies than unemployed. Now there are around 8 unemployed for every job vacancy. The unemployed cannot search for jobs that are not there!


Despite the long period of robust economic growth since the early 1990s recession, the Australian economy did not remotely approach full employment. In the last four economic cycles low point unemployment rates have been 4.6 per cent (June 1976), 5.5 per cent (June 1981), 5.6 per cent (November 1989) and then 6.0 percent in September 2000.

The low point unemployment has steadily ratcheted upwards over successive cycles. Despite one of the stronger growth rates in the 1990s among OECD economies, the unemployment trend remains positive. The problem is even worse when one broadens the measure of labour wastage.

In May 2002, the official unemployment rate was 6.3 per cent. The labour market indicators developed by the Centre of Full Employment and Equity (CofFEE) at the University of Newcastle show that if estimated hidden unemployment (workers who want work but are not actively looking) is included the rate of labour underutilisation jumps to 8.6 per cent. Including the underemployed (part-time employees who desire more hours of work but cannot find them) pushes the wastage rate to 12.5 per cent.

The cumulative costs in terms of foregone output and the social malaise related to unemployment are huge and dwarf the costs of alleged microeconomic inefficiency.

Accompanying the persistently high unemployment in most countries has been increasing levels of economic inequality. This has manifested in terms of declining employment opportunities for the least skilled and a wider dispersion of earnings.

While unemployment remains the major cause of poverty the new problem is that growth no longer seems to be associated with improved equity. The combination of strong growth, persistent labour underutilisation and rising economic inequality in the 1990s has overturned the received wisdom. Economic growth had until the mid-1970s provided upgrading bonuses which reduced income inequality (and poverty rates). These bonuses were in the form of productivity improvements, increased working time and labour force participation rates, occupational upgrading, and rising average earnings for the most disadvantaged in the labour market.


The considerable labour market deregulation and microeconomic reform since the late 1980s has not only created job losses overall but has also exacerbated inequality. More fractional employment opportunities with less earnings security are now being forced onto the employees.

The indicators of poverty in Australia have shifted as a result. In the 1970s, the main group at risk was the aged without home ownership. Now the youth, the unemployed, the underemployed and the low-paid service sector workers are the groups at risk. Increasing numbers of older workers are also induced into premature retirement by disability and other pensions as a consequence of the lack of available work.

Economists offer several explanations to link joblessness to the rising inequality. First, technological change has been biased towards higher skilled workers. There is some truth in this but it does not explain the large shifts away from unskilled job opportunities. Second, increased competition through trade from low wage countries in Asia has led to declines in manufacturing in the older industrialised nations. While valid, the shift against the unskilled has also occurred in the non-traded services sector. Third, significant changes have occurred in the industrial relations and wage determination machinery that have disadvantaged the lower paid workers. The growth in individual agreements in Australia has disadvantaged full-time employees who can earn higher mean and median wages with correspondingly less inequality under collective agreements. Further, employees receiving awards only are subject to relatively low wages, as compared to other employees in the same occupation or industry. Finally, labour market changes referred to as ‘bumping down’ whereby as job opportunities for lower skilled workers shrink and more skilled workers enter the labour force the less qualified are driven out of traditional employment areas by the more skilled employees.

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About the Author

William F. Mitchell is Professor of Economics and Head of Department and Director, Centre of Full Employment and Equity research University of Newcastle New South Wales.

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