Long-Term Unemployment: A Critical Policy Issue in Australia

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While the unemployment rate has fallen over the past couple of years, the incidence of long term unemployment has been on the rise and therefore still remains a critical policy issue in Australia. The question of how best to reduce unemployment has been a significant part of the policy agenda for more than two decades due to the complex problems it causes for both policy makers and the individuals affected (Dixon, 2004 & Walsh, 1987). Those that are long term unemployed (LTU), unemployed for 52 weeks or more, are the most challenging group of unemployed from a policy perspective. These group of people are often less educated and qualified, there last job was on average less skilled, they reside in lower socio economic locations, they are more likely to live with other non-working adults and are they are less likely to speak English well. Overall they have the same age distribution as the rest of the labour force except for a slightly higher prevalence of young and older people (Chapman et al, 2000).

The personal, social and economic costs of LTU are significant, causing problems for both efficiency and equity. This paper will explain what LTU is, as well as present some possible explanations as to why it is currently high in Australia. This will be done by analysing factors that influence the long term unemployment rates, such as family situation, birthplace and the current welfare system as well as the duration-dependence and heterogeneity effects. The paper will then go on to describe why LTU is a concern for policy makers, analysing the social, economic and personal issues caused from the existence of LTU.

In line with recommendations from the International Labour Organisation, the Australian Bureau of Statistics (ABS) classifies a person as unemployed when they are without work during the reference week, currently looking for work and are available to work. A person who has been unemployed for 52 weeks (12 months) or more is classified as being LTU. The long term unemployment rate is the number of long term unemployed expressed as a percentage of the labour force. The incidence of long term unemployment (or the long term unemployment ratio) is the proportion of unemployed persons who are long term unemployed (ABS, 1994a). However, the definition excludes discouraged jobseekers and others marginally attached to the labour force. Also, many people have recurrent spells of unemployment which, over time, lead to a cumulative duration exceeding 52 weeks. As a result there is a systematic underestimation of the severity of LTU (Chapman et al, 1992 & ACTU, 2002).

The last two decades have seen the emergence of LTU as a persistent labour market phenomenon, yet it was not formally recognised in journals until the late 1980’s and a major financial commitment wasn’t made by the Commonwealth government until 1994 (Chapman et al, 2000). As of August 2005, the incidence of long term unemployment was 16.7% (Andrews, 2005). Most of the growth in the LTU figures has been driven by an increase in the numbers of people who have been unemployed for more than two years, the very long term unemployed (VLTU). Compared with other individuals, the VLTU are the most work deprived individuals in a society and are caught in a ’unemployment trap’ as they find it progressively more difficult to enter the workforce (ABS, 1994a & Chapman, 2000). Many groups within Australian society have a higher incidence of LTU than others. It varies with family type (SDC, 1995) and education levels (ABS, 1994b), as well as region (ABS, 1994b & SDC, 1995) and birthplace (ABS, 1994b).

The duration-dependence and heterogeneity effects explain as to why the long term unemployed find it difficult to obtain employment. The duration-dependence effect encapsulates the factors relating to unemployment. These include such factors as the loss of skills and on-the-job training caused by being unemployed for a long period of time. The reduced effectiveness and...
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