During the 1970’s-1990’s the increase in the rate of unemployment in Australia can be explained through the combination of increasing real wage rates and a slow rate of output growth. The reason behind such prolonged periods of high unemployment was due to our inability to reverse the effects of the sudden unemployment rate shocks fast enough (prolonged recovery periods) which resulted in Australia experiencing high levels of long-term unemployment. In May 1997, 30% of unemployed Australians had been out of work for over a year, this was roughly 240,000 people. Since the 21st Century however, unemployment rates have decreased significantly and there has been a perceived decline in the natural rate of unemployment. This decline however may be misleading. Studies performed on recovery periods during the 1980’s and 1990’s have shown that although unemployment rates changed at a similar pace, employment growth and labour force participation rate in the 1990’s was much slower than that of the 1980’s. Essentially, the differences between employment growth rates during the 1980’s and 1990’s were due to hidden unemployment and the decline in rates of employment growth due to structural changes e.g. permanent downsizing. The reason why slower employment growth did not actually manifest itself into higher rates of unemployment in the 1990’s, is that growth in labour force participation rate (number of people who are looking for work) declined alongside employment growth. In other words, not only were there less employment opportunities but there were also less people actively seeking work. If the labour force participation rate had grown at the same rate as it had in the 1980’s the aggregate rate of unemployment for May 1997 would have been 12.5% rather than the actual figure of 8.8%. The same reasoning could be applied to explain our recent decline in the natural unemployment rate.
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