The Macroeconomics of Australian Unemployment

A macroeconomic examination of unemployment obscures much of the rich detail that underpins the labour market. Nevertheless, it enables us to analyse the broad trends that have occurred over the past twenty years on both the demand and supply sides of the labour market. In the next section we examine these trends at an aggregate level. The aggregate unemployment rate has risen as a result of a large increase in labour supply which has not been matched by an equivalent increase in labour demand (employment). Most of the rise in the aggregate unemployment rate occurred in the 1970s, associated with the increase in labour costs at that time. Since the early 1980s, the aggregate unemployment rate has fluctuated with the economic cycle around a relatively constant mean. In Section 2, we also discuss estimates of the natural rate of unemployment. Similar to the trend in the aggregate unemployment rate, the natural rate rose sharply in the mid 1970s, but has been relatively steady over the past fifteen years fluctuating between 6 and 8 per cent. The adjustment of inflation expectations has played an important role in the movement of the aggregate unemployment rate relative to the natural rate in the 1990s.