Australia: Selected Issues
Author: International Monetary Fund
Publication Date:
18 Feb 1999
eISBN:
9781451801958
Language:
English
Keywords:
ISCR; CR; Australia; deficit; wage; replacement rate; wage growth; Australia unemployment; labor force; activity test; Employment; Unemployment benefits; Real wages
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This Selected Issues paper and Statistical Appendix focuses on two analytical approaches for judging whether the current account for Australia is sustainable. The paper implements the first approach, by asking how Australia’s net external liability position is likely to evolve over time, based on assumptions of future growth and interest rates. The paper implements the second approach by exploring the implications of a model of optimal external borrowing and lending. The main conclusions are also discussed in the paper.

Abstract

This Selected Issues paper and Statistical Appendix focuses on two analytical approaches for judging whether the current account for Australia is sustainable. The paper implements the first approach, by asking how Australia’s net external liability position is likely to evolve over time, based on assumptions of future growth and interest rates. The paper implements the second approach by exploring the implications of a model of optimal external borrowing and lending. The main conclusions are also discussed in the paper.

II. The Causes of Australia’s High Unemployment Rate1

A. Introduction and Summary

1. Australia’s unemployment rate has shown a strong upward trend over the past 25 years. It rose from very low levels in the mid-1970s to a historical peak of 11 percent in 1992, following the recession of the early 1990s. Since then, the rate has fallen to just over 8 percent as economic growth has rebounded, but remains more than 2 percentage points above the level at a similar stage of the 1980s economic recovery. Although Australia’s unemployment rate is not high when compared with continental Europe, it is above that for most other advanced countries, including New Zealand, the United Kingdom, and the United States.

2. This chapter investigates the reasons for high unemployment in Australia. The approach taken is first to look at existing cross-country studies of unemployment to identify some factors that explain differences in the unemployment rate between Australia and other countries. Second, the chapter estimates a model of the labor market in Australia, in order to get at some of the underlying causes of Australia’s high unemployment rate.

3. The results suggest that the increase in the replacement rate for the unemployment benefit (i.e., the ratio of the unemployment benefit to earnings) has been a significant contributor to the level of structural unemployment in Australia. Another key finding is a lack of responsiveness of real wages to unemployment, which may help to explain the persistence of unemployment in Australia. The inflexibility of real wages may be due to features of the wage bargaining system, including union power and the award system. In addition, increased social welfare benefit payments in the 1990s are found to have contributed to a fall in labor force participation, particularly for the young and old-age cohorts. While lower participation helped to reduce unemployment, it is also likely to have detracted from Australia’s employment and output growth. Recent reforms to wage bargaining and the social welfare system will help address the unemployment problem, but more fundamental reforms are likely to be required to achieve decisive progress in bringing unemployment down and improving wage flexibility.

B. Recent Developments in the Labor Market

4. The main feature of Australia’s labor market in the past 25 years has been the upward trend in unemployment. The rate rose from about 2 percent in the early 1970s to 8 percent in mid-1998, with cyclical peaks of 10–11 percent in the early 1980s and early 1990s, and a cyclical trough of less than 6 percent in the late 1980s (Figure II.1, top panel). Each cyclical economic contraction has pushed the unemployment rate higher, while subsequent economic expansions have not reduced the rate sufficiently to reach earlier levels. By mid 1998, after six years of economic expansion, the unemployment rate was more than 2 percentage points above the level in late 1989 (which was a similar stage of the 1980s expansion).

FIGURE II.1
FIGURE II.1

AUSTRALIA UNEMPLOYMENT, EMPLOYMENT AND WAGES

Citation: IMF Staff Country Reports 1999, 001; 10.5089/9781451801958.002.A002

Source: Australian Bureau of Statistics; and staff estimate.1/ The troughs are as follows: 1983Q1 for the 1983/84 recovery and 1991Q2 for the 1991/92 recovery.

5. Slow employment growth in the most recent expansion contrasts sharply with strong employment growth in the 1980s expansion (Figure II.1, middle panel), and appears to be related to more rapid growth of real product wages during the current expansion. Over the period 1983–89, employment grew at one of the strongest rates among the advanced countries, and was sufficient to reduce the unemployment rate to about 6 percent, despite rapid growth in labor force participation, particularly among women. In the expansion of the 1990s, employment growth was strong in 1994–95 (particularly in the service sector), but slowed in recent years. Employment appears to have been adversely affected by the strong growth in real product wages in the 1990s expansion, in contrast with virtually no increase on real product wages in the 1980s expansion (Figure II.1, bottom panel).

6. A comparison with New Zealand’s experience is of particular interest, as its wage bargaining and social welfare systems were similar to Australia’s until fundamental reforms that decentralized wage bargaining and reduced welfare benefits were introduced in 1991. In part, reforms in New Zealand were in response to a very sharp contraction in employment and rise in unemployment in the late 1980s and early 1990s. By 1996, however, following the reforms, the unemployment rate in New Zealand had fallen significantly below Australian levels. While unemployment has recently increased in New Zealand with the sharp cyclical slowdown, the rate is still about ½ percentage point below that in Australia, and was 2–2½ percentage points lower in 1996–97.

C Evidence from Cross-Country Studies of Unemployment

7. A number of recent studies have examined the causes of differences in unemployment between countries. Jackman and others (1996) undertook an analysis of the determinants of unemployment in 20 OECD countries during 1983–88 and 1989–94. They found that the relatively high rate of unemployment in Australia was explained by the longer duration of unemployment benefits, and the higher level of union coverage in Australia than in most other countries.2 According to the study, these factors raised Australia’s unemployment rate by about 2¾ percentage points in the period 1989–94.

8. Ball (1996) examined causes of changes in the non-accelerating-inflation-rate of unemployment (NAIRU) for 20 OECD countries between 1980 and 1990. He found that the increase in the NAIRU in Australia was explained mainly by the unlimited duration of unemployment benefits, which reduced the incentive for job search.

9. Other cross-country studies have focused on the role of wage bargaining systems. Calmfors and Driffill (1988), for example, have argued that highly centralized or highly decentralized industrial relations systems yield superior labor market outcomes compared with in-between systems.3 The current Australian industrial relations system is an “in-between” system, with elements of both centralized and decentralized bargaining. More recent analysis by the OECD (1997), however, which updated the work of Calmfors and Driffill, found no statistical relationship between economic performance and the extent of collective bargaining for a range of OECD countries.

D. A Simple Model of the Labor Market in Australia

10. This section estimates a model of the labor market to analyze the reasons for Australia’s high unemployment rate. The model consists of equations for employment, wages, and labor supply. A disaggregated approach is taken, with employment and wage equations estimated for the economy as a whole and for two sectors—manufacturing and services—separately. This is motivated by the fact that the slow employment growth in the 1990s can be traced largely to slower growth in the manufacturing sector. Labor supply equations are also disaggregated by gender and by age-group, given the differing trends in participation (Figure II.2).

FIGURE II.2
FIGURE II.2

AUSTRALIA LABOR FORCE PARTICIPATION

(In percent)

Citation: IMF Staff Country Reports 1999, 001; 10.5089/9781451801958.002.A002

Source: Australian Bureau of Statistics.

11. Appendix II. 1 outlines the model. In short, employment is derived from a simple constant elasticity of substitution (CES) production function, with employment expected to be positively related to output, and negatively related to real product wages. Wages are expected to be positively related to productivity and the unemployment benefit replacement rate, but negatively related to unemployment (adjusted by union density to capture the extent of “insider” power in wage bargaining).4 Finally, wages are expected to be positively related to the terms of trade of the sector.

12. In the labor supply equation, wages could be either positively or negatively related to participation, depending on income and substitution effects. Non-labor income is expected to be negatively related to participation, as higher non-labor income reduces the need to work. The unemployment rate could be positively or negatively related to participation, depending on whether the ‘discouraged worker effect’ of higher unemployment outweighs the ‘encouraged’ worker effect.5 The relationship of demographic and structural variables with participation depends on the nature of the variable. For instance, the share of the population under 15 should be negatively related to participation, as changes in child care responsibilities affect the capacity to work, particularly for females.

13. Long-run cointegrating relationships in the levels of the variables are estimated using the Johansen (1988) method (Table II.1). Error correction models are also estimated in order to gauge the dynamics toward long-run equilibrium. The estimation results are found to be generally statistically satisfactory, with most coefficients having the expected sign, where strong priors exist. Further details are available in Brooks (forthcoming).

Table II.1.

Australia: Factors Related to Employment and Real Wage Growth

(Percent change June 1990–97)

article image
Source: Fund staff estimates.

The cointegrating equations for services and total employment were statistically satisfactory, while the manufacturing equation was less satisfactory. See Brooks (forthcoming) for further details. See data appendix for definition of the data.

Based on the equation: log (manufacturing employment) = 0.91 log(y) - 0.85 log(rw)

Based on the equation: log (services employment) = 0.71 log(y) - 0.41 log(rw)

Based on the equation: log (total employment) = 0.73 log(y) - 0.27 log(rw).

Based on equation: log(manufacturing real wage) = 0.97 log (prod) - 0.22 log(U.(1-UD))+0.98 log(rr) + 0.57 log(tot).

Based on equation: log (services real wage) = 0.43 log(prod)-0.07 log(U.(1-UD))+0.56 log(rr)+0.19 log(tot).

Based on equation: log (total real wage) = 1.2 log(prod)-0.18 log (U.(1-UD))+0.83 log(rr)-0.23 log(tot).

E. Why Has Unemployment Remained High in Recent Years?

14. The estimation results can be used to gain some further insight into why unemployment remained high in the 1990s. Two approaches to this analysis are taken. First, the equations are used separately to quantify the impact of various factors on the behavior of employment, real wages, and labor supply. Second, a simple model consisting of the employment, wage, and labor supply equations, together with a production function, is simulated dynamically to assess the impact of changes in two policy variables—the unemployment benefit, and other social welfare benefits—on the key labor market variables, including unemployment.

Single equation analysis

15. The single equation analysis highlights three main factors affecting unemployment:

  • higher real product wages detracted from employment growth, by about 4 percentage points, in the 1990s, particularly in the manufacturing sector (Table II.1).6

  • the increase in real product wages in the 1990s was driven largely by productivity increases, but almost one-third of the increase was related to the increase in the unemployment benefit replacement rate (Figure II.3, top panel).7 These influences were partly offset by the negative impact on wages of the rise in unemployment and fall in union density (Figure II.3, middle panel).

  • an increase in social welfare benefits (excluding unemployment benefits and pensions) was the main factor holding down both male and female labor force participation in the 1990s (Table II.2). These benefits, which comprise government payments for sickness, permanent disability, and family and child benefits, grew significantly in the 1990s. (Figure II.3, bottom panel.)

FIGURE II.3
FIGURE II.3

AUSTRALIA UNION DENSITY AND SOCIAL WELFARE BENEFITS

Citation: IMF Staff Country Reports 1999, 001; 10.5089/9781451801958.002.A002

Source: Australian Bureau of Statistics.
Table II.2.

Australia: Factors Related to Labor Force Participation Rate

(Percent change June 1990–97)

article image
Source: Fund staff estimates.

Equations for total male and female labor force participation and the three-age cohorts (15–24, 25–54, 55 and over) were statistically satisfactory (see Brooks (forthcoming)).

Based on aggregate male equation: log (male participation rate) = log 0.29 (wtm) - 0.08 log (um) - 0.10 log(yg) - 0.08 log (yo).

Based on aggregate female equation: log (female participation rate) = -0.12 log(yg) -1.22 log (pop<15) + 2.08 log (serv).

Simulation analysis

16. Two policy experiments were simulated with the model, that focus on possible channels for public policy to reduce unemployment and raise labor force participation. First, the unemployment replacement rate was held at the 1990 level, and second, social welfare benefits were reduced by 10 percent. In addition to the aggregate employment, wage and labor supply error-correction equations used in the simulations, a production function was included to allow for an endogenous output response.8

17. In the first exercise, the model was dynamically simulated over the period June 1990 to June 1997, holding the unemployment replacement rate at the June 1990 level. The main result from this simulation is that the unemployment rate falls by about 1¾ percentage points after three years in response to the cut in unemployment benefits, and stays at around this level until the end of the simulation period (Figure II.4, top panel).9 Unemployment falls because real wages fall by 6 percent in response to the lower replacement rate, and this raises employment. In turn, this feeds through to higher output, and drives a further increase in employment, despite a slight increase in labor supply resulting from the encouraged worker effect of lower unemployment.

FIGURE II.4
FIGURE II.4

AUSTRALIA UNEMPLOYMENT RATE

Citation: IMF Staff Country Reports 1999, 001; 10.5089/9781451801958.002.A002

Source: Staff calculations.1/ Derived from a dynamic simulation of the error correction equations for employment, wages, and male and female labor supply (along with a production function). See Brooks (forthcoming) for further details.

18. The second simulation involves reducing real social welfare benefits per person by 10 percent from June 1990 in the male and female labor supply equations.10 This policy change results in a rise in the labor force by 0.6 percent after three years (Figure II.4, bottom panel). In turn, this contributes to a rise in the unemployment rate by 0.4 percentage points over the same period, and unemployment remains at this higher level through the remainder of the simulation. The rise in the unemployment rate contributes to a fall in the real wage by ½ percent, which raises employment (and output), offsetting only part of the impact of the rise in participation on the unemployment rate.

Comparison with New Zealand

19. It is useful to compare the outcome of the simulated cut in social welfare benefits in Australia with the experience of an actual cut of a similar magnitude in New Zealand. Social welfare benefits (in real terms, excluding unemployment benefits) in New Zealand were cut sharply in the early 1990s, although by the mid-1990s they had returned to about 90 percent of the levels of the late 1980s (Box II. 1, Figure II. 5). At the same time, unemployment benefits were reduced, and eligibility for the government old-age pension was tightened.

FIGURE II.5
FIGURE II.5

AUSTRALIA AND NEW ZEALAND LABOR FORCE PARTICIPATION AND SOCIAL WELFARE BENEFITS, 1980–97

(In percent unless otherwise stated)

Citation: IMF Staff Country Reports 1999, 001; 10.5089/9781451801958.002.A002

Sources: Australian Bureau of Statistics; and Statistics New Zealand.

20. In order to assess the role of social welfare benefit reforms in New Zealand, labor supply equations were estimated in the same fashion as those estimated above for Australia. The estimation results obtained were qualitatively similar to those for Australia (see Brooks (forthcoming) for details), confirming that a rise in participation in New Zealand in the 1990s was due in part to the benefit reforms (Table II.3). In addition, the dramatic rise in participation for the population aged 55 and over was found to be related to pension reform, with the increase in the age of eligibility for pensions lifting participation by 4–5 percentage points for this age cohort.

Table II.3.

New Zealand: Factors Related to Labor Force Participation Rate

(Percentage point change June 1990–97)

article image
Source: Fund staff estimates.

The cointegrating equations for total male and female participation and the age cohorts (15–24, 25–54, 55 and over) were generally statistically satisfactory. See Brooks (forthcoming) for further details. See the data appendix for definition of the data.

Based on aggregate rate equation: log (male participation rate) = - 0.25 log (wtm) - 0.06 log (um) - 0.05 log (yg)

Based on aggregate female equation: log (female participation rate) = -0.13 log (yg) + 1.79 log (serv) - 0.27 log (student)

Based on equation for males aged 55 and over = log (male participation rate 55+) = -0.16 log (u) - 0,32 log (yg) - 0.73 log (ypen)

Based on equation for females aged 55 and over: log (female participation rate, 55+) = -0.09 log (u) - 0.35 log (yg) - 1.60 log (ypen)

21. A key difference between the labor market experience of the two countries in the 1990s is that the unemployment rate fell in New Zealand more sharply than in Australia (as noted in section B), despite the rise in participation. This contrasts with the simulated effects of the cut in social welfare benefits in Australia, in which the unemployment rate rose in tandem with the rise in participation. The different outcomes suggest that other factors were at play in the New Zealand labor market to deliver a better outcome for unemployment. These factors are likely to include the cuts to unemployment benefits in 1991 and the fundamental reform of the wage bargaining system (Box II. 2), which acted to improve wage flexibility, contain wage growth, and raise employment growth.

Social Welfare Reforms in the 1990s: A Comparison of Australia and New Zealand

Australia’s and New Zealand’s social welfare systems are similar in many respects. Unemployment benefits are available for an unlimited duration, a wide range of other benefits are targeted at families and individuals with sicknesses or disabilities, and universal government old-age pensions are available. Social welfare spending, however, grew more rapidly in New Zealand than Australia in the 1980s—but the opposite occurred, on average, for the 1990s.

In 1990, the New Zealand government introduced far-reaching reforms following the rapid growth of social spending in the 1980s. The reforms aimed at encouraging job search, raising labor force participation, and reducing the fiscal cost of the social welfare system. A wide range of benefit rates were cut, including the unemployment, sickness and domestic purposes benefit. The cuts averaged about 10 percent, but ranged between 3 and 25 percent, with the deepest cuts made to youth unemployment benefits. At the same time, eligibility criteria for some benefits were tightened, particularly for student allowances. New Zealand’s National Superannuation, the pay-as-you-go government pension scheme, was also reformed. The eligibility age was increased to 61 years in April 1992, with further increases scheduled to take the eligibility age to 65 years by 2001. These reforms were successful in sharply reducing social welfare spending in the early 1990s, but spending on some benefits (especially the sickness and invalidity benefits) picked up in the mid-1990s. By 1996/97, however, social welfare spending was about ¾ percent of GDP lower than in 1989/90 (excluding unemployment benefits, which fell a further ⅓ percent of GDP).

In Australia, despite some reforms introduced with “Working Nation” in 1994,1 spending on social welfare programs grew by 2 percent of GDP between 1989/90 and 1996/97 (excluding unemployment benefits which grew by nearly ½ percent of GDP). The growth in spending stemmed from higher rates of payments and the introduction of supplementary payments for families with children and people with disabilities in the early 1990s.

1 “Working Nation” introduced a number of reforms, including the easing of the rate at which benefits were withdrawn for extra income earned. In other reforms, the government moved to achieve parity between the old-age pension eligibility criteria for women and men (set at 65 years, to be achieved by 2013) and tightened the unemployment benefit activity test (a requirement to search for jobs or lose support).

F. Conclusions

22. The analysis in this chapter suggests that the rise in the replacement rate for the unemployment benefit over the past decade contributed to the rise in structural unemployment in Australia. One implication is that reducing the unemployment benefit replacement ratio to earlier levels would have a significant impact on unemployment. The cross-country study results would also suggest the need to limit the duration of the unemployment benefit.

23. Another key finding is that increased social welfare benefit payments contributed to a fall in labor force participation, particularly for the young and old age cohorts. While lower participation may have helped to reduce unemployment slightly, it is also likely to have detracted from Australia’s employment and output growth. An implication is that potential growth rates could be raised by lowering social welfare benefits, while still retaining an effective social safety net. More importantly, the main reason for the rise in unemployment in response to a reduction in social welfare benefits is likely to be a lack of responsiveness of real wage, the root causes of which would seen to reside in inflexibilities in the wage bargaining system, possibly due to union power and the award system.

24. The experience of New Zealand provides a sharp contrast to that of Australia. New Zealand’s far-reaching social welfare reforms of the early 1990s contributed to a rise in labor force participation in the 1990s. At the same time, the unemployment rate fell. This suggests that the reforms to wage-bargaining in New Zealand were effective in improving wage flexibility, and facilitating the move into jobs of new labor force participants.

25. The Australian authorities have taken a number of measures to address the unemployment problem. Reforms to industrial relations were introduced in 1996; the unemployment benefit was subject to a tighter activity test (a requirement to search for jobs or lose support); government-funded labor market, training and education programs are being reformed; and broader product market reforms are continuing. These reforms are steps in the right direction, and are likely to reduce structural unemployment over time. The magnitude of their impact, however, is difficult to gauge at this stage since the reforms were implemented only recently and, in some cases, the beneficial impact is still likely to be in the pipeline. The reforms, however, were not as far-reaching as in New Zealand. This suggests that a more fundamental break from the past industrial relations and social welfare systems may be desirable, in order to accelerate reductions in structural unemployment and improve growth prospects.

Industrial Relations Reform: A Comparison of Australia and New Zealand

The industrial relations systems in Australia and New Zealand have traditionally shared many common features: compulsory arbitration of industrial disputes; a registration process that ensures recognition of unions before industrial tribunals, and that prevents competition for members of existing unions; and a system of awards setting out wages and terms of employment.

During the 1980s, both Australia and New Zealand made tentative steps toward deregulating their labor markets. In 1987, the Labour Government in New Zealand introduced the Labour Relations Act, which attempted to rationalize the number of trade unions and required the formation of single bargaining units to negotiate at the enterprise level with large employers. However, the most dramatic shift, and one that caused a significant divergence between the industrial relations systems in Australia and New Zealand, came with the introduction of the Employment Contracts Act in 1991.

Under the Act, industry-wide awards were abolished and replaced with a system of free contracting aimed at facilitating agreements negotiated directly between employees and employers at the enterprise level. Individual employees can either negotiate their own contracts or appoint a bargaining agent to represent them. Contracts must meet minimum standards relating to employment conditions such as wages, leave, hours of work, and grievance procedures. These changes effectively brought to an end compulsory unionism, closed shops, and preference arrangements for union members. Although the Act does not mention unions, legislative protection for their role is provided under the Trade Unions Act.

A comparison between New Zealand’s Employment Contracts Act and Australia’s 1996 Workplace Relations Act reveals significant differences between the wage bargaining system in the two countries. Most important, Australia still maintains a system of awards and a significant role for trade unions in wage bargaining. Awards continue to be a reference point for workplace agreements through the application of the so-called global no-disadvantage test (that is agreements must not result in a reduction in employees’ overall terms and conditions of employment when compared with the relevant award). Awards are also to be the mechanism for implementing safety net wage increases for workers unable to gain wage increases through enterprise bargaining. While the monopoly power of trade unions has been removed, unions are nonetheless guaranteed a role in bargaining over most enterprise agreements, provided a member requests their involvement.

APPENDIX II.1 The Labor Market Model

The specification of the model follows Henry and Snower (1996) and Jackman, Layard, and Nickell (1991). The employment equation is derived from a standard CES production function (similar to Henry and Snower and Ferguson, 1969), with output and the real wage the key determinants of employment. The wage equation is based on a “competing claims” model of union-firm behavior (following Jackman, Layard, and Nickell). The real wage is the outcome of a bargain between the firm and the union, where once the wage is determined the firm sets the employment level In this model, wages are dependent upon real unemployment benefits, productivity, unemployment and an index of union strength. The labor supply equation is standard, and is a variant of that outlined in Pencavel (1986) and derived from Hicks (1946), Further details of the model are provided in Brooks (forthcoming). The model is outlined below, with all lower case variables in logs:

Employment

ni = α1 yi + α2 (wi - poi) + seasonals

Wages

wi - poi = β1 (yi - ni) + β2 log U*(l-UDi) + β3 rr + β4 (poi - pii) + seasonals

Labor force participation

Ifj = γ1 wtj + γ2 zj + γ3 dj + γ4 uj + seasonals

where: n = numbers employed

  • y = output

  • w = nominal wage

  • po = price index of outputs

  • pi = price index of inputs

  • U = unemployment rate

  • UD = union density, i.e., union members as a proportion of numbers employed

  • rr = replacement rate for the unemployment benefit

  • If = labor force participation rate

  • wt = real-after-tax wage

  • z = real income from sources other than labor (e.g., social welfare benefits, pensions)

  • d = demographic variables or structural change variables

  • u = unemployment rate

  • i = ith sector (aggregate economy, manufacturing or service sector)

  • j = sex or age group

Data Appendix

This appendix provides the definition and source of data used in the model (lower case variables are in logs).

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References

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  • Brooks, R., “The Causes of Australia’s High Unemployment Rate”, IMF Working Paper, Washington, DC, (forthcoming).

  • Calmfors, L. and J. Driffill, 1988, “Centralization of Wage Bargaining,” Economic Policy, No. 6, pp. 14–61.

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  • Hicks, J. R., 1946, Value and Capital, 2nd Edition, (Oxford: Oxford University Press).

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  • Johansen, S., 1988, “Statistical Analysis of Cointegrating Vectors,” Journal of Economic Dynamics and Control, 12, pp. 231–254.

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1

This chapter was prepared by Ray Brooks.

2

Average unemployment benefit replacement rates in Australia for a couple with no children in the first year of unemployment are quite low (about 50 percent in 1995 compared with the OECD average of about 60 percent). However, given that benefits are independent of previous earnings, persons in the bottom 10 percent of the earnings distribution face replacement rates that are close to or even above 100 percent. Furthermore, the fact that benefits are paid indefinitely results in the Australian system being more generous for the long-term unemployed than the OECD average (with a replacement rate of 40 percent for a couple with no children compared with a comparable replacement rate of 19 percent for the OECD).

3

The argument is that centralization of wage bargaining can help promote wage moderation, while decentralized bargaining enables wages to be closely linked to circumstances at the enterprise level If unions are industry-specific and wage bargaining is not coordinated across industries, unions have an incentive to seek higher wages. This is because an increase in the output price of that industry (needed to offset the impact of higher nominal wages) will only have a limited impact on the aggregate real wage.

4

Insider power refers to the extent to which unions bargain to improve the position of their members (“insiders”) and ignore non-union members among the ranks of the unemployed (“outsiders”).

5

The encouraged worker effect arises when other members of the household enter the workforce in response to a reduction in household income if a member of the household becomes unemployed.

6

Restricting the coefficient for output to equal one in the aggregate employment equation (as in the Australian Treasury’s TRYM model) raises the impact of real wages on employment.

7

The unemployment benefit replacement rate rose from about 37 percent in 1990 to 42 percent in 1997. This was largely due to increases in housing assistance to the unemployed in the early 1990s. As noted in the “One Nation” statement by Prime Minister Keating in February 1992, the real value of unemployment benefits for a single adult receiving the accommodation benefit (if renting privately) rose by 53 percent between 1983 and 1992.

8

See Brooks (forthcoming) for details of the error-correction models, and Chapter II of Singh and others (1998) for the production function.

9

The impact of the replacement rate on unemployment is somewhat larger than in earlier Australian studies (see, for example, Fahrer and Pease, 1993).

10

This is only a relatively small adjustment given that real social welfare benefits per person of working age (yg) rose by more than 50 percent between 1990 and 1997.

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Cover IMF Staff Country Reports
Australia: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1999: Issue 001
Publisher:
International Monetary Fund
ISBN:
9781451801958
ISSN:
1934-7685
Pages:
90
DOI:
https://doi.org/10.5089/9781451801958.002

AUSTRALIA UNEMPLOYMENT, EMPLOYMENT AND WAGES

AUSTRALIA LABOR FORCE PARTICIPATION

(In percent)

AUSTRALIA UNION DENSITY AND SOCIAL WELFARE BENEFITS

AUSTRALIA UNEMPLOYMENT RATE

AUSTRALIA AND NEW ZEALAND LABOR FORCE PARTICIPATION AND SOCIAL WELFARE BENEFITS, 1980–97

(In percent unless otherwise stated)