Introduction to Unemployment and the Australian Labour Market

terms, too high a level of aggregate wages reflects an imbalance of labour market power between active participants in the labour market (insiders), and those with a less effective presence (outsiders). Such an imbalance can diminish the benefits of productivity-enhancing reforms if the increase in productivity is captured predominantly by those already employed, in the form of higher wages, rather than being more evenly distributed across the whole population, in the form of increased employment. One means of increasing the bargaining power of outsiders is to use active labour market programs. Drawing on the large variety of programs that have been adopted in OECD countries, the paper by Martin presents a checklist of those labour market programs that appear to work and those that do not. The general aim of such programs is to increase the ability of the unemployed to compete effectively in the labour market by increasing ‘job readiness’ in terms of basic work skills and by assisting the unemployed in locating employment opportunities through the provision of information, or the provision of wage subsidies which increase their attractiveness to potential employers. Labour market programs which target potentially disadvantaged groups at an early age, while initially expensive, can avoid greater costs in the future. A particularly effective type of labour market program is one that provides opportunities for the workforce to increase their education and skill levels. However, care must be taken to avoid the pitfall of encouraging individuals to remain in certain forms of education which, while temporarily reducing the measured unemployment rate, do not provide them with the necessary training to increase their future employability. Education, like all other forms of labour market programs, needs to be carefully targeted. Furthermore, labour market institutions should be structured to allow the unemployed with increased skills and education to compete effectively with the insiders. A necessary element in any solution to unemployment is entrepreneurship. Without a sufficient pool of entrepreneurial skills, there will not be adequate employment opportunities for the workforce to utilise their skills and education. Impediments to risk-taking need to be minimised so that businesses can create jobs in response to enhanced labour market flexibility and the availability of skills. Some decrease in unemployment could be achieved through increased relative wage flexibility, rather than through increased aggregate wage flexibility. That is, the wide range of unemployment rates across the different groups in the workforce may reflect the inability of the wage-setting system to allow relative wages to adjust to imbalances in labour demand and supply. Allowing greater adjustment in relative wages may also deliver a lower aggregate wage level, as relative wages fall for those groups experiencing the higher unemployment rates. An outcome where wages fall for certain sections of the population may raise concerns about equity. However, the inequity of lower wages must be weighed against the inequity of unemployment, particularly given that unemployed households are, in general, lower in the income distribution than low-wage households. An important issue in such a debate is whether the employment generated by the lower wage outcomes is the first point in a career path that leads to higher wages later in the working life, or whether those gaining employment predominantly remain locked into low-wage employment. The evidence on this in Australia is, however, fairly scant.