Long-term unemployment (LTU) rises during periods of weak employment growth and tends to decline during periods of strong and sustained employment growth ¹⁶. For example, LTU rose sharply during the 1990s recession, to a peak of 331,400 in May 1993 (as shown in Figure 12).

Aside from the rises recorded in the second half of the 1990s and when the dot com bubble burst in the early 2000s, LTU essentially trended downwards after the 1990s recession to reach a trough of 65,200 in June 2007. After the onset of the GFC in September 2008, LTU again rose sharply, by 51,100 (65.7%) in just two years, to stand at 128,900 in October 2010. The unwinding of the mining boom in 2012 led to a further rise in LTU and in February 2020 it stood at 173,400 – 95,600 (122.9%) above the level recorded in September 2008. Although employment increased by 1,081,500 (9.1%) over the four years to February 2020, long-term unemployment also rose, albeit marginally, by 300 (0.2%)

It is also important to consider the damaging impact of hysteresis, or the ratcheting up of LTU, which tends to fall at a much slower rate than overall unemployment. Aside from the obvious social consequences, this also results in a reduction in effective labour supply and the potential productive capacity of the Australian economy.

A high level of long-term unemployment is of concern, as people who have been unemployed for a significant length of time face greater difficulty, on average, finding subsequent work, due to skill depreciation, loss of motivation, screening out by employers and marginalisation from the labour market.

A longer duration of unemployment is also associated with a degrading of human capital and a ‘scarring’ effect, whereby the long-term unemployed believe their own re-employment prospects are poor.

In addition, a sectoral shock (such as the decline in manufacturing jobs and move towards service industries) or technological change following a downturn can result in a greater mismatch between the job vacancies available and the skill level of unemployed persons who could fill them, resulting in fewer exits from LTU. This is because workers who were previously employed in shrinking industries may need to retrain to secure a job in a different industry or occupation – for example, automobile manufacturing workers seeking employment in the health, hospitality and retail sectors.