State of Australia’s Skills 2021: now and into the future
Short-term business cycles and long-term structural change in the labour market
Over recent decades there have been large fluctuations in the strength of the labour market as well as changes in its composition. Some of these changes have been short-lived while others have endured. The short-term changes arise mainly from the fluctuations in the business cycle, while the changes that endure are known as structural changes. The analytical challenge is to separate the two.
Structural change refers to long-term and persistent shifts in the composition of the labour market or economy. There are many different factors that can cause these shifts, such as the international economic environment, technological change and shifts in societal norms. Although commonly viewed as a shift in the composition of industries or occupations, structural change can also refer to other observable shifts in the labour market or economy, such as the continuing rise in female labour force participation or the increase in those aged 15 to 24 years who are remaining in education.
Increased global competition and advances in technology have led to considerable growth in occupations that require higher-level cognitive skills and that are not easily replicated by machines. These skills include social skills, emotional intelligence, creativity and advanced reasoning.
Although structural change in the labour market is an inevitable process as the economy grows and evolves, it is difficult to measure in real-time and considerably easier to observe retrospectively.
Over the last several decades, structural change in the economy, together with a number of economic shocks and associated movements in the business cycle, have resulted in some sizeable fluctuations in overall labour market activity. During economic downturns, the unemployment rate has tended to ratchet up quickly and the pace of employment growth has tended to slow. During periods of economic recovery, employment growth has strengthened but the unemployment rate has tended to decline slowly.
Figure 4: Unemployment rate and annual employment growth, February 1980 to February 2020
For instance, as Figure 4 shows, between December 1989 and the peak of the 1990s recession in December 1992, employment fell sharply, at an annual average rate of 1.0%. Full-time employment also plummeted, at an annual average rate of 2.1%. As a result, the unemployment rate in Australia rose appreciably, from a pre-recession trough of 5.8% in December 1989, to a peak of 11.2% in December 1992.
After the low point of the 1990s recession the pace of employment growth recovered strongly, in line with the robust global recovery. Between December 1992 and August 2003 employment increased at an annual average pace of 2.0%. But even against this positive backdrop, it took well over a decade for the unemployment rate to return to its pre-recession rate of 5.8% in August 2003.
From 2003 the unprecedented impact of the mining boom on economic growth and labour market activity in Australia was clearly evident. The consequent flow-on effects on the labour market were also substantial, with the pace of employment growth averaging 2.5% over the five years to 2008, while the unemployment rate declined to a trough of just 4.0% in August 2008, prior to the onset of the global financial crisis (GFC) in September 2008.
The shock of the GFC also had a significant, albeit temporary, impact on economic and labour market conditions in Australia. The unemployment rate increased to a peak of 5.9% in June 2009, while employment growth was flat over the year to August 2009, compared with the robust growth of 3.3% over the year to February 2008, just prior to the GFC.
The Australian economy and labour market weathered the fallout from the GFC much better than most advanced economies, buoyed by strong demand from Asia for our resource commodities and the ongoing, positive impact of expansionary fiscal and monetary policies. In addition, Australian employers responded flexibly to the difficult economic circumstances during the global recession by reducing the average hours worked by their staff, rather than shedding employees, which mitigated the upward pressure on the unemployment rate, at least to some extent. This also meant that employers were able to swiftly reinstate employee hours when economic conditions recovered, which they did relatively quickly. Employment rose at an annual average rate of 2.0% over the two years to September 2011.
From 2011 to 2015, after the mining boom ended, global prices for bulk commodities fell sharply, which led to a substantial decline in export revenues and a significant fall in the terms of trade. This had a significant impact on the Australian economy and labour market, with the pace of employment growth softening considerably and the unemployment rate rising, to a high of 6.4% in October 2014. Although labour market conditions were mixed between 2014 and 2016, the following period was, in the main, marked by reasonably strong labour market activity, with employment increasing at an annual average rate of 2.5% over the three years to February 2020, while the unemployment rate declined to 5.1% just prior to the onset of the COVID-19 pandemic.