RDP 1978-02: Unemployment: An Econometric Dissection 1. Introduction

P.D. Jonson, R. Battellino and F. Campbell

December 1978

The dramatic increase in unemployment in many countries in the 1970's represents an economic and social problem of major proportions. This paper attempts an explanation of the proximate causes of the rise in unemployment in Australia. It does this with the help of simulation analysis of a model of the labour market with equations for adult males, adult females, junior males and junior females.[1]

At this stage of the study, the labour market model has not been included in the RBA76 macroeconomic model.[2] The study does not therefore allow for several important linkages and relationships, such as the effects of changes in wages and prices on aggregate demand and real product. The results should therefore be regarded as preliminary; they are a building block to be used in a larger study, which will include a version of the labour market model outlined in this paper in the full macroeconomic model.

Nevertheless, when the results of the current paper are examined beside those of an earlier study using the RBA76 model[3], they point to a strong conclusion: that the large wage rises of the 1970s have been a major cause of the present levels of unemployment.

The rest of the paper is organised as follows. In section 2 an overview of recent experience in the Australian labour market is presented. This section illustrates and defines the issues which the econometric research addresses. Section 3 discusses a model of the labour market; and this model is simulated to provide a preliminary econometric dissection of recent behaviour in the Australian labour market. Section 4 contains some concluding comments.

Footnotes

Other recent econometric studies of unemployment are by Gruen (1978), Johnston, Campbell and Simes (1978) and Sheehan (1978), while pieces in which the emphasis is on theory and numerical calculations include Corden (1977), Corden (1978), Fisher (1978) Hughes (1976, Stammer (1978) and various Commonwealth Government submissions to national wage cases. [1]

This model was discussed at the 1977 Conference in Applied Economic Research; see Norton (ed.), (1977). [2]

Jonson and Taylor (1977). [3]