RDP 1999-12: Unemployment and Skills in Australia 1. Introduction

In Australia, as in many other countries, vast differences exist in the unemployment rates faced by different skill groups. For example, in May 1998 the unemployment rate for those with bachelor degree or postgraduate qualifications was 3.1 per cent, compared with 8.6 per cent for those with only final secondary education and 11.7 per cent for those who had not completed high school.^[1] One possible explanation for such large differences is that labour market regulations such as minimum award wages are more binding for less-skilled workers, and prevent the market for unskilled labour from clearing. However, this does not seem a complete explanation, since unskilled unemployment is relatively high even in countries with deregulated labour markets and very low minimum wages, such as the United States.

This paper documents the main empirical features of the Australian labour market disaggregated by various measures of skill. It also discusses a number of important questions regarding skilled and unskilled labour:

• is the observed shift in demand towards skilled labour in Australia an important cause of the increase in aggregate unemployment over the past three decades?
• have unemployment rates for unskilled workers relative to skilled workers deteriorated over time?
• what are some possible explanations for why unskilled workers have consistently higher unemployment rates than skilled workers? What evidence can we bring to bear to decide which of these explanations is most important?

To preview our findings, we conclude that changes in unemployment across different skill groups can be mainly accounted for by aggregate factors. Unskilled unemployment rates were always much higher than skilled unemployment rates, even when the aggregate unemployment rate was low. Both types of unemployment are now much higher than in the 1960s. There is little support for the argument that the significant rise in overall unemployment in Australia since the 1960s has been caused by declining demand for unskilled labour coupled with inflexible wages for these workers. Using data on transition probabilities we find that the high unemployment rate for less-skilled workers is accounted for partially by a higher exit probability from employment relative to skilled workers (a high ‘separation rate’), and partially by a lower probability of finding employment from non-employment (a low ‘matching rate’).

In Section 2 we examine international evidence on unemployment by skill, and provide a framework for examining labour demand and supply shifts for different skill groups. We use this framework to illustrate the effects of an aggregate labour demand shift, and a relative demand shift towards skilled labour, on skilled and unskilled employment, unemployment and wages. In Section 3, we break the Australian labour market down by occupational and educational measures of skill, highlighting differences in labour market performance between the different groups. An application of the framework developed in Section 2 suggests the evolution of skilled and unskilled unemployment is consistent with a series of aggregate labour market shocks. Section 4 examines transition probabilities between labour market states for different levels of educational attainment using data on individuals from the Survey of Employment and Unemployment Patterns. This analysis is used to examine reasons why unskilled unemployment has been consistently higher than skilled unemployment in recent history.

Footnote

These data are from Transition from Education to Work, ABS Cat. No. 6227.0. When classifying individuals according to educational attainment, we generally refer to their most advanced level of education. Thus, ‘completed high school’ refers to a person who has completed secondary school but has no tertiary qualifications. ‘Not completed high school’ does not include individuals who did not complete secondary school, but do have further qualifications. [1]