A comparison of youth unemployment in Australia and the United States Essay

Neither Australia nor the United States has escaped theinternational “unemployment plague.” In common with the otherindustrialized countries in the Organization for Economic Cooperationand Development area (the most notable exception being Japan), Australiaand the United States are experiencing high rates of overall and youthunemployment. This article examines the comparative labor market situation of youth in both countries. It also reviews the most frequentexplanations of the causes of youth unemployment, which relate to highlabor costs, demography, and the general economic situation. Youth unemployment rates are affected by the overall job market.

Thus, the emergence of youth unemployment as a major problem inAustralia and its growing seriousness in the United States cannot beunderstood independently of the general growth in unemployment. Overallunemployment The beginning of the world economic recession in 1974, precipitatedby steep price rises for Middle East oil in late 1973, marked thecollapse of full employment in Australia and a deterioration in labormarket conditions in the United States. Indeed, the world recessionadversely affected the labor markets of virtually all of theindustrialized nations.

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By the end of 1981, the unemployment rate inthe United Kingdom had reached 10.6 percent, the highest in the Westernworld. At the same time, the unemployment rate was 8.5 percent inItaly, 7.6 percent in the United States and Canada, 7.

3 percent inFrance, 4.8 percent in Germany, and 2.2 percent in Japan.

The Australian unemployment rate stood at 6.3 percent–a relativelymoderate rate compared with the American rate and prevailinginternational rates. With rare exceptions, these rates represented thehighest incidence of unemployment in each country since World War II andthe highest Depression of the 1930’s. Recently, the progressive economic decline that began in 1974accelerated quite sharply in Australia.

Domestic demand flattened outin the fourth quarter of 1981 and began to deteriorate in the first halfof 1982. The 3 previous years had seen some economic growth spurred onby investment in the mining and basic metal industries. The recentdecline in the Australian economy has been such that in the firstquarter of 1983 real gross nonfarm product–the measure of theindustrial sector of the economy–represented the poorest economicperformance in 8 years. The recent accelerated decline of the Australian economy and the1981–82 U.S.

economic recession have led to sizable increases in theunemployment rate over a very brief period. The seasonally adjusted U.S. unemployment rate reached a 42-year peak of 10.

7 percent inDecember 1982, while the Australian unemployment rate peaked at 10.3percent in March 1983. These unemployment rates represented 12,036,000unemployed Americans out of a total labor force of 112,794,000 and714,000 unemployed Australians out of a labor force of 6,950,000.

There was modest improvement in Australia toward the end of 1983,but in January 1984 unemployment again stood at 10.3 percent. By May1984, however, the overall unemployment rate (the most recent figure)was approximately 9 percent. By contrast, the U.S. unemployment ratehas been slowly declining since January 1983 and by May 1984 had reached7.5 percent.

Although Australia’s 1983 unemployment rate was onlymarginally higher than that of the United States, the Australian raterepresents a relatively more serious problem to that country. Evenprior to the world economic recession, U.S.

unemployment rates were highcompared with Australia’s. Rates in excess of 5 percent wereexperienced in 1949-50, 1954, 1958-64, 1971-72 and in each year since1974. In contrast, Australia’s past employment performance hasbeen impressive. At the end of 1950, the unemployment rate stood at 0.2percent–the all-time low. Between 1945 and 1973, it exceeded 2 percentonly in the recession years of 1952-53, 1960-62, and 1972. During mostof this period, the labor force grew rapidly and the unemployment rateaveraged between 1 and 1.5 percent.

Indeed, for more than 25 yearsfollowing World War II, Australia’s manpower problems were definedas labor shortages and the solution was massive immigration. For twodecades, immigration contributed 40 percent of the annual growth in theAustralian labor force. In view of Australia’s postwar experience of nearlyuninterrupted full employment, the labor market situation since 1974represents a much more severe and rapid deterioration than that ofcomparable Western economies.

Bettina Cass wrote in 1981 thatAustralian figures show a steeper decline in the rate of growth ofemployment and a higher rate of growth in unemployment in comparisonwith, for example, the United States and West Germany. Labor forcesurveys Australian and U.S. labor force survey data can be compared becausethe survey methods are similar: they are a central component of monthlypopulation surveys involving interviews with members of a sample ofrepresentative households. The Australian population survey covers morethan 33,000 households, while the U.S. sample survey coversapproximately 60,000 households.

The definition of the labor force is fundamental to any labor forcesurvey. Comparison between the labor force data of the two countries isfacilitated by the similarity in the definitions of employed andunemployed persons, definitions which conform to the internationalstandard definitions specified by the International Labor Organization.Revisions of the ILO definitions in 1982 specified that studentjob-seekers should be classified as unemployed. However, even prior to1982, the labor force survey data of Australia and the United Stateswere comparable. This is because both countries departed from thepractice of most others by including in their unemployment figuresunemployed teenagers in full-time education who sought jobs during theschool year. However, there are some differences between the definitions used inthe labor force surveys.

Although nominally covering all teenagers fromage 15 to 19, the Australian data effectively cover 15-to 17-year-oldsonly. This is because the definition of students relates only to thoseenrolled full time at regular secondary schools, which few 18- or19-year-olds attend. Excluded from the student work force figures arepersons enrolled at colleges, universities, and trade and businessschools. Because of these exclusions, as well as the exclusion ofpart-time students, the Australian proportion of the teenage studentlabor force is understated, compared with the U.

S. measure. Also, there is a difference between the two countries with regardto the lower limit of the youth segment of the labor force captured bythe labor force surveys. The lower age limit is generally considered tobe the age at which compulsory schooling ends and the age at whichteenagers may enter the labor market on a full-time basis. This lowerage limit is 15 in Australia and 16 in the United States. However, bothcountries define the upper age limit of the youth labor force as 24years of age. Composition of the youth labor force The labor force activity of students features prominently inAmerican analyses of the dimensions of youth unemployment.

A recentinternational study of unemployment observed that the working student isvery much and American phenomenon, whereas young workers or jobseekersin other countries are mainly out-of-school youth. In 1979, nearly 45percent of U.S. teenage students held a job and, between 1967 and 1977,student labor force participation rates increased by about 5 percentagepoints for male teens and 13 percentage points for female teens. Yet the observation made by the international study is less true ofAustralia today than it was a decade ago.

Australia experiencedconsiderable growth in part-time youth employment during the 1970’sand a substantial part was accounted for by the rising proportion offull-time students who were in the labor force–from 5 percent in 1971to 27 percent in 1981. Students manifest a particular proclivity to frequently enter andexit the labor force because, as noted, they are typically employed inpart-time (often casual) jobs. Consequently, student unemployment tendsto magnify overall youth unemployment rates. Thus, while there appearsto be a gradual confluence in Australian and American trends with regardto student labor activity, the higher U.S. student participation rateexerts a stronger upward pressure on youth unemployment rates than doesthe comparatively lower Australian student participation rate. Most countries have certain groups within the labor force that aremore prone to unemployment than others. In the United States, blacksand Hispanics have fared far worse in the labor market than whites.

Consequently, racial-ethnic distinctions characterize American laborforce surveys. In contrast, the composition of the Australian laborforce is primarily differentiated in terms of socioeconomic status.Thus, given the differences in the composition of the Australian andU.S. labor forces, youth unemployment is described only in terms of thecommon dimensions of sex and age. Youth unemployment rates by age andsex Australian youth unemployment rates have steadily increased overthe last decade or so. While youth unemployment rates hovered around 3percent between the mid-1960’s and early 1970’s, 1974 marked aturning point.

In that year, the youth unemployment rate reached 4.9percent and grew steadily in succeeding years–9.7 percent in 1975, 10percent in 1976, 12 percent in 1977, 12.6 percent in 1978, and 13percent in 1979. U.

S. youth unemployment rates also rose with the onsetof the world economic recession, increasing by 4.3 points between 1974and 1975 alone to 16.1 percent. The balance of the 1970’switnessed a slow decline in U.S.

unemployment rates, but the 1979 rateof 11.7 percent was still as high as the 1974 rate. The turn of the decade saw the continued growth in Australian youthunemployment and a reversal of the slow decline in U.

S. youthunemployment rates to the high levels reached in both countries by March1983. (See table 1.) The absolute numbers of unemployed Australian youth translate intoyouth unemployment rates of 24.3 percent for teenagers, 15.

4 percent foryoung adults, and 19.1 percent for the youth segment of the labor forceas a whole. The corresponding unemployment rates for the United Statesare 23.5 percent, 15.4 percent, and 18.1 percent. Clearly, teenagers inboth countries are experiencing unemployment levels well in excess ofyoung adult levels.

The male youth unemployment rate is higher than the female rate inboth Australia (19.8 percent compared with 18.3 percent) and the UnitedStates (19.

5 percent compared with 16.6 percent). However, when themale and female youth unemployment rates are further disaggregated byage (teenagers versus young adults), the Australian data indicate thatthe apparent labor market advantage of female youth is confined to the20- to 24-year-old age group. Thus, for 15- to 19-year-olds the maleunemployment rate was 23.2 percent while the female rate was 25.6percent.

This pattern is reversed in the 20- to 24-year-old age groupwhere the male unemployment rate is 17.6 percent and the female rate is12.5 percent. In the United States, female teenagers and female youngadults fared better in the labor market than their male counterparts.

Thus, the male teenage unemployment rate was 25.3 percent and the femalerate was 21.5 percent while those for young adults were 16.6 percent(male) and 14.1 percent (female). The figures on the incidence of youth unemployment in Australia andthe United States underscore the gravity of the problem in bothcountries. Indeed, both are experiencing youth unemployment rates thatare 2 to 3 times higher than adult unemployment rates. Part of thisdifferential is because of the higher job mobility of students and ofyouth in general.

Further, youth account for an acutelydisproportionate share of the unemployed labor force–50.4 percent inAustralia and 37 percent in the United States in March 1983. As in1980, Australia still probably shares with Britain and Italy the dubiousdistinction of having the highest proportions of youth among theunemployed in the Western industrialized countries. Discouraged workers The unemployment figures cited so far in this article actuallyunderstate the extent of the unemployment problem.

This is because theyexclude the individuals of working age who have been discouraged fromseeking work because they believe there is none to be found. Data on discouraged workers are gathered by Australia and theUnited States. Questions dealing with these workers were first includedin the Australian labor force surveys in 1975 and data are collectedtwice a year–in March and September. U.S. data on discouraged workers,gathered on a quarterly basis, were first published in 1969. Both labor force surveys use similar definitions of the discouragedworker, namely, unemployed persons who want a job but are not activelyseeking work because they believe there is none to be found for any ofthe following reasons: (1) no jobs in their locality or line of work;(2) lack the necessary training, skill, or experience; (3) considered byemployers to be either too young or too old; and (4) have personal orsocial handicaps such as language or racial difficulties. In both countries, changes in the number of discouraged workershave generally paralleled cyclical changes in the overall unemploymentrate.

In March 1983, there were 113,200 discouraged workers inAustralia who represented 15.5 percent of all unemployed persons. Atthe same time, there were 1,871,000 discouraged U.S. workers. Theproportion of discouraged workers among America’s unemployed wasthe same as Australia’s.

American labor force surveys have shown large numbers ofdiscouraged teenagers and young adults. This contrasts markedly withthe Australian situation. Thus, in March 1983, there were slightly morethan a half million discouraged youthful workers in the United States,and they represented 11.6 percent of the approximately 4.5 millionout-of-work American youth. Discouraged youthful Australian workerstotaled a modest 15,800 or 4.

4 percent of Australia’s out-of-workyouth. Labor costs The cost of youthful labor has been advanced as an explanation ofrising youth unemployment in the two countries. Although thetheoretical foundations and posited effects are similar, Americananalysts have focused upon the price of youthful (mainly teenage) laborrelative to the market-clearing wage, while Australian analysts havefocused upon youths’ wages in direct relation to adults’wages. The reasons for this difference are twofold: first, theinstitutional mechanisms for the determination of youth’s wagesdiffer in the two countries and, second, the trend in the ratio of youthwages relative to adult wages in Australia is opposite to that of theU.S. trend.

The United States and Australia, among other countries, haveminimum wage laws. The United States passed its minimum-wagelegislation in 1938 as part of the Fair Labor Standards Act. With theexception of an exemption introduced in 1961 permitting full-timestudents to be hired at a subminimum wage of 85 percent of the basicminimum wage (the Student Certification Program), a uniform minimum wageprevails. In contrast, the institutional mechanism for establishingwage levels (and some other working conditions) in Australia is theindustrial tribunal.

There are many Federal and State tribunals in thatcountry covering a diversity of occupations and industries. Thetribunals prescribe minimum, or “award,” wages for”juniors” (that is, teenagers). Award wages for juniors arebased on vague notions of need in relation to the cost of living and thework value of juniors in comparison with adults. However, in the main,they tend to vary according to changes in adult award wages. There arecurrently several thousand awards in existence. United States. The issue of the minimum wage has assumedconsiderable importance in discussions of youth unemployment in theUnited States because of the supposed negative correlation that existsbetween the level of the minimum wage and the level of employment ofyoung people in minimum-wage jobs where they are disproportionately represented–44.2 percent of 16- to 19-year-olds in 1980.

In thestandard competitive model, a minimum wage, if it is to be effective inachieving any of its goals, must be established above themarket-clearing wage leading firms to reduce the quantity of (demandfor) labor. In view of their disproportionate representation amongminimum-wage employees, teenagers are thought to be particularlyvulnerable to minimum-wage hikes. The minimum wage, however, can also affect the supply of labor: anincrease in the going price of labor consequent to an increase in theminimum wage may produce a positive response on the supply side if thesupply of labor is positively sloped, that is, low-wage workers may beattracted to reenter the labor market in search of the higherremuneration represented by the improved minimum-wage level. Inaccounting for youth unemployment, analysts assume that the unemploymenteffects of a hike in the minimum wage (a decrease in the demand foryouthful labor) will be stronger than the employment effect (an increasein the supply of labor) leading to an overall net reduction inemployment. Based on available studies of the effect of the minimum wage, itwould appear that while the minimum wage has been argued as a primarycause of youth unemployment in the United States, empirical evidencesuggests that its contribution to youth unemployment is small.

Clearly,the minimum wage is unable to account for the bulk of U.S. youthunemployment. Australia. In Australia, the relationship of youth wages to adultwages has been seen as an important cause of youth unemployment.

Duringthe 1970’s, Australia experienced tremendous upward pressure onwages and salaries in general. Many analysts have asserted that thisproduced a situation referred to in Australia as “wageoverhang,” which arises when earnings increases outpace productivity gains. This results in a rise in the cost of laborrelative to the cost of capital, which serves as a disincentive to theuse of labor as a factor of production.

The high cost of labor isviewed by many Australians as a major cause of their country’s highoverall unemployment and inflation rates. While young and older workers alike benefited from the improvedwage levels in Australia, analysts have argued that the young workerbenefited more. The progressive increase in youth unemployment since1974 has been directly attributed to the higher price of young labor.Thus, employers tended to hire adult workers in preference to youth whocould command similar wages.

By contrast, between 1967 and 1977, American youth experienced adecrease in their wages relative to adult wages despite upwardadjustments in the minimum wage. Drawing on traditionalsupply-and-demand analysis, Richard B. Freeman and David A. Wise arguethat the downward trend in youth wages relative to adult wages was theproduct of the increasing proportion of youth in the population.

Just as the evidence provided by American studies on the impact ofthe minimum wage on youth unemployment is mixed, so is the evidenceprovided by Australian studies. With regard to the trend in youth-adultwage relationships, one study found that youths’ wages relative toadults’ wages remained virtually static between 1966 and 1976 whileanother, focusing upon individual industries, found that wages in somejobs in a small number of industries had risen. Perhaps the most comprehensive study of the relationship betweenyouth wages and employment was recently released by the AustralianBureau of Labor Market Research. The Australian Bureau’s study,which drew on the most current data available, found that a suddencompression in the wage spread between youth (juniors) and adultsoccurred during 1972 and 1975. Indeed, the compression in wages largelyoccurred before the onset of the recession in 1974. Junior award wagesrose by 8 percent relative to those of adults between early 1972 andmid-1974, and both sexes experienced similar compressions injunior-adult wages. The compression was greatest for the youngestjuniors (for example, a 13.

6-percent compression for 17-year-olds), anddeclined with increasing age so that 20-year-olds experienced the leastcompression (5.2 percent). Market forces played some role in thecompression in junior and adult wages between 1972 and 1974. While theeconomic forces of demand and supply have led to a downward trend in thewages of American youth relative to adult wages, these forces havefailed to reverse the wage compression in Australia in the period since1974. What has been the impact of changes in youth-adult wages on thedemand for and supply of youth labor? When the sudden compression inwage spreads between juniors and adults occurred, the youth labor forceparticipation rate remained high while the youth unemployment ratesteadily grew. But the Australian evidence on the precise influence ofwages on youth labor demand and supply is sparse. In reviewing the few earlier studies, the Australian Bureau ofLabor Market Research found analytical deficiencies.

The Bureau thenundertook further research of its own and found that increases in youthwages relative to those of adults decreased employment and increasedlabor supply, thereby adding to unemployment. While youth unemploymentlevels rose, the Australian Bureau was unable to precisely quantify themagnitude of the effect. Demography A popular explanation for youth unemployment is the post-World WarII baby boom experienced in both Australia and the United States.Analysts have asserted that the baby boom led to a bulge in the size ofthe youth population from the late 1950’s to the early 1960’s,and continuing into the 1970’s. The surge in the youthfulpopulation, together with increased labor force participation by theyoung, resulted in supply exceeding demand and, other things beingequal, higher youth unemployment rates. In Australia, the youth population grew rapidly.

During 1966-82,the teenage population grew by approximately 22 percent and the youngadult population grew by about 52 percent, while the civilian populationage 15 years or more grew by 39 percent. However, Australian analystshave shown that the growth in the number of young people of working agearising from the baby boom had largely ceased well before thecommencement of the recession in 1974. Between 1976 and 1982, the maleteenage population grew by only 3.7 percent and the female teenagepopulation, by 1.3 percent, suggesting that the labor marketdifficulties of teenagers in recent years have been less than theyotherwise would have experienced had their population numbers continuedto grow at earlier rates. The United States also experienced a steady increase in theproportion of youth in the working-age population–from about 20 percentin the late 1950’s to about 27 percent by the mid-1970’s.

TheCongressional Budget Office estimated that the youth population bulgeadded perhaps 4 percentage points to the teenage unemployment rate and 1percentage point to the unemployment rate for 20- to 24-year-olds.However, by the mid-1970’s, the decline in the proportion ofteenagers in the American population had already begun and in 1980, thedecrease in 20- to 24-year-olds began. A surge in the size of the youth population of working age does notcompletely translate into an equivalent increase in the size of theyouth labor force because not all working-age youth are either workingor seeking employment. Over the last two decades, a higher proportionof Australian youth has entered the labor market than that of Americanyouth; indeed, the only country with consistently higher youthparticipation rates than Australia is Great Britain. Relative to theUnited States, Australian youth participation rates have beenhistorically high and have fluctuated by only a few percentage points.In contrast, U.S.

teenagers and young adults have had progressivelyincreasing rates over most of the past two decades. Thus, between 1960and 1980, American youth participation rates rose by almost 12 percentfrom 56 to 68 percent. Over a slightly briefer period (1964 to 1980),Australian youth participation rates increased by only 2 percent–from69 to 71 percent. The figures on labor force participation for all youth mask somepronounced differences in participation trends between teenagers andyoung adults. However, in Australia only the young adult participationrate rose; the teenage population manifested a long-run trend of fallingactivity. This downward trend has reversed itself though during thecourse of the recession.

In the United States, participation rates forboth groups steadily increased from 1960 to 1980. The early 1980’s have witnessed slow declines in teenageactivity rates and increases in the number of young people in full-timeeducation. Deteriorating labor market conditions have led youth to stayon at school longer. However, only about 35 percent of Australianstudents complete secondary school (compared with 70 to 90 percent inthe United States). Data for the United States, then, indicate that the working-agechildren of the baby boom and the steady increase in their labor forceparticipation may have contributed to high unemployment rates of youth.

However, the effects of the baby boom in both countries had largelydissipated by the late 1970’s. In Australia, it appears that thereversal (until recently) in the long-run trend of falling participationover a period when the economy had been in a state of protracted downturn played a more significant role in rising youth unemploymentthan the continuing, but decelerated, growth in youth population levels.Effects of recession The business cycle has a major impact on unemployment in generaland youth unemployment in particular. The argument that has receivedthe widest acceptance (certainly in Australia) is that the dramaticincrease in youth unemployment in Australia since 1974 is because of themalaise of the country’s economy and this has dampened the demandfor young workers more than it has for older workers. (This same viewapplies to the United States as well.) A number of reasons have been advanced for the greater dampening inthe demand for youthful labor during the recession. These include: apreference on the part of employers to hire mature, adult workers ratherthan the young during a period of excess labor supply because of theformer’s presumed greater productivity and the latter’sjob-changing proclivities; changes in industry structure; anddeficiencies in the stock of youthful human capital. With regard to thelast two reasons, many youth find their first employment in unskilledjobs.

Yet many unskilled jobs are disappearing in both Australia andthe United States and entry-level jobs are increasingly requiring someskills. Thus, the production of manufactured goods that may haveformerly required a sizable, unskilled work forde has either beencurtailed in the face of both slackened demand and competition fromimported products or now involves more sophisticated, capital-intensiveprocesses than previously, in order to maintain a competitive edge.This situation has lead to a mismatch between the skills demanded byemployers and those available in the youth labor force. Conclusion Each of the reasons advanced to explain why youth have borne adisproportionate share of the increase in unemployment during therecession certainly has merit.

However, high youth unemployment inAustralia and the United States is by no means a recent development. Onthe contrary, youth unemployment rates in excess of adult rates and thehigh representation of youth among the unemployed are factors whichemerged before the 1970’s. In Australia, above-average unemployment rates for youth appearedwell before the watershed year of 1974. In 1969, for example, the adultmale unemployment rate was 0.7 percent, and the female rate was 0.

9percent. The corresponding male and female rates for persons under 21years of age were 1.7 percent and 2.

3 percent–approximately 2-1/2 timeshigher than the adult rates. With regard to the share of unemploymentborne by Australian youth, this began to rise for teenagers during1953-54 and 1965-66 when their proportion increased from 13.5 to 38.2percent.

For young adults (20- to 24-year-olds), their share ofunemployment rose most rapidly during 1965-66 and 1970-71–from 16 to 21percent. As in Australia, the United States’ youth unemployment rateshave also been historically higher than those for adults, but thedisparity between youth and adult rates appears to have been greater.Indeed, between 1966 and 1969, for example, the unemployment rate forboth sexes combined for persons between age 16 and 19 was more than fivetimes higher than the male unemployment rate, age 20 and over. The foregoing analysis of the causes of youth unemployment mostfrequently advanced by analysts in Australia and the United States bearstestimony to the elusiveness of a consensus on the causes of youthunemployment and the futility of seeking a single-factor explanation.

Logic would suggest that youth unemployment in its current dimensions isthe product of the interplay of a number of factors with differingsaliency. The analysis indicates that the labor market has long beenadverse for youth, a situation that has been exacerbated by an economicrecession accompanied by movements in youth labor costs and a changeddemographic profile. Perhaps the major distinguishing feature of youth unemploymenttoday is the magnitude of the numbers of unemployed youth. Certainlywithin the Australian context, youth unemployment as a problem onlybegan to receive the attention it had long deserved when the incidenceof youth unemployment and the numbers of unemployed youth began a steadyupward climb in 1974.


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