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

Neither Australia nor the United States has escaped the
international “unemployment plague.” In common with the other
industrialized countries in the Organization for Economic Cooperation
and Development area (the most notable exception being Japan), Australia
and the United States are experiencing high rates of overall and youth
unemployment. This article examines the comparative labor market situation of youth in both countries. It also reviews the most frequent
explanations of the causes of youth unemployment, which relate to high
labor 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 in
Australia and its growing seriousness in the United States cannot be
understood independently of the general growth in unemployment. Overall
unemployment



The beginning of the world economic recession in 1974, precipitated
by steep price rises for Middle East oil in late 1973, marked the
collapse of full employment in Australia and a deterioration in labor
market conditions in the United States. Indeed, the world recession
adversely affected the labor markets of virtually all of the
industrialized nations. By the end of 1981, the unemployment rate in
the United Kingdom had reached 10.6 percent, the highest in the Western
world. At the same time, the unemployment rate was 8.5 percent in
Italy, 7.6 percent in the United States and Canada, 7.3 percent in
France, 4.8 percent in Germany, and 2.2 percent in Japan.


The Australian unemployment rate stood at 6.3 percent–a relatively
moderate rate compared with the American rate and prevailing
international rates. With rare exceptions, these rates represented the
highest incidence of unemployment in each country since World War II and
the highest Depression of the 1930’s.



Recently, the progressive economic decline that began in 1974
accelerated quite sharply in Australia. Domestic demand flattened out
in the fourth quarter of 1981 and began to deteriorate in the first half
of 1982. The 3 previous years had seen some economic growth spurred on
by investment in the mining and basic metal industries. The recent
decline in the Australian economy has been such that in the first
quarter of 1983 real gross nonfarm product–the measure of the
industrial sector of the economy–represented the poorest economic
performance in 8 years.



The recent accelerated decline of the Australian economy and the
1981–82 U.S. economic recession have led to sizable increases in the
unemployment rate over a very brief period. The seasonally adjusted U.S. unemployment rate reached a 42-year peak of 10.7 percent in
December 1982, while the Australian unemployment rate peaked at 10.3
percent in March 1983. These unemployment rates represented 12,036,000
unemployed Americans out of a total labor force of 112,794,000 and
714,000 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 May
1984, however, the overall unemployment rate (the most recent figure)
was approximately 9 percent. By contrast, the U.S. unemployment rate
has been slowly declining since January 1983 and by May 1984 had reached
7.5 percent.



Although Australia’s 1983 unemployment rate was only
marginally higher than that of the United States, the Australian rate
represents a relatively more serious problem to that country. Even
prior to the world economic recession, U.S. unemployment rates were high
compared with Australia’s. Rates in excess of 5 percent were
experienced in 1949-50, 1954, 1958-64, 1971-72 and in each year since
1974. In contrast, Australia’s past employment performance has
been impressive. At the end of 1950, the unemployment rate stood at 0.2
percent–the all-time low. Between 1945 and 1973, it exceeded 2 percent
only in the recession years of 1952-53, 1960-62, and 1972. During most
of this period, the labor force grew rapidly and the unemployment rate
averaged between 1 and 1.5 percent. Indeed, for more than 25 years
following World War II, Australia’s manpower problems were defined
as labor shortages and the solution was massive immigration. For two
decades, immigration contributed 40 percent of the annual growth in the
Australian labor force.


In view of Australia’s postwar experience of nearly
uninterrupted full employment, the labor market situation since 1974
represents a much more severe and rapid deterioration than that of
comparable Western economies. Bettina Cass wrote in 1981 that
Australian figures show a steeper decline in the rate of growth of
employment and a higher rate of growth in unemployment in comparison
with, for example, the United States and West Germany. Labor force
surveys



Australian and U.S. labor force survey data can be compared because
the survey methods are similar: they are a central component of monthly
population surveys involving interviews with members of a sample of
representative households. The Australian population survey covers more
than 33,000 households, while the U.S. sample survey covers
approximately 60,000 households.



The definition of the labor force is fundamental to any labor force
survey. Comparison between the labor force data of the two countries is
facilitated by the similarity in the definitions of employed and
unemployed persons, definitions which conform to the international
standard definitions specified by the International Labor Organization.
Revisions of the ILO definitions in 1982 specified that student
job-seekers should be classified as unemployed. However, even prior to
1982, the labor force survey data of Australia and the United States
were comparable. This is because both countries departed from the
practice of most others by including in their unemployment figures
unemployed teenagers in full-time education who sought jobs during the
school year.



However, there are some differences between the definitions used in
the labor force surveys. Although nominally covering all teenagers from
age 15 to 19, the Australian data effectively cover 15-to 17-year-olds
only. This is because the definition of students relates only to those
enrolled full time at regular secondary schools, which few 18- or
19-year-olds attend. Excluded from the student work force figures are
persons enrolled at colleges, universities, and trade and business
schools. Because of these exclusions, as well as the exclusion of
part-time students, the Australian proportion of the teenage student
labor force is understated, compared with the U.S. measure.



Also, there is a difference between the two countries with regard
to the lower limit of the youth segment of the labor force captured by
the labor force surveys. The lower age limit is generally considered to
be the age at which compulsory schooling ends and the age at which
teenagers may enter the labor market on a full-time basis. This lower
age limit is 15 in Australia and 16 in the United States. However, both
countries define the upper age limit of the youth labor force as 24
years of age. Composition of the youth labor force



The labor force activity of students features prominently in
American analyses of the dimensions of youth unemployment. A recent
international study of unemployment observed that the working student is
very much and American phenomenon, whereas young workers or jobseekers
in other countries are mainly out-of-school youth. In 1979, nearly 45
percent of U.S. teenage students held a job and, between 1967 and 1977,
student labor force participation rates increased by about 5 percentage
points for male teens and 13 percentage points for female teens.



Yet the observation made by the international study is less true of
Australia today than it was a decade ago. Australia experienced
considerable growth in part-time youth employment during the 1970’s
and a substantial part was accounted for by the rising proportion of
full-time students who were in the labor force–from 5 percent in 1971
to 27 percent in 1981.



Students manifest a particular proclivity to frequently enter and
exit the labor force because, as noted, they are typically employed in
part-time (often casual) jobs. Consequently, student unemployment tends
to magnify overall youth unemployment rates. Thus, while there appears
to be a gradual confluence in Australian and American trends with regard
to student labor activity, the higher U.S. student participation rate
exerts a stronger upward pressure on youth unemployment rates than does
the comparatively lower Australian student participation rate.



Most countries have certain groups within the labor force that are
more prone to unemployment than others. In the United States, blacks
and Hispanics have fared far worse in the labor market than whites.
Consequently, racial-ethnic distinctions characterize American labor
force surveys. In contrast, the composition of the Australian labor
force is primarily differentiated in terms of socioeconomic status.
Thus, given the differences in the composition of the Australian and
U.S. labor forces, youth unemployment is described only in terms of the
common dimensions of sex and age. Youth unemployment rates by age and
sex



Australian youth unemployment rates have steadily increased over
the last decade or so. While youth unemployment rates hovered around 3
percent between the mid-1960’s and early 1970’s, 1974 marked a
turning point. In that year, the youth unemployment rate reached 4.9
percent and grew steadily in succeeding years–9.7 percent in 1975, 10
percent in 1976, 12 percent in 1977, 12.6 percent in 1978, and 13
percent in 1979. U.S. youth unemployment rates also rose with the onset
of the world economic recession, increasing by 4.3 points between 1974
and 1975 alone to 16.1 percent. The balance of the 1970’s
witnessed a slow decline in U.S. unemployment rates, but the 1979 rate
of 11.7 percent was still as high as the 1974 rate.



The turn of the decade saw the continued growth in Australian youth
unemployment and a reversal of the slow decline in U.S. youth
unemployment rates to the high levels reached in both countries by March
1983. (See table 1.)



The absolute numbers of unemployed Australian youth translate into
youth unemployment rates of 24.3 percent for teenagers, 15.4 percent for
young adults, and 19.1 percent for the youth segment of the labor force
as a whole. The corresponding unemployment rates for the United States
are 23.5 percent, 15.4 percent, and 18.1 percent. Clearly, teenagers in
both countries are experiencing unemployment levels well in excess of
young adult levels.



The male youth unemployment rate is higher than the female rate in
both Australia (19.8 percent compared with 18.3 percent) and the United
States (19.5 percent compared with 16.6 percent). However, when the
male and female youth unemployment rates are further disaggregated by
age (teenagers versus young adults), the Australian data indicate that
the apparent labor market advantage of female youth is confined to the
20- to 24-year-old age group. Thus, for 15- to 19-year-olds the male
unemployment rate was 23.2 percent while the female rate was 25.6
percent. This pattern is reversed in the 20- to 24-year-old age group
where the male unemployment rate is 17.6 percent and the female rate is
12.5 percent. In the United States, female teenagers and female young
adults fared better in the labor market than their male counterparts.
Thus, the male teenage unemployment rate was 25.3 percent and the female
rate 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 and
the United States underscore the gravity of the problem in both
countries. Indeed, both are experiencing youth unemployment rates that
are 2 to 3 times higher than adult unemployment rates. Part of this
differential is because of the higher job mobility of students and of
youth in general. Further, youth account for an acutely
disproportionate share of the unemployed labor force–50.4 percent in
Australia and 37 percent in the United States in March 1983. As in
1980, Australia still probably shares with Britain and Italy the dubious
distinction of having the highest proportions of youth among the
unemployed in the Western industrialized countries. Discouraged workers


The unemployment figures cited so far in this article actually
understate the extent of the unemployment problem. This is because they
exclude the individuals of working age who have been discouraged from
seeking work because they believe there is none to be found.



Data on discouraged workers are gathered by Australia and the
United States. Questions dealing with these workers were first included
in the Australian labor force surveys in 1975 and data are collected
twice 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 discouraged
worker, namely, unemployed persons who want a job but are not actively
seeking work because they believe there is none to be found for any of
the following reasons: (1) no jobs in their locality or line of work;
(2) lack the necessary training, skill, or experience; (3) considered by
employers to be either too young or too old; and (4) have personal or
social handicaps such as language or racial difficulties.



In both countries, changes in the number of discouraged workers
have generally paralleled cyclical changes in the overall unemployment
rate. In March 1983, there were 113,200 discouraged workers in
Australia who represented 15.5 percent of all unemployed persons. At
the same time, there were 1,871,000 discouraged U.S. workers. The
proportion of discouraged workers among America’s unemployed was
the same as Australia’s.



American labor force surveys have shown large numbers of
discouraged teenagers and young adults. This contrasts markedly with
the Australian situation. Thus, in March 1983, there were slightly more
than a half million discouraged youthful workers in the United States,
and they represented 11.6 percent of the approximately 4.5 million
out-of-work American youth. Discouraged youthful Australian workers
totaled a modest 15,800 or 4.4 percent of Australia’s out-of-work
youth. Labor costs



The cost of youthful labor has been advanced as an explanation of
rising youth unemployment in the two countries. Although the
theoretical foundations and posited effects are similar, American
analysts have focused upon the price of youthful (mainly teenage) labor
relative to the market-clearing wage, while Australian analysts have
focused upon youths’ wages in direct relation to adults’
wages. The reasons for this difference are twofold: first, the
institutional mechanisms for the determination of youth’s wages
differ in the two countries and, second, the trend in the ratio of youth
wages relative to adult wages in Australia is opposite to that of the
U.S. trend.



The United States and Australia, among other countries, have
minimum wage laws. The United States passed its minimum-wage
legislation in 1938 as part of the Fair Labor Standards Act. With the
exception of an exemption introduced in 1961 permitting full-time
students to be hired at a subminimum wage of 85 percent of the basic
minimum wage (the Student Certification Program), a uniform minimum wage
prevails. In contrast, the institutional mechanism for establishing
wage levels (and some other working conditions) in Australia is the
industrial tribunal. There are many Federal and State tribunals in that
country covering a diversity of occupations and industries. The
tribunals prescribe minimum, or “award,” wages for
“juniors” (that is, teenagers). Award wages for juniors are
based on vague notions of need in relation to the cost of living and the
work value of juniors in comparison with adults. However, in the main,
they tend to vary according to changes in adult award wages. There are
currently several thousand awards in existence.



United States. The issue of the minimum wage has assumed
considerable importance in discussions of youth unemployment in the
United States because of the supposed negative correlation that exists
between the level of the minimum wage and the level of employment of
young people in minimum-wage jobs where they are disproportionately represented–44.2 percent of 16- to 19-year-olds in 1980. In the
standard competitive model, a minimum wage, if it is to be effective in
achieving any of its goals, must be established above the
market-clearing wage leading firms to reduce the quantity of (demand
for) labor. In view of their disproportionate representation among
minimum-wage employees, teenagers are thought to be particularly
vulnerable to minimum-wage hikes.



The minimum wage, however, can also affect the supply of labor: an
increase in the going price of labor consequent to an increase in the
minimum wage may produce a positive response on the supply side if the
supply of labor is positively sloped, that is, low-wage workers may be
attracted to reenter the labor market in search of the higher
remuneration represented by the improved minimum-wage level. In
accounting for youth unemployment, analysts assume that the unemployment
effects of a hike in the minimum wage (a decrease in the demand for
youthful labor) will be stronger than the employment effect (an increase
in the supply of labor) leading to an overall net reduction in
employment.



Based on available studies of the effect of the minimum wage, it
would appear that while the minimum wage has been argued as a primary
cause of youth unemployment in the United States, empirical evidence
suggests that its contribution to youth unemployment is small. Clearly,
the minimum wage is unable to account for the bulk of U.S. youth
unemployment.



Australia. In Australia, the relationship of youth wages to adult
wages has been seen as an important cause of youth unemployment. During
the 1970’s, Australia experienced tremendous upward pressure on
wages and salaries in general. Many analysts have asserted that this
produced a situation referred to in Australia as “wage
overhang,” which arises when earnings increases outpace productivity gains. This results in a rise in the cost of labor
relative to the cost of capital, which serves as a disincentive to the
use of labor as a factor of production. The high cost of labor is
viewed by many Australians as a major cause of their country’s high
overall unemployment and inflation rates.



While young and older workers alike benefited from the improved
wage levels in Australia, analysts have argued that the young worker
benefited more. The progressive increase in youth unemployment since
1974 has been directly attributed to the higher price of young labor.
Thus, employers tended to hire adult workers in preference to youth who
could command similar wages.



By contrast, between 1967 and 1977, American youth experienced a
decrease in their wages relative to adult wages despite upward
adjustments in the minimum wage. Drawing on traditional
supply-and-demand analysis, Richard B. Freeman and David A. Wise argue
that the downward trend in youth wages relative to adult wages was the
product of the increasing proportion of youth in the population.



Just as the evidence provided by American studies on the impact of
the minimum wage on youth unemployment is mixed, so is the evidence
provided by Australian studies. With regard to the trend in youth-adult
wage relationships, one study found that youths’ wages relative to
adults’ wages remained virtually static between 1966 and 1976 while
another, focusing upon individual industries, found that wages in some
jobs in a small number of industries had risen.



Perhaps the most comprehensive study of the relationship between
youth wages and employment was recently released by the Australian
Bureau of Labor Market Research. The Australian Bureau’s study,
which drew on the most current data available, found that a sudden
compression in the wage spread between youth (juniors) and adults
occurred during 1972 and 1975. Indeed, the compression in wages largely
occurred before the onset of the recession in 1974. Junior award wages
rose by 8 percent relative to those of adults between early 1972 and
mid-1974, and both sexes experienced similar compressions in
junior-adult wages. The compression was greatest for the youngest
juniors (for example, a 13.6-percent compression for 17-year-olds), and
declined with increasing age so that 20-year-olds experienced the least
compression (5.2 percent). Market forces played some role in the
compression in junior and adult wages between 1972 and 1974. While the
economic forces of demand and supply have led to a downward trend in the
wages of American youth relative to adult wages, these forces have
failed to reverse the wage compression in Australia in the period since
1974.



What has been the impact of changes in youth-adult wages on the
demand for and supply of youth labor? When the sudden compression in
wage spreads between juniors and adults occurred, the youth labor force
participation rate remained high while the youth unemployment rate
steadily grew. But the Australian evidence on the precise influence of
wages on youth labor demand and supply is sparse.



In reviewing the few earlier studies, the Australian Bureau of
Labor Market Research found analytical deficiencies. The Bureau then
undertook further research of its own and found that increases in youth
wages relative to those of adults decreased employment and increased
labor supply, thereby adding to unemployment. While youth unemployment
levels rose, the Australian Bureau was unable to precisely quantify the
magnitude of the effect. Demography



A popular explanation for youth unemployment is the post-World War
II baby boom experienced in both Australia and the United States.
Analysts have asserted that the baby boom led to a bulge in the size of
the youth population from the late 1950’s to the early 1960’s,
and continuing into the 1970’s. The surge in the youthful
population, together with increased labor force participation by the
young, resulted in supply exceeding demand and, other things being
equal, higher youth unemployment rates.



In Australia, the youth population grew rapidly. During 1966-82,
the teenage population grew by approximately 22 percent and the young
adult population grew by about 52 percent, while the civilian population
age 15 years or more grew by 39 percent. However, Australian analysts
have shown that the growth in the number of young people of working age
arising from the baby boom had largely ceased well before the
commencement of the recession in 1974. Between 1976 and 1982, the male
teenage population grew by only 3.7 percent and the female teenage
population, by 1.3 percent, suggesting that the labor market
difficulties of teenagers in recent years have been less than they
otherwise would have experienced had their population numbers continued
to grow at earlier rates.



The United States also experienced a steady increase in the
proportion of youth in the working-age population–from about 20 percent
in the late 1950’s to about 27 percent by the mid-1970’s. The
Congressional Budget Office estimated that the youth population bulge
added perhaps 4 percentage points to the teenage unemployment rate and 1
percentage point to the unemployment rate for 20- to 24-year-olds.
However, by the mid-1970’s, the decline in the proportion of
teenagers in the American population had already begun and in 1980, the
decrease in 20- to 24-year-olds began.



A surge in the size of the youth population of working age does not
completely translate into an equivalent increase in the size of the
youth labor force because not all working-age youth are either working
or seeking employment. Over the last two decades, a higher proportion
of Australian youth has entered the labor market than that of American
youth; indeed, the only country with consistently higher youth
participation rates than Australia is Great Britain. Relative to the
United States, Australian youth participation rates have been
historically high and have fluctuated by only a few percentage points.
In contrast, U.S. teenagers and young adults have had progressively
increasing rates over most of the past two decades. Thus, between 1960
and 1980, American youth participation rates rose by almost 12 percent
from 56 to 68 percent. Over a slightly briefer period (1964 to 1980),
Australian youth participation rates increased by only 2 percent–from
69 to 71 percent.



The figures on labor force participation for all youth mask some
pronounced differences in participation trends between teenagers and
young adults. However, in Australia only the young adult participation
rate rose; the teenage population manifested a long-run trend of falling
activity. This downward trend has reversed itself though during the
course of the recession. In the United States, participation rates for
both groups steadily increased from 1960 to 1980.



The early 1980’s have witnessed slow declines in teenage
activity rates and increases in the number of young people in full-time
education. Deteriorating labor market conditions have led youth to stay
on at school longer. However, only about 35 percent of Australian
students complete secondary school (compared with 70 to 90 percent in
the United States).



Data for the United States, then, indicate that the working-age
children of the baby boom and the steady increase in their labor force
participation may have contributed to high unemployment rates of youth.
However, the effects of the baby boom in both countries had largely
dissipated by the late 1970’s. In Australia, it appears that the
reversal (until recently) in the long-run trend of falling participation
over a period when the economy had been in a state of protracted downturn played a more significant role in rising youth unemployment
than the continuing, but decelerated, growth in youth population levels.
Effects of recession



The business cycle has a major impact on unemployment in general
and youth unemployment in particular. The argument that has received
the widest acceptance (certainly in Australia) is that the dramatic
increase in youth unemployment in Australia since 1974 is because of the
malaise of the country’s economy and this has dampened the demand
for young workers more than it has for older workers. (This same view
applies to the United States as well.)



A number of reasons have been advanced for the greater dampening in
the demand for youthful labor during the recession. These include: a
preference on the part of employers to hire mature, adult workers rather
than the young during a period of excess labor supply because of the
former’s presumed greater productivity and the latter’s
job-changing proclivities; changes in industry structure; and
deficiencies in the stock of youthful human capital. With regard to the
last two reasons, many youth find their first employment in unskilled
jobs. Yet many unskilled jobs are disappearing in both Australia and
the United States and entry-level jobs are increasingly requiring some
skills. Thus, the production of manufactured goods that may have
formerly required a sizable, unskilled work forde has either been
curtailed in the face of both slackened demand and competition from
imported products or now involves more sophisticated, capital-intensive
processes than previously, in order to maintain a competitive edge.
This situation has lead to a mismatch between the skills demanded by
employers and those available in the youth labor force. Conclusion



Each of the reasons advanced to explain why youth have borne a
disproportionate share of the increase in unemployment during the
recession certainly has merit. However, high youth unemployment in
Australia and the United States is by no means a recent development. On
the contrary, youth unemployment rates in excess of adult rates and the
high representation of youth among the unemployed are factors which
emerged before the 1970’s.



In Australia, above-average unemployment rates for youth appeared
well before the watershed year of 1974. In 1969, for example, the adult
male unemployment rate was 0.7 percent, and the female rate was 0.9
percent. The corresponding male and female rates for persons under 21
years of age were 1.7 percent and 2.3 percent–approximately 2-1/2 times
higher than the adult rates. With regard to the share of unemployment
borne by Australian youth, this began to rise for teenagers during
1953-54 and 1965-66 when their proportion increased from 13.5 to 38.2
percent. For young adults (20- to 24-year-olds), their share of
unemployment rose most rapidly during 1965-66 and 1970-71–from 16 to 21
percent.



As in Australia, the United States’ youth unemployment rates
have also been historically higher than those for adults, but the
disparity between youth and adult rates appears to have been greater.
Indeed, between 1966 and 1969, for example, the unemployment rate for
both sexes combined for persons between age 16 and 19 was more than five
times higher than the male unemployment rate, age 20 and over.



The foregoing analysis of the causes of youth unemployment most
frequently advanced by analysts in Australia and the United States bears
testimony to the elusiveness of a consensus on the causes of youth
unemployment and the futility of seeking a single-factor explanation.
Logic would suggest that youth unemployment in its current dimensions is
the product of the interplay of a number of factors with differing
saliency. The analysis indicates that the labor market has long been
adverse for youth, a situation that has been exacerbated by an economic
recession accompanied by movements in youth labor costs and a changed
demographic profile.



Perhaps the major distinguishing feature of youth unemployment
today is the magnitude of the numbers of unemployed youth. Certainly
within the Australian context, youth unemployment as a problem only
began to receive the attention it had long deserved when the incidence
of youth unemployment and the numbers of unemployed youth began a steady
upward climb in 1974.