Unemployment and Skills in Australia

In Australia, as in many other countries, labour-market groups with higher skill levels generally enjoy lower unemployment rates. This paper investigates why this might be the case, whether this is a recent phenomenon, and whether declining demand for unskilled labour, perhaps coupled with wage inflexibility, is an important explanation for the observed increase in the Australian unemployment rate over the past three decades. We find that relative demand shifts towards skilled labour are not an important determinant of the increase in overall unemployment. The shift in demand towards skilled labour has been matched by an equivalent shift in labour supply, leaving the structure of relative unemployment rates across skill groups fairly stable. Unemployment of both skilled and unskilled labour has increased, but this appears to be for reasons unrelated to relative demand shifts across skill groups. We also discuss possible reasons for the pervasively higher unemployment rates of less-skilled workers, drawing on data on individuals from the Survey of Employment and Unemployment Patterns (SEUP). We find that the high unskilled unemployment rate is associated with a higher exit probability from employment relative to skilled workers (a high ‘separation rate’), and a lower probability of finding employment from non-employment (a low ‘matching rate’).