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The unemployment rate in Australia has risen from less than 2 per cent in the late 1960s to an average of over 8 per cent over the past fifteen years. In this paper, we examine unemployment from an aggregate perspective and present a framework with which to analyse how the unemployment rate could be permanently lowered from its current level. In doing so, we also discuss the role that monetary policy can play in assisting the adjustment to a lower unemployment rate.

A macroeconomic examination of unemployment obscures much of the rich detail that underpins the labour market. Nevertheless, it enables us to analyse the broad trends that have occurred over the past twenty years on both the demand and supply sides of the labour market. In the next section we examine these trends at an aggregate level. The aggregate unemployment rate has risen as a result of a large increase in labour supply which has not been matched by an equivalent increase in labour demand (employment). Most of the rise in the aggregate unemployment rate occurred in the 1970s, associated with the increase in labour costs at that time. Since the early 1980s, the aggregate unemployment rate has fluctuated with the economic cycle around a relatively constant mean.