Labour Market Flexibility and the Output-Employment Ratio in Australia

Abstract

This paper addresses two questions with regard to Australia's unemployment policies over the last decade: namely, the extent to which labour market reform has led to increased labour market flexibility; and the extent to which increased output per worker has meant that strong GDP growth has been translated into correspondingly large reductions in unemployment. With regard to the first question, we use shifts in the Beveridge Curve as a measure of changes in flexibility (following Solow). Shifts in the Beveridge Curve suggest that changes in the efficiency of labour market matching reflect the cyclical effects of hysteresis rather than the effects of labour market reform. With regard to the second question, we decompose changes in the output-employment ratio into structural effects, average hours effects, and residual factor intensity effects. We identify those sectors of the economy in which output per worker has increased significantly.