We use a SVAR model to analyse gross flows of workers between the states of employment, unemployment and non-participation in the Australian labour market. We determine the cyclicality of stocks, gross flows and state transition rates by examining their responses to business cycle shocks. We use the derived cyclicality of transition rates to characterise labour force inflows and outflows as being consistent in aggregate with either the Discouraged-Worker Effect or the Added-Worker Effect. We find evidence that the total participation rate is procyclical which means that the Discouraged-Worker Effect is dominant overall, but also find that the Added-Worker Effect is dominant in several particular types of transition. We also apply shocks to gross flows between employment and unemployment and find that unemployment inflows are more important than outflows to the evolution of the unemployment rate. We find that participation decisions make only a small contribution to unemployment relative to flows between employment and unemployment.

Traditionally, economic growth and business cycles have been treated independently. However, the dependence of GDP levels on its history of shocks, what economists refer to as “hysteresis,” argues for unifying the analysis of growth and cycles. In this paper, we review the recent empirical and theoretical literature that motivate this paradigm shift. The renewed interest in hysteresis has been sparked by the persistence of the Global Financial Crisis and fears of a slow recovery from the Covid-19 crisis. The findings of the recent literature have far-reaching conceptual and policy implications. In recessions, monetary and fiscal policies need to be more active to avoid the permanent scars of a downturn. And in good times, running a high-pressure economy could have permanent positive effects.

Unemployment and the Australian labour market.

This book examines the key topics in contemporary labour economics It presents the background to current debates and defines the major concepts used by labour economists in an accessible and straighforward manner. The text adopts a pluralistic approach to theory and details government policy.

This paper studies the macroeconomic effect and underlying firm-level transmission channels of a reduction in business entry costs. We provide novel evidence on the response of firms' entry, exit, and employment decisions. To do so, we use as a natural experiment a reform in Portugal that reduced entry time and costs. Using the staggered implementation of the policy across the Portuguese municipalities, we find that the reform increased local entry and employment by, respectively, 25% and 4.8% per year in its first four years of implementation. Moreover, around 60% of the increase in employment came from incumbent firms expanding their size, with most of the rise occurring among the most productive firms. Standard models of firm dynamics, which assume a constant elasticity of substitution, are inconsistent with the expansionary and heterogeneous response across incumbent firms. We show that in a model with heterogeneous firms and variable markups the most productive firms face a lower demand elasticity and expand their employment in response to increased entry.