Why is it hard to escape the unemployment trap?

Highlights

• The unemployment rate in Australia is at an all-time low, even as Aussies struggle to manage a living.
• The unemployment trap refers to the situation wherein unemployment benefits appear more economical than working.
• Unemployed individuals find the opportunity cost of working to be very high, which forces them to fall into the unemployment trap.

The unemployment rate in Australia is at an all-time low of 3.9%, reflecting the tightest conditions the labour market has ever seen. However, the nation has still not been able to solve the issue of unaffordability and painfully low wages. Many Australians are forced to live in extreme conditions, with unemployment benefits being their only aid in managing household expenses.  

While government data projects a robust labour market, the real evidence suggests that a significant proportion of the population is still living at the margins. Relying on unemployment benefits, these individuals are finding it hard to emerge out of poverty-like circumstances.

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As a matter of fact, unemployment benefits are supposed to ensure individuals that they are not left behind in an increasingly unaffordable economy. Such benefits are usually introduced to bring better means to even those who are unable to find a job for themselves. Then why do most people relying on unemployment benefits find it hard to eventually earn a better living for themselves?

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What is an unemployment trap?

The unemployment trap is a scenario in which unemployment benefits end up preventing individuals from finding a job. The paradoxical nature of unemployment benefits often makes it hard to understand what these benefits truly do to an economy. It is a well-established phenomenon that can be seen across various countries.

The main question arising at this point is, why does an initiative introduced to improve the living conditions of individuals mostly end up disrupting them? The answer is only realised after unemployment benefits are distributed among individuals.

Those depending on unemployment benefits can afford basic expenses such as rent, food and other necessities. These allowances are enough to manage daily expenses and just enough to manage a living. However, once these individuals shift to a job offering minimum wages, they are barely able to afford the daily expenses, and the opportunity cost of working becomes way higher.

Consider an unemployed, single individual relying on JobSeeker payments. This unemployment payment offers AU$642.7 per fortnight to single unemployed individuals with no children. Now suppose this individual qualifies for a job paying minimum wages of AU$772.6 per week or AU$20.33 per hour. This means that the individual will earn close to AU$1,545.2 in a fortnight.

Though the minimum wages are much higher than the JobSeeker payments, the additional expenses and taxes attached to a job make it harder for individuals to maintain the same financial conditions as those offered by unemployment benefits.

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Why is the opportunity cost of working at minimum wages high?

Opportunity cost refers to the cost of the next best alternative foregone when one decision is made. For instance, an individual choosing to work at minimum wages is foregoing the opportunity to accept unemployment benefits. However, the economic cost of this decision might be higher than the benefits gained from it.

This higher cost arises from many costs associated with working, such as travel expenses, buying workplace-appropriate clothes and the costs of childcare for working individuals with children. Additionally, income tax also reduces the income received in hand. These higher costs often make unemployment benefits seem like a more economical choice. Thus, even with available jobs, many individuals might not prefer taking the extra effort to apply for them.

What is the solution?

Individuals must develop the capacity to work, regardless of the unemployment benefits available. To ensure an easy entry into the working sector, one can start by taking up volunteer work or internship-based roles that can offer more exposure than financial benefits. Such roles ensure a long-term solution to the problem of unemployment.

Additionally, individuals should aspire to develop great relationships in the industry or field of their choice. This can only be achieved by taking the first step and developing the required acumen. It is also essential to not find comfort in managing basic sustenance. Constantly developing one’s skill set can bring more lucrative opportunities to choose from.

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