Australian Unemployment in the Long Run, 1903-2007

We develop a two equation model of wage setting and unemployment, which we estimate on annual time series for Australia since Federation. Our model links the real wage level to productivity and to a set of wage pressure variables, while the unemployment rate is linked to the gap between the real wage and productivity and to demand side variables. We evaluate the contribution of different variables to the equilibrium unemployment rate for 1903-1941, 1942-1973 and 1974-2007. We also examine the effects on unemployment of several key policy-related episodes in wage regulation spread over the past century of labour market history.