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5.7 The Australian government’s economic responses to address changes in the labour market
Relatively higher levels of unemployment until 2021 helped to slow wage rises. In other words, unemployment means that the supply of labour exceeds its demand, depressing wage growth.
Declining union membership
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Since the 1970s, union membership by workers has dropped from 51 per cent to around 14 per cent. This has weakened the bargaining strength of workers in various occupations when negotiating their wages and conditions. It also reflects changes in how wages are set. There has been a shift from a centralised, regulated, uniform wage system controlled by the government’s Fair Work Commission, to a decentralised, deregulated, collective enterprise bargaining system. Nowadays, most individuals negotiate their wages on a firm-by-firm basis, often reflecting rises in productivity, resulting in a lesser role for trade unions. 5.5.5 Factors that have led to labour shortages Labour shortages can occur in any economy when the demand for labour exceeds the supply, and unemployment rate is low. While generally higher unemployment rates over recent years have slowed wage growth overall, there are some people, typically those with special skills whose wages have increased (e.g. engineers, medical specialists, trades, digital technology, business analysts), reflecting labour shortages in key areas. The problem has been worsened by Australia’s ageing population where skills are lost as people retire. The rise in the pension access age has helped to ease shortages but, on its own, is not enough. There has also been a rise in the proportion of the labour force seeking a better work–life balance. They don’t want to work too may hours. Additionally, there has also been a decline in the proportion of students taking some high-level maths and science subjects, slowing graduate numbers in some areas with wanted skills. Most recently, due to the COVID-19 pandemic and border closures in 2020–21–22 to immigrants and those on temporary work visas, there have been skills shortages across a range of occupations. This, too, has limited the growth in Australia’s productive capacity.
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Track your results and progress Find all this and MORE in jacPLUS 5.5 Exercise 5.5 Quick quiz 5.5 ExerciseUNCORRECTED PAGE PROOFS 1. a. Define the following terms related to the labour market. b. According to ABS definitions, classify each of the following individuals listed in Table 5.3 as being: • employed persons • unemployed persons • persons not in the labour force.
(1 mark)
(6 marks)
TABLE 5.3 Classifying individuals according to ABS labour force definitions
Description of the individual ABS classification of the individual’s situation
John is 17 and a full-time VCE student. Jennifer, aged 25, does not have a full-time job but works for pay at the corner milk bar for 5 hours each week. Dana is not working because of a strike at the shoe factory. Damien, aged 12, works for 20 hours each week on the family farm for pocket money. Jonathan has completed his VCE and is having a holiday at Torquay. Discouraged by being unable to find a job, Amy performs voluntary unpaid community work with the Salvation Army and has not applied for other jobs. 2. a. Define the term, labour market. (1 mark) b. Briefly explaining your reasoning, classify each of the events listed in Table 5.4 into factors that mainly affect: (5 marks) • the demand for labour, • the supply of labour, • or both the demand and supply of labour. TABLE 5.4 Factors that can affect Australia’s labour market conditions
Event affecting Australia’s labour market conditions
Explanation of whether the event affects the demand, supply or both the demand for and supply of labour A rise in the minimum school leaving age from 15 to 17 A rise in the pension access age from 67 to 70 Consumer and business confidence booms to record highs There is a severe recession in our major export markets — Japan, China and the US A baby boom causing the rate of natural population increase to rise from 0.7 to 1.7 per cent per year Increased participation rates among the physically handicapped There is a fall in the rate of immigration to Australia The RBA and the government raise interest rates and taxes paid by individuals Government assistance to the unemployed becomes harder to obtain There is increased use of technology making more workers’ skills and training inadequate UNCORRECTED PAGE PROOFS
TABLE 5.5 Some changes that have occurred in Australia’s labour market
Change in the labour market Identify and explain the factors causing the change
Increased size of the labour market Overall rise in the participation rate Shortages of some skilled labour Overall slow rise in wage growth Identify and explain the main likely causes of each of the changes in the labour market listed in this table. (8 marks) 4. Changes in aggregate demand factors and aggregate supply factors have contributed to variations in the rates of employment and unemployment. a. Giving examples, explain the causes of cyclical unemployment and structural unemployment. (4 marks) b. Examine Table 5.6 showing some factors that can influence changes in Australia’s unemployment rate. Identify and explain how each factor would be likely to affect the unemployment rate. (5 marks) TABLE 5.6 How events can change the labour market
Factor
Explain the likely effect of the factor on the unemployment rate, identifying the type of unemployment affected Increased consumer confidence A global economic boom gains speed Businesses accelerate their use of new technology in production The government lowers the rate of tax on company profits There is a rise in the minimum wage set by the FWC Fully worked solutions and sample responses are available in your digital formats. 5.6 Different perspectives about the changing labour market KEY KNOWLEDGE • the different perspectives about changes in the labour market Source: VCE Economics Study Design (2023−2027) extracts © VCAA; reproduced by permission. Our views or perspectives about the changing labour market are shaped by our roles as economic agents. Change affects each of us in different ways, not always positively. For example: • Some workers will note that they have less certainty and predictability in employment than their parents UNCORRECTED PAGE PROOFS who were more likely to stay in the one job for their whole life. Some see the development of artificial intelligence and the widespread use of technology in production as a threat to their jobs and future employment. • As a student, you may well ask the question about what types of jobs will be in demand in 5–10 years, and what educational path you should take.
• As a consumer or householder, you certainly need a job and good pay to allow you to enjoy reasonable living standards. However, you also want cheap goods and services. There is a real challenge here to have high pay, lots of jobs and cheap prices. • Some business owners are keen to see wage growth remain slow, and hence push for the government to accelerate immigration, increase the retirement age, invest more in education and skills training, and provide tax and other financial incentives to invest in new labour-saving technology. • Some union leaders see the answer to depressed wages growth and growing wage inequality over recent years is to again increase the unionisation of the labour force. The idea is that a union increases the bargaining strength of workers relative to employers. They may also like to see more government regulation of the labour market to ensure better wages and working conditions. • As a member of the government, you probably want to use various economic policies that help to grow job opportunities and achieve the goal of full employment (i.e. a low unemployment rate somewhere between 4.0 and 4.5 per cent of the labour force). In addition, you probably want to keep sweet with voters by using measures that make them better off. This is a tricky business for governments since a gain for one group can be a loss for another. For instance, some voters would like faster rises in wages. However, if pay rates increase too quickly, inflation is likely to accelerate and depress the purchasing power of incomes and living standards. In addition, faster wage rises reduce Australia’s international competitiveness. This is bad for business owners. It can also ultimately destroy jobs and cause a drop in average incomes. In addition, these days, the Australian government’s ability to influence wages is limited. This is because the labour market has been substantially deregulated where few workers remain on the minimum wage that is set by the Fair Work Commission. Instead, pay rates are largely set using a system of enterprise bargaining or negotiation between workers and their employer.
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Track your results and progress Find all this and MORE in jacPLUS 5.6 Exercise 5.6 Quick quiz 5.6 Exercise 1. Explain how the viewpoints of workers and business owners about wages and conditions may differ. (2 marks) 2. Explain why some in the community see higher levels of immigration as vital for the labour market and our wellbeing. (2 marks) UNCORRECTED PAGE PROOFS
Fully worked solutions and sample responses are available in your digital formats.
5.7 The Australian government’s economic responses to address changes in the labour market
KEY KNOWLEDGE
• the economic responses, including government policies, to changes in the labour market Source: VCE Economics Study Design (2023−2027) extracts © VCAA; reproduced by permission. Changes in Australia’s labour market have resulted in a range of responses by economic agents, especially by governments. In this section, we will mostly focus on economic policies that are designed to help achieve the goal of full employment. This objective means that the unemployment rate should be held somewhere between 4.0 and 4.5 per cent of the labour force, or the lowest rate that doesn’t cause inflation to accelerate. In other words, a healthy labour market is one where the unemployment rate is not too high causing a drop in incomes and living standards, nor too low where there would be labour shortages leading to spiraling wagecost inflation and the erosion of purchasing power. Apart from managing the unemployment rate, policy is also directed towards growing the size and efficiency of the labour market, allowing Australia to expand its productive capacity and improve living standards. Specifically, we will examine two key types of government policy: • Aggregate demand policies to limit cyclical unemployment and avoid labour shortages by regulating the strength of AD • Aggregate supply policies to lower structural unemployment and grow the size of the labour force, making AS conditions more favourable for business expansion. 5.7.1 Government aggregate demand policies to reduce cyclical unemployment during slowdowns Earlier in our studies, we saw that market-based economies are unstable. As they move along the business cycle, they experience recessions where there are high levels of cyclical unemployment, and booms where there are labour shortages. This instability is illustrated in Fiigure 5.18. Both these problems in the labour market adversely affect living standards. To help reduce the severity of recessions (where there is high cyclical unemployment) and booms (where there are labour shortages), the Treasurer and the Reserve Bank of Australia (RBA) collaborate. They use countercyclical aggregate demand policies to help flatten out the business cycle. This is also shown in figure 5.18. So, in slowdowns and recessions, they will apply expansionary aggregate demand policies to stimulate AD and GDP and avoid high levels of cyclical unemployment. In reverse, during strong recoveries and booms, contractionary aggregate demand policies will be used to slow AD and GDP and help avoid severe labour shortages that would otherwise cause inflation. Through these countercyclical measures to stabilise the economy, the government hopes to achieve its goal of full employment. Ideally, the government doesn’t want unemployment to be too low (causing inflation) nor too high. It needs to be just right. Thinking of the five-sector circular flow model (see Topic 1) to help guide our thinking, let’s step through how these countercyclical aggregate demand policies might work to help stabilise AD and improve labour market conditions.UNCORRECTED PAGE PROOFS
FIGURE 5.18 How countercyclical government and RBA policies can help stabilise AD and GDP, to help minimise cyclical unemployment and labour shortages
Boom – labour shortages
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During a slowdown, expansionary budgetary and monetary policies help to stimulate AD and boost GDP, lowering cyclical –4 –2 4Annual rate of change in the level of economic activity (GDP) During an upswing and boom, contractionary budgetary and monetary policies help to slow AD and GDP, to avoid inflation and labour shortages. Recession – high unemployment unemployment. Cyclical rate of change in the level of economic activity (GDP) when countercyclical AD policies are not used. 2 Time in years Expansionary aggregate demand policies to help avoid cyclical unemployment In slowdowns and recession where the unemployment rate rises above 4.5 per cent, typically, expansionary aggregate demand budgetary and monetary policies are used. • Expansionary budgetary policy Budgetary policy involves changes in the level of government tax receipts (i.e. T or leakages in the circular flow) and government spending (i.e. G or injections in the circular flow). To stimulate AD (C + I + G + X –M) and lower cyclical unemployment during slowdowns, the treasurer could announce reductions in taxes on personal incomes and companies and increases in government outlays and spending on national infrastructure and welfare, for example. More spending (flow 3) causes the level of unsold stocks of goods to fall. Firms then lift output (increasing GDP, flow 4) and employ more resources (flows 1 and 2) including labour. This helps to keep the level of cyclical unemployment lower than otherwise. For instance, during and following the recession through 2020 and 2021 when cyclical unemployment was rising, highly expansionary budget measures were used where the value of budget outlays was increased relative to budget tax receipts (i.e. there was a huge budget deficit). Measures included reductions in taxes and rises in government outlays including the $130 billion for the JobKeeper wage subsidy scheme. This allowed struggling businesses affected by COVID-19 lockdowns to keep on paying wages to their staff rather than dismissing them. It meant that over a million people could keep on spending, stimulating GDP and employment. Welfare generosity for the unemployed was also temporarily doubled, again boosting spending. As a result of these budget measures, 0 UNCORRECTED PAGE PROOFS unemployment was kept to a monthly peak of just over 7 per cent. In fact without this stimulus measure, the unemployment rate would have been above 11 per cent. It also meant that, moving forward, the economy was able to recover far more quickly than otherwise.
Monetary policy affects the financial sector of the circular flow model and involves the RBA changing interest rates to influence the borrowing costs and credit-based spending by businesses and households (i.e. I or injections and C). Changes in interest rates can also affect the incentive for households to save income (i.e. S in the circular flow model). Hence, in slowdowns, the RBA will normally cut interest rates to make it cheaper to borrow credit and undertake investment and consumption spending. At the same time, lower interest rates also discourage saving, again stimulating AD. In turn, stronger spending helps to boost GDP and lower the level of cyclical unemployment. Over recent years till mid-2022, the RBA cut interest rates to just 0.10 per cent — their lowest level ever. This provided much needed stimulus to AD, GDP, and employment. Contractionary aggregate demand policies to slow spending and avoid labour shortages in booms When the economy expands too quickly and experiences a boom, labour shortages can appear as the unemployment rate falls below 4.0 per cent. The demand for labour exceeds the supply, putting upward pressure on wages and prices. The purchasing power of money is reduced and living standards suffer. To help avoid this problem, more contractionary aggregate demand budgetary and monetary policies are used to slow spending. • Contractionary budgetary policy: The treasurer could choose to increase taxes collected (i.e. leakages) and slow government outlays and spending (injections). With more leakages and less injections, AD and GDP will start to slow, firms will buy fewer resources, and labour shortages should start to disappear. • Contractionary monetary policy: Typically, in booms, the RBA will also adopt a more contractionary monetary policy to slow spending by raising interest rates. Referring to the circular flow model, this would make borrowing credit more expensive, slowing investment (injections), and encouraging savings (leakages). As a result, higher interest rates will tend to slow AD and GDP, helping to reduce labour shortages. 5.7.2 Government aggregate supply policies to reduce structural unemployment and grow the size of the labour force Structural unemployment (the main type of natural unemployment) is often caused by changes in the way goods and services are produced. For example, it could be the result of the following: • Firms decide to use more technology including robotics that replace some workers • Businesses try to cut their costs and rationalise their operations by closing unprofitable branches • Sometimes there is a mismatch of skills where those who are unemployed lack the wanted training or experience to fill the job vacancies available • Some firms are forced to close because their costs are too high and profits too low to keep going, causing staff to lose their jobs and become unemployed. UNCORRECTED PAGE PROOFS Even healthy economies experience structural unemployment and perhaps also other types of natural unemployment. Even so, governments still try to minimise natural unemployment using a range of aggregate supply policies. These cost-cutting, efficiency-promoting, profit-enhancing, and capacity-building policies are
designed to make conditions more favourable for businesses or suppliers so they expand their operations rather than close down. For Australia, aggregate supply policies have included the following measures: • Cutting the rates of company tax • Improving education and training • Providing better infrastructure for business • Deregulating the labour market • Using policies to grow the labour force through skilled immigration and tightening welfare access.
Improving education and training Structural unemployment can be caused by workers having the wrong skills or experience to fill the job positions that are advertised. For example, in March 2022, 551 000 people were unemployed and, presumably, they were unable to take up the 423 000 job vacancies on offer at the time. In this situation, government outlays on education and re-training can make workers more employable and provide them with the right skills needed to get a job. For instance, in its 2022–23 budget, the Australian government announced that there would be around $46 billion in government funding of schools, early learning, apprenticeships, TAFE colleges and universities. In addition, there has been the successful $1.5 billion JobTrainer scheme. This has provided free or subsidised courses for young unemployed individuals. Government spending on education and training can also help strengthen the creativity, ingenuity, and capacities of Australia’s labour resources. It can lift labour productivity and increase GDP per hour worked. From a business perspective, this lowers the unit costs of labour in producing goods and services, making local businesses more internationally competitive and profitable. With lower costs, firms can profitably sell at cheaper prices. Instead of closing, businesses are encouraged to expand, creating more jobs, and reducing structural unemployment. Cutting the company tax rates The level of company tax affects the level of business after-tax profits. It determines whether firms expand, survive, close down or relocate overseas to low-tax countries. Since 1985, the Australian government has reduced rates of company tax because they were higher than those in many overseas countries with whom our firms compete. This downward trend in company tax rates is shown in Figure 5.19. Today, Australia’s large companies pay at the rate of 30 cents per dollar of profit (down from a peak rate of 49 per cent in 1986), while small-medium sized firms pay 25 per cent. This has helped to make local businesses more internationally competitive and protect jobs, because companies can profitably sell at lower prices. However, despite these reductions, Australian businesses are still at a competitive disadvantage because our tax rates have not come down as fast as those in some countries (e.g. the average rate in OECD nations is just 21 per cent). This weakens employment opportunities and adds to structural unemployment. Providing better infrastructure for business Infrastructure includes investment spending for the building of highways, rail links, sea and airport facilities, UNCORRECTED PAGE PROOFS telecommunications (including the National Broadband Network or NBN), water supply and power generation. It is used by businesses to produce other types of goods and services and, as a capital resource, its quality and quantity affects the production costs and profits of firms. If these costs are low and profits are strong, firms will expand, creating job opportunities, rather than closing down where workers become structurally unemployed.
