5.8 Review

60 The gradual reduction in Australia’s rates of company tax

Company tax rate (percentage of profits) 10 20 30 40 50 49 49 39 39 36 36 36 36 28.5 27.5 26 30 30 30 25 30 25 1985–86 1989–90 1999–2000 2009–10 2015–16 2017–18 2020–21 2021–22 2022–23 2023–24 2024–25 Tax rate for small and/or medium sized companies (percentage of profits) Tax rate for large companies (percentage of profits) Linear (Tax rate for small and/or medium sized companies (percentage of profits)) Linear (Tax rate for large companies (percentage of profits))

30 Sources: Data derived from several sources including the ATO and Trading Economics, see http://www.tradinge conomics.com/australia/corporate-tax-rate. Especially during the 10 years to 2022, there has been increased federal government investment spending on national infrastructure projects. For instance, in the 2022–23 budget, the federal treasurer announced there would be around $118 billion of national infrastructure spending rolling over the ten-year period to 2031–32. Projects have recently included the M80, the inland rail project from Melbourne to Brisbane, a second airport for Sydney’s west, and regional rail projects. Improved infrastructure makes the conditions of supply for businesses more favourable. By improving infrastructure and increasing the quantity and efficiency of Australia’s capital resources, it helps to keep business costs down, strengthen efficiency and profitability, and therefore encourage business expansion. In turn, this grows Australia’s productive capacity and PPF, thereby boosting our potential rate of economic and employment growth. Whilst a move in the right direction, unfortunately, the rise in investment in infrastructure has not kept pace with the growth in Australia’s population and economy. As a result, there are bottlenecks and shortages. These add to business costs, make firms less internationally competitive, undermine profits, slow business expansion, limit employment opportunities and cause higher levels of structural unemployment. Deregulating the labour market Wage rates have a huge bearing on business and the labour market. In the 1800s, wages were largely set by the free operation of the forces of demand and supply. However, wages were often very low and working conditions poor. In response to this situation, one group of workers employed by the Sunshine Harvester Company (that made agricultural machinery), took their employer to the newly created 0 UNCORRECTED PAGE PROOFS Commonwealth Conciliation and Arbitration Court. Workers claimed that despite long hours, they were not paid fair and reasonable wages that would allow them to enjoy even basic living standards. In 1907, the court handed down its decision. It ordered that all workers in the company be paid a basic wage that would be reviewed regularly.

Other cases followed and, gradually, there was a move towards greater government regulation of the labour market. Here, minimum wages were set above the free market equilibrium. This is shown in Fiigure 5.20.

FIGURE 5.20 A regulated labour market where the minimum wage is set above the deregulated market equilibrium wage in the labour market

A regulated and a deregulated labour market

Weekly wage ($) Minimum wage (a regulated labour market) Equilibrium quantity (D = S) Market surplus of labour (S > D)

Demand for labour (D) Supply of labour (S) Equilibrium Quantity of labour (Q) Equilibrium wage (a deregulated labour market) The big flaw in this regulated or centralised wage fixing system was that pay rises were not linked to increases in worker efficiency. Rather, the system was designed to promote social goals rather than business profits. With growing union strength, Australia’s minimum wage became one of the highest in the world. However, starting in the 1970s when the government reduced tariffs (i.e. taxes on imports), it was increasingly clear that high wages in Australia pushed up prices for consumer goods and services and made local firms uncompetitive. Some businesses were forced to close, and workers lost their jobs. This added to structural unemployment. After experimentation with other forms of wage fixing, governments moved to gradually deregulate the labour market. Increasingly, wages were set through enterprise agreements. Here, workers employed by each firm negotiate their pay and conditions with the boss, reflecting the conditions of demand and supply. The system became more decentralised and wages less uniform across Australia. Pay is closely linked to productivity. This creates an incentive to work hard, and the value of all but relatively unskilled labour is largely dictated by the operation of market forces. What this more deregulated wage system has done is to dramatically slow wage growth. In turn, smaller pay 0 UNCORRECTED PAGE PROOFS rises have helped to: • reduce the costs of production per unit of output • enable local firms to become more internationally competitive and profitable • encourage the expansion of local business rather than closure • increase job opportunities and reduce structural unemployment.

Labour shortages occur when the demand for labour exceeds the supply. This situation drives up wages, causes inflation and acts as a barrier to rises in national output and real incomes. People are worse off. To help deal with these problems, the Australian government has used two main policies: • Tightening welfare access to increase labour force participation rates — The participation rate is the proportion of people aged 15 and over who are in the labour force (i.e. either employed or unemployed).

Low participation rates limit the supply of labour and contribute to labour shortages. While essential, some believe that the payment of generous government welfare benefits reduces the supply of labour. They feel that there is a case to tighten welfare and make it more difficult to access, especially by the unemployed and the aged. One recent aspect of welfare tightening has been to gradually increase the pension access age from 65 to 67 years. This encourages people to work and participate in the labour force for longer, to maintain their income and pay the bills. Another approach is to keep the fortnightly unemployment benefit at a very low and unattractive level, pushing more to try even harder to gain employment. Additionally, there are more hurdles for the unemployed to clear if they want to claim the welfare benefit — a measure that may perhaps help to fill labour shortages and keep wage growth down. • Encouraging high levels of immigration to ease skills shortages and grow the labour force — In recent times, the Australian government has actively promoted quite high levels of immigration with an annual target of around 160 000 migrants. Of these, over 60 per cent have wanted skills that are in short supply. This policy not only helps to grow the size of Australia’s labour force, easing shortages, but having skills means that it boosts the productivity of our workforce. In addition, most migrants are younger than 30 years of age and so, potentially, they have many years ahead of them as productive members of the labour force. This helps to offset Australia’s ageing population where there is a rising proportion of workers nearing retirement. Resourceseses Resources To comeUNCORRECTED PAGE PROOFS

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5.7 Exercise 5.7 Quick quiz 5.7 Exercise 1. Over the years, changes in the labour market have resulted in cyclical unemployment, structural unemployment, and skills shortages. Explain each of these problems. (3 marks) 2. From time to time, cyclical unemployment arises. a. Outline the causes of cyclical unemployment. (2 marks) b. Explain how the Australian government and the RBA might take policy action to lower the level of cyclical unemployment and to help avoid labour shortages. (4 marks) 3. All economies have some structural unemployment. a. Outline four causes of structural unemployment. (4 marks) b. Identify and explain two important government policies that can help reduce the level of structural unemployment. (4 marks) 4. Explain two important aggregate supply policy strategies that the Australian government might use to reduce labour shortages. (4 marks) 5. a. Outline two weaknesses of having government regulation of all wages and setting a high minimum wage. (2 marks) b. Explain how Australia’s labour market deregulation has helped to keep structural unemployment lower than otherwise. (2 marks) Fully worked solutions and sample responses are available in your digital formats. UNCORRECTED PAGE PROOFS

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Find all this and MORE in jacPLUS 5.8.1 Summary Definition and nature of the labour market • The labour market is an institution where buyers of labour (the D by the businesses sector) and sellers of labour (the S by the household sector) determine wages or the price of labour. • The demand for labour by firms is derived from the demand for goods and services. When spending or demand for goods and services rises, so too does the demand for labour. Labour demand therefore rises and falls with the level of AD and economic activity. It also varies inversely with the price or wage. This means that it will expand as wages fall, and contract as wages rise. • The supply of labour by households reflects population growth, participation rates and age distribution. It varies directly with wage rates. So, as the wage increases the supply of labour expands, and as the wage falls supply contracts. • The equilibrium wage in the labour market is set at a point where the quantity of labour demanded and supplied is exactly equal and there is neither a labour surplus nor a labour shortage. • Equilibrium wages (the market price of labour) will change if non-price conditions affecting the demand and supply of labour change. • As a result of new non-price factors, an increase in the quantity of labour demanded at a given wage relative to the supply of labour causes the equilibrium wage to rise in the labour market. • As a result of new non-price factors, a decrease in the quantity of labour demanded at a given wage relative to the supply of labour causes the equilibrium wage to fall in the labour market. • Non-price factors that can affect the demand for labour at a given wage might include changes in consumer or business confidence, disposable income, the number of firms, and overseas economic activity, for example. • Non-price factors that can affect the supply of labour at a given wage might include demographic factors like the age distribution, immigration, and the participation rate, for example. • There are three main types of labour market conditions: • Stronger labour market conditions when the demand for labour rises relative to supply • Weaker labour market conditions when the demand for labour falls relative to supply • Ideal labour market conditions where the demand relative to the supply of labour is neither too strong nor too weak. Measures of Australia’s changing labour market • The main measure of labour market conditions is the labour force survey conducted by the Australian Bureau of Statistics (ABS). • Key ABS measures include: • The labour force size consists of all those aged 15 years and over who are either employed or unemployed. This represents the supply of labour. UNCORRECTED PAGE PROOFS

The labour force size = Number of people employed + The number of people unemployed.

• Employed persons are those 15 years and over who have paid employment of at least 1 hour per week.

This will be affected by changes in the demand for labour. Employment can be expressed as a total number or calculated as a rate or percentage of the labour force.

The employment rate (%)=

Number of people employed × 100 Total number of people in the labour force

• Unemployed persons are generally those aged 15 and over who are actively looking for work but cannot secure a job where they are employed for money for at least one hour per week. This will be affected by changes in the demand for labour. Unemployment can be expressed as a total number or calculated as a rate or percentage of the labour force.

The unemployment rate (%)=

Number of people unemployed × 100 Total number of people in the labour force

• The participation rate represents the proportion of those aged 15 and over who are in the labour force (i.e. they are either employed or unemployed).

The participation rate (%)=

Total number of people in the labour force × 100 Total number of people 15 or over in the population

• Job vacancies are unfilled job offers by employers. The level reflects the demand for labour. • Underemployment means that people have jobs but would like more hours of work per week. • Underutilisation rate represents the proportion of the labour force that is underemployed plus the proportion that is unemployed. It is often seen as an indicator of an economy’s level of unused productive capacity. The underutilisation rate (%) = Unemployment rate (%) + Underemployment rate (%) • Hidden unemployment involves discouraged job seekers who have given up looking for work because of knockbacks and a lack of success in gaining a job. • Long-term unemployment involves those who have been without a job and unemployed for at least 52 weeks. • Aggregate hours worked is the total number of hours the labour force has worked over a period. This can be an indicator of the demand for labour. • Over both the short- and long-terms, there have been many changes in Australia’s labour market. These have included: • A huge rise in the size of the labour market due to natural population increase and immigration. • Changes in the employment and unemployment rate associated with cyclical booms (e.g. 2007–08) and recessions (e.g. 2020) • An overall increase in the labour force participation rate, mostly due to the rise in female participation • Changes in the rate of wage growth reflects the ups and downs in the business cycle — with faster wage rises in booms and slower rises or falls in recessions • A general increase in the level of higher educational attainment of the labour force • A change in the industry where the labour force is employed, with a decline in manufacturing and UNCORRECTED PAGE PROOFS agriculture and a rise in service employment • A change in average hours worked that reflect the ups and downs in the business cycle • A reduction in the unionisation of the labour force • A decline in the rate of growth in labour productivity.

The reasons why changes in Australia’s labour market are important • Changes in the labour market are important because they affect both our material and non-material living standards. • Material living standards relate to levels of real disposable income and per capita consumption. Changes in the labour market affect material living standards in at least three ways: • There is a close connection between employment, unemployment, hours of work and participation in the labour force with the level of income. • There is a close connection between unemployment, hours and employment with the degree of inequality in income distribution and the poverty rate. • There is a close connection between employment, education and productivity levels with the potential level of GDP, incomes and purchasing power. • Non-material living standards refer to the quality of daily life (rather than the quantity of goods and services purchased and consumed), perhaps reflecting general happiness, low stress levels, having adequate leisure time, job satisfaction, quality personal relationships, good mental and physical health outcomes, long life expectancy, opportunities for cultural enrichment, low crime rates, and good social cohesion and sense of inclusiveness. When there is high unemployment and labour market condition are weak, most aspects of non-material living standards suffer greatly from social isolation, mental and physical health, feelings of worthlessness, stress, strained relationships and perhaps crime. The economic factors influencing changes in Australia’s labour market • One change in Australia’s labour market is the growth in its size of the labour force. This is especially affected by two factors: • The rate of natural increase in Australia’s population reflects the birth rate minus the death rate. Over the long-term, this affects the number of people of working age and the size of the labour force. • The rate of net migration is the excess of immigrants arriving versus those leaving the country. Because most migrants are skilled and of working age, this helps to grow the labour force. • Two main factors have influenced Australia’s unemployment and employment rates: • Cyclical unemployment is caused by generally weaker aggregate demand factors (e.g. changes in consumer and business confidence, changes in interest rates, changes in disposable income and changes in overseas economic activity) that can slow spending on Australian-made goods and services. Weaker spending leads to cuts in GDP and employment, increasing the rate of cyclical unemployment. At the other extreme, excessive spending can cause labour shortages, driving up wage rates. • Natural unemployment (especially structural unemployment) is mainly caused by changes in the way goods and services are produced. It reflect the influence of changes in aggregate supply conditions (e.g. production costs and profits, climatic conditions, availability of resources including labour, productivity, tax rates on company profits). Depending on whether these conditions are positive or negative can influence whether firms expand, close down or move overseas. In turn, this impacts rates of employment and structural unemployment. • There has been an overall increase in Australia’s participation rate that makes more labour resources available for production. This increase reflects the following: • The increase in female participation has especially been important and has been associated with changes in social attitudes about the role of women and family size • The increase in the proportion of older people working has been partly caused by a rise in life expectancy (due to medical progress), along with increases in the minimum pension access age • The arrival of many migrants has helped to temporarily slow Australia’s ageing population that would otherwise have reduced the participation rate and shrunk the labour force. • Various factors have slowed wage growth for many workers: UNCORRECTED PAGE PROOFS • Slower productivity growth (i.e. a slower rise in GDP per hour worked) • The widespread application of technology by business owners whose share of income has increased, relative to that of less-skilled workers • Slower rates of economic growth have softened the demand for labour and hence wage rates.

• There are shortages of skilled labour in parts of the labour market. They reflect: • changes in the types of goods and services produced and the widespread use of new technology • an ageing population where more are nearing retirement age • for some, a shift towards a better work–life balance • the disruption to supply chains caused by the COVID-19 pandemic and business lockdowns.

Different perspectives about the changing labour market • Our perspectives about changes in the labour market partly reflect our roles as economic agents. • There are different views about the changes that have taken place in Australia’s labour market: • Some workers, for example, will note that they have less certainty and predictability in employment. • As a student, you may well ask the question about what types of jobs will be in demand in 5–10 years’ time. • As a consumer or householder, you certainly need a job with good pay to allow you to enjoy reasonable living standards, but you probably also want cheap goods that are not possible if wages are too high. • Some business owners are keen to see wage growth remain slow, and hence push the government to increase immigration. • In response to depressed wages growth and wage inequality, some union leaders would like to see an increase in unionisation of the labour force to exercise more power in deciding wage outcomes. • As a member of the government, you probably want to try and use policies that help to keep unemployment and inflation low, and grow employment opportunities.

The government’s policy responses to changes in the labour market • In response to changes in the labour market, the Australian government has used various policy measures. • The government has been keen to achieve the goal of full employment. This means achieving the lowest unemployment rate, perhaps somewhere between 4.0 and 4.5 per cent of the labour force that doesn’t accelerate inflation. Here, unemployment must not be too high leading to reduced employment opportunities, hours, incomes and living standards, nor should unemployment be so low that there are labour shortages leading to a wage-price spiral that reduces the purchasing power of incomes. • The Australian government (and the RBA) has used countercyclical aggregate demand policies to control labour market conditions and outcomes. • Avoiding high levels of cyclical unemployment means that during slowdowns and recessions, the Australian government and the RBA apply expansionary budgetary and monetary policies to help strengthen spending, AD and GDP. In turn, as firms lift output, they employ more labour, reducing cyclical unemployment. Expansionary budgetary policy involves cutting tax rates (leakages) and boosting government spending (injections) that boost AD, lift GDP and lower cyclical unemployment. Expansionary monetary policy involves the RBA cutting interest rates for borrowers making credit and spending cheaper, boosting spending and AD, lifting GDP, and cutting cyclical unemployment. • Avoiding labour shortages during a strong recovery and boom involves the use of contractionary budgetary and monetary policy to slow AD, GDP and labour demand. Contractionary budgetary policy could involve the treasurer lifting tax revenue (leakages) and slowing government spending (injections). Contractionary monetary policy might involve the RBA lifting interest rates for borrowers making credit and spending dearer, slowing spending and easing labour shortages. • The Australian government has also used aggregate supply policies (i.e. cost-cutting, efficiency-promoting, capacity-expanding measures to make conditions more favourable for producers) to help reduce structural unemployment and grow the size of the labour force. In particular, structural unemployment (the main type of natural unemployment) is largely caused by changes in the way goods and services are produced. For example, it could result from firms using technology including robotics to replace workers, businesses trying to cut costs and rationalise their operations by closing unprofitable branches, a mismatch of skills where those who are unemployed lack the wanted training to fill the job vacancies available, high production costs and low profits can cause some firms to close down and their staff to become unemployed.

Even healthy economies experience some structural unemployment. However, the government is keen to

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minimise structural unemployment and also grow the size of the labour force and our productive capacity using various policies. These can include: • Cutting the rates of company tax so firms are more profitable, expand employment and do not close down • Encouraging appropriate education and training so workers are more employable and can fill the job vacancies available • Providing better infrastructure for businesses helps to cut production costs, strengthen profits, improve our international competitiveness, expand businesses’ employment opportunities and reduce structural unemployment. • Deregulating the labour market helps to improve worker efficiency and keep wage costs lower so that firms are more profitable and expand, rather than close because they are internationally uncompetitive. • Tightening welfare access (e.g. lift the pension access age) to increase labour force participation rates can help increase the supply of labour. • Encouraging high levels of young, skilled immigration helps to grow the size and productivity of Australia’s labour force. 5.8.2 Key terms Ageing population occurs when there is a rise in the proportion of people nearing retirement age. This reduces a nation’s supply of labour and can contribute to labour shortages. Aggregate demand policies include budgetary (i.e. taxes and government outlays) and monetary (RBA changes in interest rates) measures designed to regulate spending or AD, GDP, employment, unemployment and labour shortages. Aggregate supply policies involve government measures designed to make conditions more favourable for producers by cutting production costs, improving efficiency, growing productive capacity, and strengthening profits so firms expand rather than close down or move overseas. They might include cutting company tax rates, improving infrastructure, providing funding for education and training, encouraging immigration, and tightening welfare access to increase labour force participation. The business cycle is used to describe how GDP changes upwards and downwards over a period of years. Typically, the economy passes through four main phases — a boom, slowdown, recession, and recovery. In addition, the ideal economic situation is domestic economic stability that is located midway between a boom and a recession on the business cycle. As the economy travels along the business cycle of economic activity, labour market conditions change. Centralised wage fixing system is one where the government controls the level and increases in wages, rather than allowing the free operation of the labour market and demand and supply to do this. Setting the minimum award wage is an example of government regulation of wages. The company tax rate is the proportion of business profits that must be paid to the tax office. For large companies in Australia this is currently set at 30 per cent and for small to medium firms, it is now 25 per cent. This tax rate has an effect on business survival, expansion and closures and, in so doing, it affects rates of employment and unemployment in the labour market. Contractionary aggregate demand policies involve budgetary measures by the government’s treasurer and monetary measures by the Reserve Bank of Australia (e.g. higher interest rates and taxes and decreased government spending) designed to slow spending or AD, in turn curbing economic activity and GDP, reducing the demand for labour and labour shortages. Cyclical unemployment is when individuals lose their job due to weak spending and a slowdown or recession. Here, firms cut output and reduce their demand for labour. Decentralised wage fixing system is one where wages and conditions are negotiated by employers and workers in a particular business. It involves firm-by-firm enterprise bargaining and workplace agreements. Wages reflect the demand and supply conditions for labour in that particular business, and pay rises are often linked to increases in labour efficiency.UNCORRECTED PAGE PROOFS

Deregulate the labour market means that the government gradually reduces its control over setting wages and conditions of work. The use of enterprise or workplace agreements is one indication of labour market deregulation and reduced government interference.

Employment is when people aged 15 and over have a paid job and work for more than one hour per week.

Expansionary aggregate demand policies involve budgetary measures by the government’s treasurer and monetary measures by the Reserve Bank of Australia (e.g. lower interest rates and taxes and increased government spending) designed to boost spending or AD, in turn lifting economic activity and GDP, and reducing cyclical unemployment. The Fair Work Commission (FWC) is an independent government institution that manages industrial relations in Australia, monitors enterprise agreements and is responsible in setting the annual minimum legal award wage and conditions. Goal of full employment means the lowest rate of unemployment, perhaps between 4.0 and 4.5 per cent, that will not cause inflation to accelerate. Here, there would be no cyclical unemployment due to weak AD or recession. However, around 4.0–4.5 per cent of the labour force would be naturally unemployed due mostly to structural causes and other changes in aggregate supply conditions. Immigration involves the entry into a country of people from overseas. In Australia, the government gives priority to immigrants who have wanted skills, to help ease labour shortages. Infrastructure represents capital resources like roads, sea and airports, power, hospitals, telecommunications, railways, and water supply, that enable businesses to produce other goods and services. Often this is provided by governments, sometimes in partnerships with private firms. This affects business costs, profits and the employment of labour. Interest rates are the price or cost of borrowing credit from banks. They affect the levels of spending (C + I), saving, AD, GDP, and employment. Job vacancies are job offers advertised by firms looking for staff to fill them. They reflect the demand for labour and change in response to the business cycle. Labour force includes people over 15 years old who are able and willing to work and are either employed or unemployed. The labour market is an institution where the conditions of demand for labour by firms and the supply of labour by households, interact to determine wages (i.e. the price of labour) and conditions of employment. Labour market conditions are determined by changes in the demand for labour relative to its supply. Conditions can become stronger if demand rises relative to supply (as in a boom), weaker if demand for labour falls relative to its supply (as during a slowdown), or ideal when the government’s goal of full employment is achieved (i.e. the lowest rate of unemployment, perhaps between 4.0 and 4.5 per cent, that doesn’t accelerate inflation). Conditions are especially affected by changes in the business cycle and level of economic activity. Labour market deregulation means reducing the level of government regulation over the setting of wages and conditions. There is increased flexibility for firms and a greater reliance on enterprise bargaining and workplace agreements to set wages that increasingly reflect changes in worker efficiency. Labour productivity or efficiency reflects the value of GDP produced per hour worked. Rises in productivity are seen as a favourable aggregate supply condition that slows production costs for firms, improves profitability, grows the nation’s productive capacity and keeps inflation and prices lower. Labour shortages (especially those with special skills) exist when the demand for labour exceeds the supply of labour. Typically, this happens during a boom. Material living standards are dependent on per capita levels of income and consumption of goods and services over a period of time. Monetary policy involves the Reserve Bank of Australia (RBA) using changes in interest rates to help stabilise the level of total spending, GDP and the strength of the labour market. The natural increase in a country’s population occurs when the number of births exceeds the number of deaths. A positive natural increase can eventually expand the size of the labour force. Natural unemployment is the lowest rate of unemployment, perhaps currently around 4.0 to 4.5 per cent of the labour force, that does not cause inflation to accelerate. Some natural unemployment is unavoidable, even in a healthy economy. It occurs due to the existence of structural, frictional, hardcore, and seasonal factors causing unemployment and is associated with changing aggregate supply conditions. Net migration refers to the excess of overseas arrivals over those departing the country. This can affect the size and skills of the labour force, and the level of wages. Non-material living standards are not related to the quantity of goods and services that we have, but are elements of our wellbeing that affect the quality of our daily lives. They may perhaps involve levels of freedom, UNCORRECTED PAGE PROOFS happiness, quality of family life, justice, amount of leisure time, crime, and the state of the natural environment. Participation rate represents the proportion of those people aged 15 and over who are members of the labour force; that is, they are employed or. Recession A period of two or more negative quarters (i.e. 6 or more months) of GDP growth. It is caused by weaker AD and is associated with high levels of cyclical unemployment and low inflation.

Stronger labour market conditions develop when the demand for labour rises relative to the supply, perhaps because of rising economic activity or the onset of a boom. In this situation, wages increase faster, people work longer hours and labour shortages can appear.

Structural unemployment can occur when firms change their production methods and use new technology to become more efficient (such as robots on an assembly line, ATMs for banking, automated warehouses, online shopping and so on). It can also occur when firms relocate or there is a mismatch between the skills and experience possessed by workers and the requirements of the jobs that are available. Underemployment exists when those aged 15 and over have a job and want to work more hours but are unable to do so. They are not working to capacity. Underutilisation rate is the extent to which the available labour is not working at its capacity. This is equal to the unemployment rate plus the underemployment rate. Unemployment is when those aged 15 and over who are actively looking for work cannot find a job. Unionisation of the labour force is the extent to which workers in a particular profession belong to a trade union or industrial organisation. Weaker labour market conditions develop when the demand for labour falls relative to the supply. It is often caused by a slowdown in economic activity or recession. In this situation, wages rise more slowly or fall, and people work fewer hours or become unemployed. Resourceseses Resources Digital documents Topic summary (doc-37942) Key terms glossary (doc-37949) 5.8.3 Practice school-assessed tasks OUTCOME 2 Explain the factors that affect two economic issues at a local, national and international level and evaluate actions to address the issues. ANALYSIS OF EVIDENCE — Statistical data for Eureka Before answering the following questions, examine the statistical data in Table 5.12 for a hypothetical country called Eureka. TABLE 5.12 Hypothetical data related to Eureka’s economy and labour market INDICATOR 2020–21 2021–22 2022–23 2023–24 2024–25 1. Unemployment rate (%) 5 7 11 14 9 2. Job vacancies (’000s) 90 70 45 30 55 3. Average duration of unemployment (weeks) 22 34 40 60 50 4. Labour force participation rate (%) 60 59 57 56 57 5. Consumer confidence index (points) 120 115 104 96 99 6. Business confidence (net balance) 20 5 10 8 4 7. Growth in household disposable income (%) 5 2 1 1 2 8. Economic growth in GDP for the USA (%) 4 2 1 2 3 UNCORRECTED PAGE PROOFS

A. Using the key indicators from Table 5.12 and explaining your reasoning, describe the trends in Eureka’s labour market conditions between 2020–21 and 2024–25. (3 marks)

B. Referring to statistical evidence from the table, identify and explain three important causes of these trends in Eureka’s rate of unemployment. (3 marks)

C. Explain how these changes in Eureka’s unemployment rate and labour market situation between 2020–21 and 2024–25, would be likely to affect each of the following: • Material living standards • Non-material living standards • The strength of the government’s finances and budget situation. (3 marks)

D. Imagine you are Eureka’s Treasurer or Governor of the Reserve Bank during 2022–23 and 2023–24 and want to achieve the goal of full employment, prepare a brief speech outlining the main policies you would introduce. 5.8 Exam questions

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Track your results and progress Find all this and MORE in jacPLUS 5.8 Section A: Multiple choice questions Question 1 Which of the following best describes Australia’s labour market? It involves: A. business firms. B. households. C. negotiation of wages. D. all of the above. Before answering questions 2, 3 and 4 that follow, examine Table 5.8 containing population data for an economy. TABLE 5.8 Data relating to a hypothetical country’s population and labour force Employed persons 9 million Unemployed persons 1 million Persons aged 15 years of age and over 15 million The underemployment rate 7.0 per cent Question 2 Using data from table 5.8, the size of the labour force: UNCORRECTED PAGE PROOFS A. is 9 million. B. is 10 million. C. is 15 million. D. cannot be calculated from the data.

Using this data from table 5.8, the labour force participation rate is closest to:

A. 50%. B. 56%. C. 60%. D. 66%. Question 4 Using this data from table 5.8, the labour force underutilisation rate is closest to: A. 7.0 per cent. B. 10.0 per cent. C. 17.0 per cent. D. 20 per cent. Question 5 Which of the following is incorrect? According to the ABS, the labour force generally excludes: A. all people aged 15 and over who are able and willing to work. B. all those classified as unemployed. C. all those classified as employed. D. those who have an unpaid job. Question 6 Which of the following statements about changes in Australia’s labour market over recent decades is least correct? A. The unemployment rate has not generally remained within the government’s target range for achieving the goal of full employment. B. There has been a general increase in Australia’s overall participation rate in the labour force. C. In Australia, most workers are employed in manufacturing and primary industry. D. Immigration has been more important in growing the size of Australia’s labour market than the natural increase in population. Question 7 Before answering the question that follows, examine Table 5.9: TABLE 5.9 Data relating to a country’s economy Real annual value of GDP for 2023–24 $200 000 000 Total number of hours worked in 2023–24 100 000 000 From this data, it can be concluded that annual labour productivity is equal to: UNCORRECTED PAGE PROOFS A. $1. B. $2. C. $3. D. $4.

If Chinese economic activity rose strongly, which of the following impacts on Australia’s labour market is unlikely?

A. Australia’s rate of cyclical unemployment is likely to fall. B. Australia’s GDP is likely to rise. C. Australian firms are likely to buy more resources. D. The Australian government is likely to outlay more on welfare benefits.

Question 9 A decrease in Australian business confidence is likely to: A. strengthen labour market conditions. B. cause a rise in structural unemployment. C. decrease job vacancies. D. increase average hours worked. Question 10 Before answering the question that follows, examine Table 5.10 showing annual data for a hypothetical country: Data relating to a country’s population Number of births 200 Number of deaths 150 Number of immigrants entering 50 Number of emigrants leaving 10 Data relating to a country's population Based on this data, which statement is least correct? A. The country’s population is increasing. B. The country’s population is decreasing. C. The labour force is likely to have increased. D. The natural change in the country’s population size is unlikely to have a significant impact on the labour force size over the short-term. Question 11 Australian government lockdowns due to the COVID-19 pandemic caused: A. unemployment to rise. B. caused underemployment to increase. C. caused structural unemployment. D. all of the above. UNCORRECTED PAGE PROOFS

Labour shortages in Australia have not been caused by:

A. the global COVID-19 pandemic. B. an ageing population. C. tightening government welfare access. D. an overall falling participation rate.

Question 13 Concerning Australia’s structural unemployment rate, which statement is least correct? A. Structural unemployment moves up and down and is closely aligned with changes in the business cycle. B. A cut in company tax can help reduce structural unemployment. C. Structural unemployment is not normally caused by weak aggregate demand conditions. D. Structural unemployment may occur because workers have the wrong skills, or the jobs are located in a different state or region. Question 14 The type of unemployment caused by the use of artificial intelligence and robotics is most likely to be: A. frictional unemployment. B. cyclical unemployment. C. hardcore unemployment. D. structural unemployment. Question 15 Weak aggregate demand conditions during COVID-19, including falling real per capita disposable income and lower consumer confidence, are most likely to cause: A. cyclical unemployment. B. natural unemployment. C. structural unemployment. D. frictional unemployment. Question 16 A rise in the minimum award wage set by the Fair Work Commission will tend to: A. lift the level of consumption spending, AD, and economic activity, lowering cyclical unemployment. B. reduce business profits and cause some firms to close, adding to structural unemployment. C. create more favourable supply conditions for firms. D. both (A) and (B) are likely outcomes but it is difficult to say which of the two effects is strongest without further information.UNCORRECTED PAGE PROOFS

Full employment is one of the Australian government’s key economic goals. This is normally taken to mean:

A. a zero rate of unemployment overall. B. a zero rate of natural unemployment. C. an overall unemployment rate of between 4.0 to 4.5 per cent of the labour force. D. a zero rate of structural unemployment.

Question 18 New aggregate supply conditions involving higher wages and lower productivity are most likely to be associated with: A. cyclical unemployment. B. structural unemployment. C. frictional unemployment. D. hardcore unemployment. Question 19 Normally, which of the following is not a sign of weaker labour market conditions? A. Reduced job vacancies B. Increased hours worked as overtime C. An increased underutilisation rate D. An increase in the duration of unemployment Question 20 Labour market deregulation in Australia has involved: A. government regulation of working hours and wages. B. an increase in the role of the Fair Work Commission. C. in general, allowing wages to be largely set by workers and their bosses on a firm-by-firm basis. D. Answers A and B are both correct. Question 21 An excessively low rate of unemployment may result in: A. rising wages and consumer prices, reducing the purchasing power of incomes. B. reduced international competitiveness and higher unemployment in export and import-competing industries. C. a need for the government to use contractionary aggregate demand policies to slow spending, along with aggregate supply policies that increase the size of the labour force and participation rates. D. all of the above. UNCORRECTED PAGE PROOFS Resources

Resourceseses

Digital documents Multiple choice answer grid (doc-37960) Multiple choice answers (doc-379621)