ECHI1006 The Australian Economy- Labour Market Analysis
The strength of a country's economy can be determined through careful examination of macroeconomic indicators such as real GDP, real GDP growth rate, real GDP per capita, unemployment rate and inflation rate. In your essay, analyse the economic performance of one country, over the last decade (from 2005 to 2014), using data on the macroeconomic indicators; argue whether you think the performance is strong or weak.
Discuss the performance of the economy over those ten years and provide evidence and explanations for the economic performance such as a high unemployment rate, high inflation rate and/or steady, long-term economic growth. Where appropriate, you should also explain how the policies of the government aim to achieve full employment, stable price and/or economic growth.
Your analysis should include an in-depth discussion on the performance of the economy and provide explanations for economic results as revealed by the macroeconomic indicators; where appropriate, you should also explain how the policies of the government aim to achieve full employment, stable price and/or economic growth. Support your evaluation with researched evidence.
Answer
Overview of the Australian Economy
For some time now, the Australian economy has been enjoying continuous growth, contained inflation and a relatively low public debt. The country’s financial system is strong and stable. However, last year, the fall in global prices acted a significant constraint to the growth of the economy. Major export prices fell significantly, thereby limiting the country’s prospects. In addition, the level of unemployment in the country remains relatively high. However, currently, business confidence in the economy remains high. There is also a rise in credit growth in the private sector, and a positive trade balance (“Australia Overview,” 2017). Besides, the nation is an open economy with fewer restrictions on imports. In turn, this has led to increased productivity and stimulated growth in the economy (Australian Government, 2017). Notably, all these factors play a significant role in shaping the country’s economic future. As of now, the nation’s prospects are great showing possibilities of further expansion and growth in the medium and long term.
Production Output Performance Analysis
Over the past few years, the economy has been exhibiting sustained improvements in the production output. The country’s real GDP, real growth rate and per capita have been expanding mostly over the past few year. However, there have been periods of reductions in the level of production output in the country. Essentially, real GDP refers to the macroeconomic measure if the value of economic output within the country adjusted for price changes. On the other hand, real GDP growth rate estimates economic growth in relation to the GDP of the economy over a given period of time. Normally, it is adjusted for inflation. In the same view, the real GDP per capita refers to the average production of the nation per person. Thus, it is often used as a measure of the standards of living of the people within a state over a given period of time.
It is worth noting that Australia’s real GDP growth has been rising and dropping slightly since 2005. In 2005, the GDP growth rate was estimated at 2.7 percent. This rate remained constant in the following year before rising sharply to 4.3 percent in 2007. Afterward, the rate of growth declined sharply by about 2.0 percent. Thus, in 2008, the rate of economic growth dropped to 2.3 percent. The following year experienced a further drop in the rate of rate to 1.2 percent. As at 2010, the level of GDP growth rate was estimated at 2.7 percent, a significant rise from the preceding year by 1.5 percent. In 2011, the rate of inflation dropped slightly by 0.7 percent and was recorded as 2 percent. There was a significant expansion in the rate of growth in 2012. The rate of GDP growth rose to 3.6 percent during this year before falling again to 2.5 percent in 2013. In the following year, the GDP growth rate dropped further to about 0.7 percent. As at the last quarter of last year, the real growth rate in the country was recorded as 1.1 percent (Trading Economics, 2017).
On the other hand, the nation’s real GDP per capita has been rising continuously for the most part of the last ten years. In 2007, the per capita income was estimated at 50910.3423 (Trading Economics, 2017). Afterward, in 2008, this value rose slightly to 51749.8951 before dropping to 51616.6945 in 2009. Since then, the per capita in the country has constantly been rising. More precisely, the level of real GDP per capita was estimated at 51845.6548 in 2010. In the following year, it rose to 52346.9024 before rising further to 53321.8793 in 2012 (Trading Economics, 2017). The per capita income further rose to 537303.5747 in 2013 before escalating further to 54240.4994 in 2014. As at 2015, the real GDP per capita in the country was recorded at 54688.4459 (Trading Economics, 2017). From this information, one can note that the level of GDP per capita in the country has been increasing over the past few years. Consequently, this implies that the standards of living of the people of Australia have been rising substantially over this period. In turn, this suggests that the production output performance of the country has been rising over the years.
By and large, the improved economic performance in terms of the rising real GDP growth and per capita have been achieved as a result of a series of government intervention to improve the economic output of the country. Markedly, the Australian government has taken up measures to improve economic performance in the country by reducing the cost of borrowing in the country (Focus Economics, 2017). The past few years has seen the country experience relatively low levels of interest rate coupled with the financial deregulation of the economy. In turn, this has increased investments in the economy, thereby raising the aggregate demand in the economy. Subsequently, this has pushed up the rate of economic growth in the country and enhanced the income level of the Australian people. Thus, the real GDP growth and per capita income have improved sufficiently over the past decade.
Labour Market Analysis
Over the past decade, the Australian labor market has been sending mixed signals about its overall performance. Mainly, this is due to the fact that the rate of unemployment in the country has been intensifying and deteriorating interchangeably over this period. Typically, unemployment refers to the state where individuals are actively looking for work opportunities and are willing and able to work at the prevailing market wage but are unable to secure any form of a job. Today, there are various forms of unemployment in the economy, among them structural, frictional, natural, and cyclical unemployment.
Structural unemployment
Normally, this form of unemployment arises when there is a mismatch between the skills required by the employers and the skills that workers possess (Amadeo, 2017). Here, the workers do not possess the skills and capabilities that employers require, therefore cannot secure jobs in the labor market. It is worth pointing out that this form of unemployment is predominant in the Australian economy as the workforce possess inadequate skills, therefore cannot secure jobs. In addition, when workers in the country stay unemployed for long periods of time, their skills become obsolete and outdated, thereby making it even more difficult to secure a job in the country.
Frictional unemployment
Predominantly, this form of unemployment occurs during the transition period after workers leave their job. It is the time lag between leaving the previous job and landing another job (Amadeo, 2017). In Australia, people leave their jobs in search of better opportunities in the labor market. However, it may take a long time before they land other jobs. Additionally, frictional unemployment in the country occurs when college students graduate and are unable to find unemployment immediately. In turn, this results in an increase in the level of frictional unemployment in the country.
Cyclical unemployment
Profoundly, this type of joblessness arises due to fluctuations in the business cycles. During periods of economic recession, the aggregate demand in the economy shrinks and thus many businesses incur losses (Amadeo, 2017). Therefore, they lay off a significantly large number of workers. Consequently, this results in a significantly high level of unemployment in the country. It is noteworthy that cyclical unemployment often results in higher levels of unemployment as the level of demand in the economy shrinks further, forcing companies to fire more workers.
Forms of Unemployment in Australia
It is worth noting that high rates of unemployment have been a constant and unending macroeconomic problem in the Australian economy. As mentioned earlier, the country experiences high rates of structural and frictional unemployment. However, apart from that, the nation suffers from a significantly high level of youth unemployment and long term unemployment. By and large, the existence of these high levels of unemployment in the country has reduced the welfare of the Australian people.
Long term Unemployment. Ordinarily, in Australia, long term unemployment occurs when an individual is unable to find any form of unemployment for over a year (ABS, 2017). As such, individuals who remain jobless for over 52 weeks are termed as being long term unemployed. As at 2015, about 500,000 people in the country were long-term unemployed. Reports by the country’s Department of Social Services (2012) indicate that the number of individuals receiving unemployment allowances increased by about 36 percent. At that time, the level of long-term unemployment had risen by approximately double figures (Schneiders, 2014). Indeed, this form of unemployment has become a huge problem in the Australian economy and should be controlled.
In Australia, individuals with disabilities, women, and immigrants are overly represented among those suffering from prolonged unemployment in the country. Noteworthy, the country’s unemployment rate rose substantially during the economic downturns in the 1990s (ABS, 2017). Although it has declined over the past few years, the rate of long term joblessness remains alarmingly high. The lowest rates of long term unemployment were experienced in late 2007 and early 2008 at 0.6 percent but increased towards the beginning of 2009 before dropping late that year.
Youth unemployment. Just like long term unemployment, youth unemployment is also a significant problem in the Australian economy. Currently, approximately one-third of the Australian youth are unemployed (Davidson, 2017). The current rate of underemployment in the country is estimated at 18 percent (Davidson, 2017). Additionally, 13.5 percent of the youth in the country are unable to secure a job at the current economic conditions. Notably, the lowest rate of youth unemployment in the country was experienced in August 2008, at 7.61 percent (Trading Economics, 2017).
Government measures to reduce unemployment in Australia
It is worth noting that the Australian government has recognized the severity of the unemployment menace in the country. For this reason, it has taken an active role in trying to increase the level of employment in the country. In order to reduce the level of structural unemployment, the Australian government has initiated training measures and facilities that equip the labor force with the required skills and expertise that is needed by employers in the labor market (Pettinger, 2016). In addition, the Australian government has lowered the level of interest rates in the country with the aim of increasing the rate of investment in the country. More precisely, an increase in the level of investments in the country would bring about an increase in the level of employment in the country (Amadeo, 2016). Besides that, the government has facilitated selective credit directed towards labor-intensive sectors such as agriculture and mining. In turn, this is expected to increase the rate of employment in the country.
Price Level Analysis
For a while now, the Australian economy has been enjoying an extended period of price stability. Typically, inflation refers to the sustained increases the price level within the country. In Australia, inflation is mainly cost push or demand pull. Profoundly, cost push inflation occurs when the cost of producing services and goods rises due to an upsurge in the cost of raw materials or due to scarcity. As a result, when the cost of production rises, producers transfer the burden to its consumers in the form of higher prices of the product. In turn, this leads to inflation. In the same view, demand-pull inflation occurs when the demand for services and goods in the economy outstrips the supply of the product. Thus, this exerts an upward pressure on the price of the commodity, thereby resulting in increases in the price of the product. A sustained increase in the price of commodities within the country would result in inflation in the economy.
The rate of inflation in Australia has been rising and falling interchangeably over the past few years. As at 2007, the rate of inflation in the country was estimated at 2.3 percent. In the following year, this rate shot upwards to 4.4 percent before declining sharply to 1.7 percent in 2009. Afterward, in 2010, the rate of inflation rose again and was estimated at 2.9 percent. The following year saw substantial increases in the rate of inflation and was recorded as 3.3 percent. What followed was a slight drop to 1.7 percent in 2012. The rate of inflation in 2013 and 2014 remained constant at 2.5 percent after which it dropped by 1 percent in the following year. Thus, the rate of inflation in 2015 was estimated at 1.5 percent. Last year, this rate dropped again slightly and was estimated at 1.3 percent. Thus, over the past four years, the level of price stability in the country was improving significantly, with the rate of inflation operating within the country’s inflation target.
Source: (Trading Economics, 2017).
The Australian government has taken an active role in maintaining price stability in the country. So far, it has achieved this through measures such as inflation targeting, selective credit control and even the control of money supply in the economy through Open market Operations. In addition, the RBA has maintained the country’s cash rate at 1.5 percent since last year with the hope that it would maintain the level of inflation in the country on the check.
Conclusion
The economic performance of the Australian economy is commendable. The rate of real GDP growth rate has been expanding over the past few years. The same applies for the real GDP per capita, thereby indicating a sustained improvement in the nation’s production output and performance. However, the rate of unemployment remain high, and the government must be more vigilant in initiating policies to reduce joblessness. The rates of inflation have been dropping over time, thereby indicating that the economy is enjoying a period of price stability. For this reason, all in all, all factors considered the Australian economy is exhibiting sustained improvements in major economic indicators. Thus, the economy is expected to maintain increases in real GDP growth, per capita, employment and price stability over the short term period as well as the long term period.
References
Australia Overview (2017). Central Intelligence Agency. Retrieved 28 May 2017, from https://www.cia.gov/library/publications/the-world-factbook/geos/as.html.
Australia GDP per capita (2017). Trading Economics. Retrieved 28 May 2017, from https://tradingeconomics.com/australia/gdp-per-capita.
Real GDP per Capita in Australia (DISCONTINUED) (2012). Economics Research. Retrieved 28 May 2017, from https://fred.stlouisfed.org/series/AUSRGDPC.
Australia GDP Growth Rate (2017). Trading Economics. Retrieved 28 May 2017, from https://tradingeconomics.com/australia/gdp-growth.
Jericho, G. (2015). Youth unemployment is not a problem to be fixed with labour flexibility. the Guardian. Retrieved 25 May 2017, from https://www.theguardian.com/business/grogonomics/2015/dec/11/youth-unemployment-not-a-problem-to-be-fixed-with-labour-flexibility.
Schneiders, B. (2014). Long-term unemployment in Australia doubles since the global financial crisis. The Sydney Morning Herald. Retrieved 25 May 2017, from https://www.smh.com.au/national/longterm-unemployment-in-australia-doubles-since-the-global-financial-crisis-20141010-113r2d.html.
Long term Unemployment (2011). Economics Research. Retrieved 28 May 2017, from https://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/4102.0Main+Features20Sep+2011.
Australia Youth Unemployment Rate (2017). Trading Economics. Retrieved 28 May 2017, from https://tradingeconomics.com/australia/youth-unemployment-rate.
Unemployment Rate by State and Territory (2017). Australian Government. Retrieved 28 May 2017, from https://lmip.gov.au/default.aspx?LMIP/LFR_SAFOUR/LFR_UnemploymentRate.
Australia Unemployment Rate (2017). Trading Economics. Retrieved 28 May 2017, from https://tradingeconomics.com/australia/unemployment-rate.
Amadeo, K. (2017). 9 Types of Unemployment. The Balance. Retrieved 25 May 2017, from https://www.thebalance.com/types-of-unemployment-3305522.
Australia Inflation Rate (2017). Trading Economics. Retrieved 28 May 2017, from https://tradingeconomics.com/australia/inflation-cpi.
Pettinger, T. (2016). Policies for reducing unemployment. Economics Help. Retrieved 25 May 2017, from https://www.economicshelp.org/blog/3881/economics/policies-for-reducing-unemployment/.
Amadeo, K. (2016). What Is Being Done to Control Unemployment? The Balance. Retrieved 25 May 2017, from https://www.thebalance.com/what-is-being-done-to-control-unemployment-3306220.
About Australia (2017). Australian Government. Retrieved 28 May 2017, from https://dfat.gov.au/about-australia/Pages/about-australia.aspx.
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