HI5003 Economics for Business - Inflation of Wages

Answer

Economics for Business      

Introduction

The main purpose of this paper is to examine the issue of unemployment in Australia in the last ten years and its effects or impacts on the economy of Australia. The paper also discusses government policies towards reducing unemployment.

Unemployment, also referred to as joblessness, is an economic condition which happens when people are unable to secure work. The rate of unemployment is usually calculated by dividing the number of unemployed persons by the number of individuals who are currently working. In the fiscal year 2017, Australia had 5.6% of its population unemployed. The increasing rate of unemployed individuals in Australia is significantly causing great challenges to the Australian government. According to the Australian Bureau of statistics, the rate of unemployment in Australia increased significantly in February due to decrease in the number of employment opportunities (Australian Bureau of Statistics, 2012).

The high rate of unemployment is mostly caused by slowdown of employment, which has rendered most Australian youths jobless. This high number of unemployed youths may also be attributed to the significant decrease in the number and availability of entry level opportunities of jobs in the Australian labor market. The problem of unemployment has even worsened due to emergence of a population comprised of individuals who are rapidly aging (Nguyen Van, 2016). It is evident that the extremely high rate of unemployment among the Australian youth will have adverse impacts on the Australia’s future productivity (Karanassou & Sala, 2009). In Australia, the high rate of unemployment among youth is considered a serious challenge. For instance, there is expected or projected loss of Australian productivity due to long-term unemployment of youth. This will result into increased pressure on welfare systems and health as well as other public services in the near future. In addition to this, poverty and poor standards of living are direct outcomes of unemployment (Gerard, Kearns & Reserve Bank of Australia, 2011).

Unemployment in Australia in the Last Ten Years

The rate of unemployment during the last ten years has been the worst. Australia’s unemployment rate was 5.6% during the fiscal year 2017, which was attained after a gradual drop from the previous’ years rate which was 7.7% in 1998. According to Australian Bureau of Statistics, the rate of joblessness has gone up to 7.7 in the past ten years, due to loss of approximately 3700 opportunities of job which were removed from the Australian economy (Karanassou & Sala, 2009). There were around 7100 jobs that were lost in the Australian economy and 3400 part time opportunities of jobs were created. The labor market of Australia is weak due to lack of spinning. Consequentially, businesses and companies have lost their confidence with regard to economic conditions in future, and have resulted into trimming individuals and giving increased work to their current staff, thus working them harder (Australian Bureau of Statistics, 2012).

The rate of unemployment in Australia has been tumbling due to the high number of persons leaving the labor market. In accordance to the Australian Bureau of Statistics, there was an increase in employment by 12,000 in terms which are adjusted seasonally. However, this was a significant miss from the projected increment of 19,000. The decrease in the rate of unemployment in Australia is a reflection of the decrease in the participation in the labor force, which has dropped from 66% to 65%. There was a significant drop in the size of labor force in Australia by 14,800 approximately, to around 13 million (Australian Bureau of Statistics, 2012).

The ratio of employment in Australia to its population has fallen by approximately 0.1% to around 62% over the past years. The huge rate of unemployment and underemployment in Australia is an indication that there is a steady supply of workers who are available and willing to work in many companies and industries. This contributes to weak outcomes of wages that have been recently experienced (Gerard, Kearns & Reserve Bank of Australia, 2011). According to the most current data by the Australian Bureau of Statistics, there have been insignificant efforts with regard to reduction of the number of workers in the labor force who are underutilized or unemployed. In addition to this, there is a continued reduction in the growth rate of employment, with a consequential increase in the number of Australians leaving the labor force. Research also indicates that the hours that are worked are extremely weak. The graphs and diagrams below provide a summary of the rate of unemployment in Australia in the last ten years (Australian Bureau of Statistics, 2012).

                                                                             Figure 1: Australia's Unemployment rate

                                                                 Figure 2: Unemployment Rate in Australia in the last 10 years

Effects of Unemployment on Australian Economy

The following are some of the effects of unemployment on the Australian economy.

Decreased Tax Revenue and Increased Government Borrowing

The high rate of unemployment in Australia has caused a significant decrease in the revenue from tax due to the fact that there are only a few number of individuals who pay income tax. This has also been attributed to a drop in the spending of the Australians, thus leading to low amounts of Value Added Tax (VAT) revenue. In addition to this, the government has a responsibility of providing the unemployed individuals with unemployment benefits as well as other related benefits, thus making it increase its expenditure. In addition to unemployment benefits, the Australian government provides the families of the unemployed individuals with house benefits as well as income support. Due to these increased government expenditures and a corresponding decrease in tax revenues, the Australian government considers seeking additional source of funds which is mainly borrowings. This is essential for the government to supplement its tax revenue for the purpose of financing its annual budget (Stock & Watson, 2018).

Low Gross Domestic Product (GDP) for the Economy

A high rate of unemployment is an indication that the operation of an economy is far much below the full capacity, and the economy is considered inefficient. This often results into reduced output, which leads to lower incomes (Salvatore & Salvatore, 2011). The unemployed individuals have been unable to buy or purchase as many products as possible due to their reduced purchasing power and spending, thus causing lower outputs. Furthermore, the high rate of unemployment has caused a negative multiplier effect on the Australian economy (Slavin, 2014).

Loss or Wastage of Human Capital

Labor is considered a critical factor of production in any economy. There has been a great loss or wastage of labor in Australia due to the inability of most individuals to work. The productivity of Australian labor has been greatly reduced by the high rate of unemployment (Stock & Watson, 2018).

Loss of Income for the Unemployed Individuals

The high rate of unemployment in Australia has caused poverty to most of its residents and citizens. The unemployed persons have no income, and therefore are pushed into using debts, which consequentially increases the poverty rates (Slavin, 2014).

Reduced Spending Power of Both the Employed and the Unemployed

In Australia, the unemployed have a lower spending power than that of the employed individuals. Loss of income due to unemployment reduces the spending power of the unemployed individuals, who often consider saving their money rather than spending it on purchasing products. This has an adverse effect on the Australian economy. In addition to this, the spending power of the employed individuals is highly affected by the increased taxes imposed on their incomes as well as lack of job security due to the high rate of unemployment which may lead to retrenchment. This causes them to start spending less of their incomes and increasing their savings. This is believed to have affected the Australian economy adversely (Stock & Watson, 2018).

Economic Recessions

The high rate of unemployment in Australia has affected the other economic factors significantly. These include, income per person, health care quality, costs of health services, poverty and living standards. The increased rate of unemployment has led to significant economic recessions in Australia (Zawadzki, 2016).

Slack in the Flow of Money

The circular flow of money or income is an essential aspect of a good economy. However, the high rate of unemployment in Australia has slowed down this flow of income due to lack of inflow and outflow of money. The growth of an economy slugs when money is not pumped into it. Signs of jobless recovery are shown by an economy due to the continued increases in the unemployment rates. This often leads to reduced recovery from future economic recessions or may indicate possibilities of experiencing double dip recession (Zawadzki, 2016).

Inflation of Wages

The high unemployment rate in Australia has caused increased competition of jobs and significant decreases in labor costs as well as an increased labor availability. The employed individuals in Australia will therefore be affected severely in the event that the rate of unemployment rises further in the economy. Furthermore, when wages and salaries are reduced, the amount of revenues collected by the Australian government from income taxes decreases significantly. This results into further limitations in the availability of enough funds for being pumped inti the economy, which leads to further inefficiencies in the flow of money (Prince, Prince  & Forsyth, 2008).

Underutilization of Economic Resources

There is wastage of productivity of labour which results from the high unemployment rate in Australia. This leads to consequential underutilization of machinery capacity as well as the available raw materials with a view to matching the drop in demand for goods supplied by the Australian industries and companies (McKenzie, Betts & Jensen, 2011).

Reduced returns on Investments

One of the major outcomes of the high rate of unemployment in Australia is the high deficits in the economy’s current account. Due to lack or reduced federal spending resulting from currency devaluation and financial resource unavailability has propelled ambiguous feelings among investors towards the future economic prospects. There is a consequential and significant reduction in returns on investments which has been induced by decrease in Australian net national income and investment. Furthermore, most investors are considering pulling out funds from the Australian economy and investing the same in other prosperous economies which have more promising industries and do not have major challenges in high unemployment rates (Hull, 2012).

Government Policies towards Reducing Unemployment

There are various policies that may be used by a government to reduce the high rate of unemployment. These policies are broadly classified into two categories, which are demand side policies and supply side policies (Parker, 2017). Each of them is further explained in the sections below.

Demand Side Policies

These refer to policies that are established by a government in order to manage aggregate demand. They are essentially critical for reducing cyclical unemployment resulting from economic recessions (Gordon, 2014). The two main demand side policies of reducing unemployment are monetary and fiscal policies.

Fiscal Policy

Fiscal policies can help in reducing unemployment by increasing aggregate demand as well as economic growth rate. The government must consider pursuing fiscal policies which are expansionary in nature, such as increasing government expenditure and reducing taxes. Reduced taxes results into increased disposable income, thus putting more income in the pockets of citizens and making them spend more than before, a factor that leads to increased aggregate demand. From a macroeconomic perspective, increase in aggregate demand results into a higher Gross Domestic Product which causes higher demand for labor due to increased production by firms. This helps in reducing unemployment caused by deficiencies in demand. In addition to this, high economic growth and increased aggregate demand enables most firms to remain solvent, thus reducing the number of job losses (Gordon, 2014).

Monetary Policy

Monetary policies are those which are aimed at reducing the rates of interest and the supply of money. Reduced rates of interest results into reduced cost of borrowing, which helps in encouraging individuals to spend and invest more than before. This results into higher aggregate demand and also increases Gross domestic Product and therefore helps in reducing unemployment due to demand deficiencies. Besides, reduced interest rates leads to significant drop in the exchange rates, thus making a country’s exports more competitive (Perloff, 2018).

Supply Side Policies

These are policies that are used for dealing with issues which are more microeconomic in nature. They are not therefore aimed at boosting or enhancing the aggregate demand in overall, but are instead meant for overcoming imperfections arising in the labor market and reducing unemployment resulting from supply side factors (Besanko, Braeutigam & Rockett, 2015). Some of the supply side policies that can be used to reduce the rate of unemployment are discussed below.

Education and Training

This aims primarily at providing those individuals who are long-term employed with new skills and expertise for enabling them look for jobs within the developing industries. For instance, the government may consider retraining the unemployed workers in the steel sector in order to equip them with basic computer and Information Technology skills which may assist them in finding work in other service sectors (Newbold, Carlson & Thorne, 2013).

Reducing the Power of Trade Unions

Real wage unemployment may be potentially caused by the bargaining power of unions for setting wages far much above the market rate or level. Therefore, the government can reduce this type of unemployment through reduction of trade unions’ influence or alternatively setting minimum wages at a lower level (Marshall, 2013).

Subsidies of Employment

The government can significantly reduce unemployment by issuing subsidies or tax breaks to firms if they seek to employ or take the long term unemployed individuals. However, the government must exercise this with much care since firma may consider replacing their current staff with the long term unemployed persons with a view to benefiting from the subsidies and tax breaks (Haugen & Musser, 2011).

Improving the Flexibility of the Labor Markets

The high rate of structural unemployment in Australia is highly attributed to restrictive labor markets which are not flexible enough to encourage firms to employ workers. With this regard, more jobs can be created by abolishment of maximum working weeks in order to ease the process of hiring and firing workers (Ghatak, 2012).

Improving Geographical Mobility

According to research, the unemployed individuals are often more concentrated in specific geographical areas than others. This geographical unemployment may be overcome by giving tax breaks to firms which consider setting up in such areas and localities. Alternatively, the unemployed individuals migrating to areas with high rate of employment could be supported by the government financially (Bogart, 2008).

Conclusion

As discussed above, unemployment refers to an economic condition which happens when people are unable to find work or jobs. The rate of unemployment is usually calculated by dividing the number of unemployed persons by the number of individuals who are currently working. According to the Australian Bureau of statistics, Australia has experienced the highest rate of unemployment in the last ten years, with the rate standing at 5.6% during the fiscal year 2017. The increasing rate of unemployed individuals in Australia is significantly causing great challenges to the Australian government.

There are various economic impacts caused by the high rate of unemployment in Australia. These include lower Gross Domestic Product, loss of income, reduced tax revenue, increased financial costs, increased government spending, slack in the flow of money, inflation of wages and underutilization of resources as well as reduced returns on investments. However, there are various policies that can be used by the government in addressing the issue of unemployment. These are mainly categorized into demand side policies and supply side policies. Demand side policies are those that are primarily aimed boosting the aggregate demand, thus increasing the ability of firms to produce more goods. Supply side policies, on the other hand, are mainly purposed for increasing the supply of labor and reducing the labor market imperfections that could cause unemployment.

References

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