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Causes and effects and Policies

Cyclical factors/unemployment: occurs due to a def. Reduced output + allocative efficiency:


in AD. Labour is a derived demand- determined by the Unemployment represents unused labour forces.
level of AD within an econ. Any decline in AD= less Limiting econ productive capacity.
consumer spending. Firms respond to this weak Econ would be operating below PPF
consumer demand by producing less output and laying Less output as firms are using less resources, decrease
off workers, since they need less resources. eco growth
 1992/1993 recession- inadequate AD resulted in a  As unemployment rose to 5.8% in 2008-09, more
rise in unemployment from 6.1% in 1989 to over ppl became eligible for Centrelink’s NewStart
11% in 1992/1993. Allowance. Govt. social welfare expenditure rose
 Onset of GFC- unemployment increasing from 4.1% from $97,842m in 2008/09 to $124,581m in 2009-
in August 2008 to 5.8% in May 2009. 10. Australia’s underlying cash outcome fell from a
surplus of $19.7b in 2007-08 to a deficit of -$27.1b
in 2008-09.
Structural change/unemployment: Changes in the Decrease in material standard of living:
pattern of production that reflects changes in Ppl no longer employed= decrease in household
technology, consumer demand and global disposable Y. (they rely only on private savings or govt.
competitiveness. Structural un= mismatch of skills and benefits)
job vacancies. Structural change eg. decline of They have low MPC.- this would also contribute to low
manufacturing industry occurring as a result of trade levels of GDP
liberalization. Manufacturing industry=inefficient, unable Fall in living standards as consumers will be forced to
to compete at a world price for goods, therefore give up some of their needs and wants, achieving less
contracting and laying off workers. marginal utility.
 Manufacturing employment has declined from 25%  As unemployment rose from 5.9% in 1989-90 to
of total workforce in 1950s to less than 10% in 10.7% in 1992/93, average income fell from
2014-15. $40,000 to $38,000 during the same period.
Frictional unemployment is the temporary Deterioration of budget position/fiscal policy
unemployment of those in the process of moving from challenges:
one job to another. workers must invest time and effort Fewer ppl working=fewer ppl earning enough $ to pay
in searching for the right job, and firms do likewise income tax. = Erosion of tax base (govt. earning less
in looking for suitable candidates. As a result, taxation rev).
individuals are not matched immediately with vacant  GFC- taxation receipts in 2008-09 were $272.6b
jobs and may experience a temporary which was $20b lower than forecasts.
period of unemployment. - The labour market is very Govt is obliged to increase its spending on social
dynamic; each year, around one million workers, or welfare payments/funding the costs for reskilling the
roughly 1 in 12, change jobs structurally unemployed.

Policies:

FP

 An expansionary stance on fiscal policy will also increase economic activity by decreasing unemployment. As
the demand for labour is a derived demand, the government’s fiscal stimulus measures during the GFC were
estimated to support 210,000 jobs. This is because direct government spending in infrastructure projects
increased production, which involved the creation of jobs as firms had expanded. Moreover, as consumer
confidence and spending had begun to increase, firms respond to that by increasing output and in order to do
that they need more factors of production (including labour). As a result, unemployment only peaked to 5.8%
in mid 2009 which was relatively low compared to other advanced economies.
 (DISCRETIONARY SPENDING: The govt. also implemented a number of discretionary fiscal stimulus
measures to reverse the drop in business and consumer confidence that had accompanied the crisis. This
included the National Building package on education, health and infrastructure and the $42b National
Building and Jobs Plan in the 2009-10 budget to support infrastructure investment and employment.)
 The most recent 2016-17 proposed budget also aims to reduce unemployment through the 10 year enterprise
tax plan which involves reducing the tax rate from 30% to 25% by 2026-27 for all small to medium
enterprises. This is designed to increase the firms’ retained profits thereby encouraging greater investment
into capital and expansion, both which will require more labour.
 The Turnbull government has also proposed to increase expenditure measures to reduce youth
unemployment, through the Youth Jobs PaTH Programme, which involves increasing skills of young people to
improve employability prospects.
 NOTE: 2016-17 budget: -2.2% of GDP. Deficit is projected to fall to -0.5% of GDP by 2018-19 through
spending restraints and higher revenue
 Provide $40b in Child Care support over the next four years through the Jobs for Families Child Care package
announced in the 2015-16 budget. Encourages labour force participation as it makes it easier for both parents
in a family to maintain paid employment and take care of their children.

MP

 An expansionary stance will stimulate economic activity by bringing the economy closer to full employment
(the level where there is no cyclical unemployment and all labour resources are being used up) and increase
inflation to meet the RBA’s target band.
 This occurs because since there is increased consumption by households, firms respond to this surge in
consumer demand by increasing their output, ultimately increasing their productive capacity and GDP growth
in the short to medium term. Moreover, since labour is a derived demand, any increase in demand for goods
and services, will require firms to hire additional labour involved in the production process, effectively lowering
cyclical unemployment.
 This is represented through the expansion in supply in the AD/AS model. Indeed, due to expansionary MP
coupled with FP, Australia’s unemployment rate only increased from 4.1% in August 2008 to 5.8% in
May 2009, which was relatively lower than other advanced economies which were experiencing URs
as high as 10% and lower than treasury forecast’s which were predicting it to reach 6.25%.
 (An expansionary stance on monetary policy was evident during the GFC, where the RBA decreased the cash
rate 7 consecutive times from 7.25% in% in March 2008 to 3% by April 2009.)

Micro: (labour market)

 labour market policies improve the incentive for individuals to participate in the workforce, better their skills
and work more productively.
 Policies such as ‘Welfare to Work’ increase the incentives for individuals to seek work, by making it more
difficult to attain transfer payments. (2006)
 Labour Market Programs, such as Skills for Sustainable Growth Strategy, aims to address the skills shortage
of around 240 000 by 2013, by providing sufficient training for 70 000 workers depending on the individual
needs of certain industries.
 Funding for employment services have to be registered to Job Services Australia, which attempts to place the
unemployed into job vacancies best tailored to their individual skill set.
 The transition to Modern Awards under Fair Work Australia has improved the flexibility for workers when
negotiating optimal working conditions, which encourages the active seeking for employment.
 Introduction of Awards has provided a minimum standard for wages and conditions of employment, and has
thus enhanced security for job seekers, promoting participation in the economy.