Reducing overtime (penalty) rates in Australia

There is a long tradition of paying workers extra when they work hours that fall outside the normal working week. In Australia these are called Penalty Rates, and called Overtime Rates elsewhere.

Australia has a strong labour movement and was the first country to establish the 'eight hour day', five days a week as standard. They guard their free time jealously and so a system of paying penalty rates to whoever works at certain times has grown up. A particularly difficult area is Sunday trading where many workers earn 'double time', including casual staff who might only work on Sunday.

Now the Australian Fair Work Commission have concluded an enquiry and recommended that the rates be reduced.

There are several points to be made on each side of the debate.

• Penalty rates allow low paid workers to boost their pay to a level where they can earn a reasonable living wage. Therefore reducing penalty rates may reduce equity in Australia. 
• Also penalty rates provide the incentive to workers to supply additional hours of work. When the incentive is removed then the capacity of the Australian economy will be reduced (affecting Aggregate Supply).

• Against these points must be set the higher costs penalty rates impose on businesses. these will now be reduced and consumers may benefit through lower prices and improved supply. The labour market will become more flexible and Australian competitiveness will be improved.

This measure is a supply-side policy that aims to lower costs and improve long-run growth.

The Sydney Morning Herald covers the story here

The ABC 7.30 report has a video here

This story is directly relevant to VCE students and represents an excellent example of Australian Supply-side policy. IB students can equally use it as an example.

A step towards freer trade

The Doha Round of the World Trade Organization (WTO) has been making little progress as many countries fail to agree to trade policy reform. Rather than wait for a general agreement the WTO agreed to implement a partial agreement known as the The Trade Facilitation Agreement (TFA).

The TFA essentially makes customs procedures easier, saving time and other costs. It is estimated that this will raise trade by $1trillion a year and be as effective as cutting all tariffs.

The benefits of free trade are well known. There is greater specilization and trade, resources are allocated more efficiently and consumer surplus will rise. Of course there will be losers, as resources are reallocated and some structural unemployment is caused. The key is to look at this as long-term gain at the price of some shorter term pain in a few sectors.

Note how long this agreement has taken however. At least fifteen years in the making, including three years to get countries to ratify the agreement. A big plus is that Developing countries will probably be winners from this agreement. Critics of the WTO have often suggested that they favour the developed countries, but this seems to make life easier to access the markets of the richer countries.

The BBC covers the story here

This story is most directly useful to IB students as it deals with global trade agreements and the WTO. However VCE students need to understand the benefits of trade and Australia is a party to all WTO agreements, so is also an example of Australian trade policy.

Sugar tax in Australia

The sugar tax is a rich topic for IA's in microeconomics. Australia is now starting discussions at State and Federal level on the possibility of introducing one. Look out for possible articles on this and save them up!

An example from the SMH here

A danger for Australia's economy

The ABC today report that the level of Australian household debt has reached 187% of disposable income. This is, they say, the highest in the world.

The problem is that this means that many households are close to not being able to afford to pay their debts (and interest) and buy the goods and services they need. If there was a rise in interest rates, or rise in unemployment this would see more and more households 'running out of money'.

The effect this will have on Australia is that Consumer spending would fall, leading to a lower level of Aggregate Demand (AD). This would put downward pressure on economic growth and could push Australia into its first recession since 1981.

Admittedly this is the 'disaster' scenario. There are other factors that simultaneously affect the economy. However it provides a constraint on the Reserve Banks ability to raise interest rates and should warn the government that further budget cuts and tax rises could combine to cause the recession everyone seeks to avoid.

Debt is a fact of life. It makes sense to borrow to buy a house. There is, however, a limit to the amount of debt a household can take on - the amount they can repay. If banks think households have reached their ability to pay then new loans will start to dry up and consumer spending will fall, leading to that fall in AD we feared. In that situation monetary policy becomes less effective, because lowering interest rates won't help much.

This is an important piece of background to Australia's current economic situation.

OECD data suggests Australia has high household debt, but not the highest

The ABC covers the story here

German trade surplus and another mad Trump claim

Germany has posted a record trade surplus on its current account. This really means that Germany has exported more than it imported. It should be noted that both exports and import values grew, but export values grew faster.

Trade surpluses are not 'good' and deficits are not 'bad'. There should be a broad balance over time on the current account. If there are persistent deficits this suggests that a country will build up foreign debt and isn't competitive. A persistent surplus means that the Aggregate Demand in the economy is being boosted, leading to inflationary pressures and demand for the currency, to buy the exports, will force up the exchange rate.

Trump's trade advisor has accused Germany of using the weak value of the Euro to boost its exports. This bizarre claim is just another conspiracy theory. The value of the Euro is determined by the market and the European Central Bank (ECB) is independent of governments in setting monetary policy.

The claim does however allow us to realise that Germany is concerned to reduce its trade deficit because of the effect it has on the domestic economy. As pointed out in the article Germany has taken steps to boost domestic demand in order to stimulate demand for imports. Some of the measures are detailed in the article.

Not for the first time though the article demonstrates that the Trump administration is just batshit crazy.

The size of Germany's Current Account surplus compared to GDP for the last ten years, shows a growing issue.

The BBC article is here

This article is primarily of use to IB students in its detail. However the effects of a trade surplus and the effect of currency value is important knowledge for VCE students.

Australian interest rates stay at record low

As expected the Reserve Bank of Australia (RBA) kept interest rates on hold at their meeting yesterday. They remain at the record low of 1.5%.

The RBA forecast that the Australian economy would continue to grow at about 3% in 2017, but that inflation remains below target. Therefore the RBA wishes to encourage the economy to grow faster by keeping it cheap to borrow and so encouraging consumer spending and investment, both components of Aggregate Demand.

Australian interest rates may stay the same for a while. The pressure to raise them might come from higher growth and a rapidly rising housing market. However the pressure to put them down will come from a rising exchange rate (based on events in the USA where interest rates will rise).

Monetary policy is a very important tool in managing the economy and works by affecting the total level of demand in the economy.

Australia's policy interest rate since 2014

Below are two links. The ABC one is for Year 12, the Channel Nine one for Year 11.

The ABC article is here

The Channel Nine article is here

VCE students must be able to explain policy decisions and economic events in Australia over the previous two years prior to their examination. Interest rate decisions (monetary policy) is one of the areas they must be familiar with and be able to explain why policy decisions (change interest rates etc) we made.

IB students can use this as an example of monetary policy too.

A shift in the supply curve

Supermarkets in the UK are abandoning reliance on the price mechanism alone and have introduced rationing of lettuce. This is very unusual in the market economy, which can usually be relied upon to provide the goods and services you want at the prices you expect.

The reason for this move is the sudden fall in supply caused by poor weather conditions in Spain (a condition of supply). The graph below shows how this has affected the market.

The bad weather has called a fall in supply and so the market supply curve has shifted from S1 to S2. This has led to a rise in price from 40p to 1.40 as the market no clears at the point where the demand and supply curves cross.

Because lettuce is a primary product demand is inelastic (not very responsive) and the result is a very large rise in price following the reduction in supply. 

The UK supermarkets are now rationing lettuce to avoid even higher price rises. The shortage of lettuce is leading to panic buying. Consumers see lettuce and buy more than they need just in case there are none the next time they shop. This pushes the demand curve, D, to the right, forcing the market equilibrium even higher.

The actions of the supermarkets may seem unnecessary, but they are reacting based on their knowledge of consumer behaviour and market forces.

The Daily Mail covers the story here

This story has a lot of terms Year 11 will not currently understand, but they will soon. It has been written is an accessible way rather than a technical way. It is equally useful for IB and VCE students as it is about the basic market mechanism. IB students might search for similar stories from other sources in case they feel it is an IA candidate.

Australia posts record Balance of Trade surplus

It is a matter of some celebration that Australia has achieved its largest Balance of Trade surplus ever in December 2016. This means that the value of exports in goods and services was greater than the value of imports of goods and services. As shown in the graph below this is unusual for Australia.

The main reason for the boost is that the price of commodities has risen and so have the volume of exports. So Australia has exported more and got more for what they have sold. Chinese demand is crucial in this process.

There are other reasons for the improvement, one being the increased competitiveness of Australian goods and services due to the lower value of the dollar in recent years. However it is mainly commodities and that really is down to China.

Don't get too excited because the Australian Current Account remains in deficit and has been since 1974. The Current Account includes the Balance of Trade, net income and transfers. This clearly implies that the deficit on income and transfers outweighs the Balance of Trade surplus. The graph below shows the Current Account balance for the last ten years to compare with the Balance of Trade above (note that the data for last three months are not yet available below).

There are always implications for of Current Account deficit, such as the effect on Aggregate Demand, a Financial Account surplus, rising foreign debt and the possibility that the country is uncompetitive. A 43 year Current Account deficit suggests the competitivness point has been settled.

Business Insider covers the story here

This topic is a crucial one for VCE students who should consider the impact on Australia's Net Foreign Debt position and what it says about the country's dependence on China and commodities. IB students will equally be able to use it as an example of International Trade and the wider effects of deficits and surpluses.