Unemployment and Monetary Policy

The Australian unemployment rate has fallen to 5.7%. This is the lowest rate for two and a half years and so people are generally pleased.

5% remains the 'full employment' target rate, but at least things are going in the right direction. The end of the mining investment boom meant many economists feared 7% unemployment would become a reality, a level not seen in Australia for a considerable period.

Why has Australia done so well? There are a few factors we can identify.

1. Accommodating monetary policy
2. A lower exchange rate
3. A Federal Budget deficit.

The Reserve Bank of Australia (RBA) has reduced interest rates to 2%, the lowest ever, and this has helped boost consumer and investment spending, both components of Aggregate Demand, by making it cheaper to borrow while also reducing the interest on existing loans.

The exchange rate has fallen significantly since 2013, making the non-mining sector more competitive overseas, and so boosting exports.

The government, despite the desire to return the Budget to surplus, has maintained a substantial deficit, so helping maintain Aggregate Demand.

As the article below points out the lower unemployment rate and slower growth in house prices, along with low inflation, means the RBA could cut interest further to encourage a depreciation in the AU$ which has strengthened recently and threatened Australia's export competitiveness.

The Sydney Morning Herald covers the story here

Australian unemployment falls to 5.8%

Unemployment in Australia, which had seemed to be heading well above the full employment level has shown encouraging signs over the last few months. It has now fallen from a peak of 6.4% last year to 5.8%.

The rise in unemployment was expected due to the ending of the mining investment boom, and the recovery is attributed to the expansionary monetary policy and the depreciation of the dollar.

VCE students need to know how all of the key economic indicators have moved over the previous four years (from 2013 for the current Year 12's). In particular VCE students should know the demand and supply side factors which have influenced each variable and the policy responses (budgetary, monetary and supply-side) these have prompted.

Below is an article from The Guardian which analyses recent trends. It also examines what full employment might mean and whether it is worth pursuing as an economic policy goal.

The Guardian article is here

While this post focuses on Australian Unemployment and the needs of tackling VCE it is also useful for IB students. Consider the impact of different factors of unemployment and how economies are interdependent.

A lower minimum wage?

The Commission of Audit, despite a poor overall analysis, suggests many sensible individual policy measures. One is the need to lower the relative level of the minimum wage.

The Commission suggest that the minimum wage should fall to 44% of the average full time wage, from the current 56%. They argue that it is currently too high to encourage employment and growth. 

The standard argument is shown below.

The minimum wage is set above the market clearing rate. This encourages Q1-Q2 additional workers to seek work when they wouldn't at the market wage rate of 0W1. Also Q2-Q3  workers are not employed who would be at the market wage rate. Unemployment is reported at Q1-Q3.

Of course the argument for a minimum wage is that without it workers would receive a lower wage than 0W1 due to the relatively greater negotiating power of employers compared to employees. (The free market is failing due to market power.)

The Guardian article below outlines the case of the Audit Commission. They believe that it will help achieve full employment and future growth. However will lowering the minimum wage help the goal of equity?

Although Australia does have an absolutely high and relatively high minimum wage rate it is falling as a percentage of full time income compared to other OECD nations. When PPP is used it also looks more reasonable in comparison.

 

 

The Guardian article is here