Economics Principles and Applications

Question: Discuss about the Economics for Principles and Applications. Answer: Introduction: Monetary policy stresses on an essential consideration which is the extent of spare capacity or excess capacity in the economy. Excess capacity is dependent on the goods and services demand and the potential of the economy to produce those. When there occurs a lack in demand it leads to a situation of spare capacity pulling down inflation whereas excess demand leads to capacity being constrained and pushing up inflation. One of the key indicators of excess capacity is unemployment rate (Mankiw,2003) . Unemployment rate is the percentage of individuals of the total labor force that is unemployed but is eager to work and keenly searching for employment. It is calculated as a percentage of the total labor force, i.e., the people who provide labor for production at a particular time period consisting both employed as well as unemployed persons (Samuelson et al, 2010). A high rate of unemployment signifies that there exists a large group of workers who are willing to work but are not involved in production hence indicating that the economy is running below its potential or may be also due to other reasons when individuals are searching for jobs and are unemployed even though the economy is at its potential. The unemployment rate that is economically steady and related to a stable inflation rate is called the non-accelerating inflation rate of unemployment (NAIRU). When the rate moves away from the NAIRU then it indicates the economy operating away from its potential (Sikdar, 2006). In the following sections we get into further in depth details of unemployment, its causes or types followed by a detailed analysis of the unemployment prevailing in Australia and its different regions along with the government interventions or policies undertaken, using secondary data from the Australian Bureau of Statistics and the Reserve Bank of Australia. Unemployment in Australia: The economy of Australia has experienced varied changes in its production structure which can attributed to reasons like technological changes, or being more integrated to the world markets, rising competition from countries with lower wages in producing manufactured goods and also consumption pattern changes. Considering men who have only minimal level of formal education, sustained job loss in production of goods has resulted in decrease in job opportunities whereas the expanding economy sectors has employed women who are being empowered and experiencing rise in share of paid work. Hence, Australia has experienced nagging unemployment, being intense at times but economic expansions had resulted unemployment to reach sustained steady low levels (Trudgian, 2016). Trends in Unemployment in Australia: The Australian Bureau of Statistics each month samples 50,000 individuals and assesses their labor force status, the individuals had been working for an hour or more or had worked are considered as employed but those not employed but are searching for jobs are termed as unemployed whereas the rest are outside the labor force (Reserve Bank of Australia, 2014). We see the Table (1) below, which lists the unemployment rates of Australia since 1991 to 2015, along with the annual real GDP growth rates, both expressed in percentages. The highest unemployment rates of 10.8% and 10.89% seen were in the years 1992 and 1993 respectively whereas in 1991 it was 9.6%. We also see growth rates of -1% and -5% in 1992 and 1993 respectively indicating recession. Till the year 2002 there were high unemployment rates in the range of 7%-8%. Unemployment rates of 8.5% from 1995 to 1997 were experienced by the country. The economy was again at a slump with economic growth rates at -9% and -4% in 1998 and 1999 respectively. It also experienced high unemployment rates of roughly 7% to 8% but inflation rates were quite low of more or less 1%. Afterward the rate of unemployment had been almost in the range of 5% to 6% but in 2009 it experienced negative growth rates during the global recession also in the years 2013 and 2014. Table 1: Unemployment rates of Australia (% of total labor force) and Annual real GDP growth rate (%) from 1991-2015 YEAR REAL GDP GROWTH RATE ( %) UNEMPLOYMENT RATE (%) 1991 1.432770121 9.600000381 1992 -1.074078243 10.80000019 1993 -5.797987771 10.89999962 1994 1.555182265 9.699999809 1995 8.932453367 8.5 1996 6.296659012 8.5 1997 8.259405934 8.5 1998 -9.104445223 7.699999809 1999 -4.065980743 6.900000095 2000 2.188321276 6.300000191 2001 -12.62231455 6.800000191 2002 1.121341305 6.400000095 2003 15.11405584 5.900000095 2004 28.37291394 5.400000095 2005 10.17874187 5 2006 4.080398933 4.800000191 2007 11.61225404 4.400000095 2008 18.46518554 4.199999809 2009 -13.70782645 5.599999905 2010 19.86761903 5.199999809 2011 17.79088183 5.099999905 2012 8.700203808 5.199999809 2013 -0.710624783 5.699999809 2014 -9.245055214 6 2015 14.57780068 5.8 Source: World Bank Data Fig 1 After the World War II, the 25 years followed with unemployment rates in the country varying between 1 and 2% of the labor force. In Fig(1) we see that during the early 1990s when there were economic recessions the unemployment rose sharply and took a long time to fall after the sharp rise. Also even though there was a small peak in the 2000s early, it accounted for only fraction of the earlier spikes (Australian Government website, 2014). According to the Reserve bank of Australias published statement of November 2013, the increase in unemployment since mid 2011, is due to a number of factors which include the cyclically weak demand for labor that has resulted slow growth of employment compared to the supply of labor and also influences that are structural in nature distressing the efficiency of the matching of unemployed laborers to job vacancies. In the couple of years around 2013, the unemployment rate increase is not due to reduced employment, the growth of employment being 1% which had been slower than the growth of the labor force being 1.4% hence increasing the number of unemployed. In one of the recent statements published by the RBA about the unemployment situation in February 2015, it forecasts that the unemployment rate is likely to rise in the forthcoming quarters as growth in economic activity is likely to remain below trend in the nearest term periods although the forecasts were based on number of macroeconomic assumptions and hence, subjected to changes (Reserve Bank of Australia, 2013 and 2015). In the present year of 2016, the number of employed individuals in Australia has gone up by 10,800 in the month of April with the total number of employed rising to 11.917 million which had been recorded as the highest level till now. The employment has risen by 2.1% over one year as per the ABS. Further statistics from the ABS show that the full time employment had fallen by 9300 followed by a decrease of 10,000 in the month of March whereas offsetting this decrease the part time employment increased by 20,200. In terms of percentages the full time employment has risen by 1.04% which is as slow as more than four times of the growth rate of part time employment which increased by 4.48%. The unemployment rate has been observed to be 5.7% which is below 5.8% expected level and has been unchanged from March. It is considered to be the lowest level since the September of 2013.In the month of March the total number of unemployed individuals increased slightly from 722900 to 723300. In the figure (2) we also see the unemployment and employment rates compared. Employment rates or known as employment ratio is the proportion of the adult population that is employed. We get the figure based on the table given below, where we divide the employment rates by 10 and plot with the unemployment rates in the figure below. In the figure(2) we see that the unemployment rates had increased since 2007 to 2015 whereas the employment rates had been consistent although it has decreased from 61.2% in 2013 to 60.99% in 2015. Table 2: Unemployment and Employment rates Year Unemployment rate(%) Employment rate(%) 2007 4.37915151 62.321111 2008 4.23432971 62.707767 2009 5.56038543 61.792817 2010 5.21334044 61.981087 2011 5.08099648 62.095578 2012 5.22066593 61.73602 2013 5.65574278 61.241028 2014 6.07302496 60.740625 2015 6.06150227 60.997315 Source: ABS Fig 2 Region Wise Unemployment in Australia: If we compare across States and territories we see that New South Wales had been observed to record the lowest unemployment rate, seasonally adjusted with 5.3% constant since March followed by Victoria and Western Australia standing at 5.6%, 6.5% recorded in Tasmania, 6.5% of Queensland and 6.8% in South Australia (Australian Government Website,2016). Of June 2016 we see from Table (3) the total employed persons seasonally adjusted has been 11939.6 with number of unemployed being 734.2 , i.e., an unemployment rate of 5.8% which is higher than that of May 2016 which recorded a rate of 5.7%. The overall participation rate slightly increased to 64.9% in June 2016 from 64.8% in May 2016. Table 3: Unemployment Statistics of May and June, 2016 May 2016 Jun 2016 Trend No. of Employed persons (in '000) 11 925.1 11 933.4 No. of Unemployed persons (in '000) 726.1 725.9 Unemployment rate (%) 5.7 5.7 Participation rate (%) 64.8 64.8 Seasonally Adjusted No. of Employed persons (in '000) 11 931.7 11 939.6 Unemployed persons ('000) 724.3 734.2 Unemployment rate (%) 5.7 5.8 Participation rate (%) 64.8 64.9 Source: ABS Fig 3 Below we see the Table (4) which gives the unemployment rates of few states and territory wise in Australia as of May 2016. We see that in overall South Australia is with the highest unemployment rate of 6.9% followed by Tasmania with 6.5% and Queensland with 6.4%. The minimum is that of Australian Capital Territory with 3.8% followed by Northern Territory with 4.1%, New South Wales with 5.2%, Western Australia with 5.7% and Victoria with 5.8%. Table 4: Region wise unemployment rate of May 2016 Region Rate of unemployment (%) Australian Capital Territory 3.8 Northern Territory 4.1 New South Wales 5.2 Western Australia 5.7 Victoria 5.8 Queensland 6.4 Tasmania 6.5 South Australia 6.9 Source: ABS Fig 4 Types/Causes of Unemployment in Australia: Now that we know what unemployment is and how it acts as an indicator of excess capacity we look into the different types or can be said the cause of unemployment prevailing in Australia. The types of unemployment which also give the causes of unemployment are: Structural unemployment: Unemployment that takes place due to the structural changes in the economy and inefficiencies in the market for labor, i.e., the fundamental mismatch between jobs and laborers. As the economy goes through structural changes, with technological advances, types of jobs, location of jobs changes with change in preferences for employers or the need of skilled or unskilled workers causing a mismatch between workers and available jobs. Example: As by Industrial Revolutions machines were created for weaving cloth, the weavers went jobless. Frictional unemployment: This is also known as search unemployment because it refers to the situation when individuals are temporarily moving from one job to another or are in search for new jobs. It can be considered as the regular movement of workers in the labor market according to their personal situations. As the individuals invest a sufficient amount of time in searching for the right job as per his/her preferences and the employers demands of skills, it results into a temporary unemployment known as frictional unemployment. Example: A person quitting from work if he/she dislikes their job or also if he/she gets fired. Cyclical unemployment: This kind of unemployment results from the aggregate conditions changes in the economy over the business cycle course. It occurs when there is shortage of aggregate demand in the economy, hence firms not able to create new jobs for people who are want to work. With fluctuating demand inflow and outflow of labor is affected as that of firms which on facing less demand for their goods lay off workers and hire few workers increasing involuntary unemployment. On the other hand, if demand is stronger the demand for workers by firms will also rise hence decreasing unemployment. Example: At the time of recession with low aggregate demand leading to less creation of jobs. Classical unemployment: Unemployment caused due to the real wage being above the market clearing price for labor (Lipsey et al, 2011) One of the most prevalent unemployment types in the country is youth unemployment of individuals 15-24 year old who are at a higher risk of being unemployed than adults. As recorded in January 2016 the trend rate of youth unemployment had been 12.2%which is high above the last dips of 9% below the global financial crisis in 2008. Though the youth unemployment is also seen to have fallen since 2014 when it was about 14%. As recoded in the the beginning days of 2016, more than 258000 individuals who are young in the labor market are not able to get employed (Carvalho, 2015). In January of 2016 the unemployment rate was 5.8% but the unemployment rate of the youth was found to be double that of the overall rate. There had been differences among different areas in Australia recorded for the youth unemployment rates. We see in the table below, 20 ABS regions which are marked to record the highest youth unemployment rates as of January of 2016. The youth of the labor markets of Outback, Cairns and Wide Bay regions of Queensland and in New South Wales the region Hunter Valley are seemed to face the high rates of 20% which is 8% more than the national average rate. As for the Outback region in Queensland it is higher than 28%. The high rates also show the overall unemployment rates across different groups of these areas (Youth Employment Campaign, 2016). Table 5: Region wise Youth Unemployment Rank Place Youth unemployment in Jan 2016 (%) 1 Queensland Outback 28.4 2 Hunter Valley excluding New Castle (NSW) 21.8 3 Wide Bay 20.6 4 Cairns 20.5 5 Tasmania- South East 19.6 6 Mid-North Coast (NSW) 19.5 7 Barossa York Mid North (SA) 19.4 8 Southern Highlands and Shoal haven (NSW) 18.4 9 New England and North West (NSW) 18.1 10 Townsville 17.6 11 Richmond Tweed (NSW) 17.4 12 Melbourne West (Victoria) 17.3 13 Geelong (Victoria) 16.9 14 North East and Launceton (Tasmania) 16.9 15 Central Coast (NSW) 16.5 16 Adelaide North (SA) 16.3 17 Adelaide- Central and Hills 16.2 18 Far West , Orana (NSW) 16.0 19 Hume (Victoria) 16.0 20 Mackay (Queensland) 16.0 Source: ABS Fig 5 The causes of unemployment may not be independent of each other and one may give rise to another. Out of the types mentioned, cyclical unemployment is the key source of excess capacity indicative of the economy producing below potential. Hence we break down the different factors affecting unemployment in Australia and we see that it can be grouped as follows: Labor demand shortage which results in job opportunities scarcity and an excess supply of labor for the existing vacancies. Individual and available vacancies mismatch due the varying characteristics of the jobseekers and the jobs. Hence, this kind of workers face structural unemployment though may be unemployed frictionally as they are temporarily searching for work. Absence of reported obstacles which indicate frictional unemployment. Shortage of labor demand causing unemployment had been cyclical which had been as a sharp rise in the recession of early 1990s, and then falling to low levels in the mid 2000s while rising again at the financial crisis outset. As per an article by the RBA, the 1990s is said to have gone through a significant excess capacity in the labor market with unemployment components indicating excess capacity being relatively high whereas for most of the 2000s there had been a labor market tightness with unemployment rate falling below many estimates of the NAIRU though not significantly. Hence, with the consistency of tight labor market, the period saw an end with increase in domestic wage and inflation. Followed by the global financial crisis, a level of spare capacity had been found in the labor market though less than what was in the 1990s. Recently the unemployment rate had been a bit above many estimates of the NAIRU whereas there had also been rise of more cyclical components of unemployment which accounts for most of the overall rise in unemployment rate and slowing of wage growth (RBA, 2016). There had been structural unemployment in the economy with the terms of trade boom although the benefits from various economic reforms had offset the structural unemployment in the last decade. Role of government in Regulating Unemployment in Australia: For regulating unemployment rates the government adopts various economic reforms and policies both fiscal and monetary. The government adopts fiscal policy for increasing or decreasing aggregate demand and hence affecting the rate of economic growth. The fiscal policies that are expansionary in nature, i.e., the expansionary fiscal policy makes use of instruments like reducing taxes or government purchases being raised. Increase in aggregate demand makes the real GDP increase and with the presence of spare capacity the firms increase their production and hence their labor demand increases. Increased labor demand, helps employment rise and hence reducing unemployment. On the other hand there are also monetary policies. In case of monetary policies the central bank cuts interest rates encouraging people to spend more as well as invest more which would boost demand, hence raising demands for labor leading to increased employment. Unemployment from supply side, that are structural, frict ional and classical unemployment also exists. In those situations policies are adopted by the firms from the supply side. These policies, like training and education helping unemployed individuals to get jobs, trade unions powers reduced to resolve the issues of unemployment from real wage mismatch, boost confidence through subsidies for employment, labor market flexibility improvements, benefit requirements that are more strict to make the unemployed losing the benefits to accept a job or risk and finally overcome the geographical unemployment by developing better labor mobility across regions (Mankiw, 2007). The Australian government has adopted many policy reforms to deal with rising inflation and unemployment. Australian government has achieved the lower unemployment rate through a long term package of economic reform measures aiming at developing the microeconomic efficiency of the economy allowing it to grow steadily and enabling it to respond to changes. The reforms had been diverse including trade reforms, financial market deregulation, tax reforms of wide range, competition being enhanced at various sectors of the economy, labor market being more flexible, skill and capacity building, welfare arrangement reforms, and creation of transparent framework for the implementation of fiscal and monetary policies to influence economic stability. Still there exists scope and potential to work more in these areas which would bring more gains in productivity and growth (Liberal.org.au, 2016). The government has been doing well to maintain steady prices since 2002 along with sustainable growth rates as well as the unemployment being at the approximate level of 5-6%, in fact declining to 4% in the year 2008. These rates are considered as sustainable helping in adjusting pressures on wages and price. It shows the overall GDP growth being stable which in reflects the developments in the macroeconomic policy frameworks taken up and the reforms which are microeconomic in nature making it possible to achieve greater long term stability and economic growth. Conclusion: Hence, we saw that the Australian unemployment rate had decreased over the years being steady at the rate of 5.7% presently but if we look more in depth in regions of Australia and through different age groups we see that there prevails a high rate of youth unemployment which gives a better picture of the Australian unemployment scenario reflecting the causes of the prevailing unemployment mostly being structural and frictional in nature as in the case of youth unemployment or the lack of demand of labor. We also looked into the prevailing types of unemployment in the economy and how they are not mutually exclusive but one is gives rise to or evolves from another type. In the end we look into the types of policies or measures be it fiscal or monetary in nature which act as instruments for the Australian government to maintain low levels of unemployment controlling for inflation and focusing on sustainable economic growth and long term stability. Further to increase participation rate s, the government can opt for a balance of incentives, requirements and assistance will influence individuals to participate in the labor force and hence enabling the country in the longer run to realize its potential. 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