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Labour market is where individuals seeking employment interact with employers (supply) who want to obtain the
most appropriate labour skills for the production process (demand)
Demand curve is downward sloping, Supply curve is upward sloping and equilibrium price is wages
Some areas there may be unemployment (excess supply of labour)
Other areas there may be shortage of skilled works (excess demand of labour)
Australian workforce
Workforce is section of population 15 or older that are either working or actively seeking work i.e. employed and
unemployed
Included
o Aged 15 and over
Employed at least one hour a week
On paid leave, strike or workers compensation
Unemployed - actively seeking and available for work
Not included
o Retired from workforce
o Aged under 15
o Performing full time domestic duties
o Full-time, non-working students
o Without a job but not available for or not actively seeking work
Supply Curve
o Slopes upward from left to right as wage rate increase, people will be more willing to supply their labour
o It is assumed people decide between utility derived from leisure and utility derived from income that is
consumed if they had a job
o As wage rates rise, opportunity cost of leisure rises and work is more attractive however at higher wage rates
people can have the same income by working less (e.g. $100/hr for 50 hrs and $125/hr for 40rs is the same)
o As a results labour supply curve is backward bending
Demand Curve
o Slopes downward from left to right and reflects law of diminish marginal
returns
Each work will contribute less to total production that the previous worker
Profit-maximising firm will only employ extra worker if the pay hem a
wage rate lower than the marginal revenue from their production
As wage rate declines, demand for workers will increase
Equilibrium
o Intersection of demand and supply curves
o Equilibrium wage rate occurs where the quantity of labour supplied is equal to quantity of labour demanded
o At any wage rate above equilibrium there is excess supply and unemployment
Unemployed would the offer to work at lower wage rate thus bringing it down to equilibrium
o At any wage rate below equilibrium there is excess demand
Firms competing for labour will force wage rate up to equilibrium
Wage outcomes
Wages and salaries are 56%
Business profits and capital investment are 18%
Property income is 11%
Government benefits are 10%
Central roles of award wages system has declined and shifted towards enterprise bargaining
Reflects change of differences in wage outcomes has increased for both industries and individuals
Led to considerable differences in income distribution between sections of community
o However relatives household incomes havent changed much due to increase family benefits for lower
income earners have offset increased wage differentials
Considerable inequality in distribution of income, though has become marginally less equal over past decade
o Top 20% have 38.5% of total income and had average weekly income 5 times bottom quintile
o Bottom 40% have had total income remain constant while highest 20% has seen total income increase
Different wage outcomes across different industries are due to structural changes in economy
o Emerging industries require skilled labour so are more likely to pay higher wages than declining industries
There is also dispersion of earnings within occupations and among employees with same skill levels or education
qualifications
o Due to shift away from centralised wage determination and union membership
Non-wage outcomes
Non-wage outcomes are the benefits that many employees receive in addition to their ordinary and overtime
payments. For example:
Superannuation
Sick and holiday leave
Salary packaging such as company cars, laptops, childcare, gym membership etc.
Bonus cash payments such as performance bonuses
Improvement of flexibility for workers e.g. Study leave, extra parental leave, leave to look after a sick family
member, extended leave without pay, allowing workers to work from home for part of week and allowing
employees to share jobs
The costs and benefits of income inequality
Economic Benefits
o Inequality encourages labour force to increase education and skill levels
People further education to achieve higher income
However some low income workers do not have access to same education opportunities
o Inequality encourages labour force to work longer and harder
Higher incomes creates incentive to work longer hours or overtime
If increased output is rewarded with increase income, labour productivity increases
Non-inflationary economic growth as wages increase due to increased productivity
o Inequality makes the labour force more mobile
Higher incomes act as incentive to encourage labour to moves to labour shortage ares
Higher incomes are therefore indicator of labour shortages
Leads to more efficient allocation of resources
o Inequality encourages entrepreneurs to accept risks more readily
Higher incomes increase reward for entrepreneurs
Increased entrepreneurs encourages innovation = Business growth & Employment opportunities
o Inequality creates potential for higher savings and capital formation
Higher incomes = MPS = National savings = Pool of domestic funds to borrow from
Leads to Reliance on foreign savings
Increased pool of funds leads to potential for Investment in medium to longer term
Social Benefits
o There are none due to inequality of opportunity
Lack of opportunities due to inequality as higher income have better access to better education
Difference in mental and physical attributes in relation to potential for jobs
People who have wealth are can create more wealth easily as opposed to those who start with no wealth
People may not have access same networks of people that may lead to new opportunities
Economic Costs
o Inequality reduces overall utility
Higher income earners derive less utility from increase in income that lower income earners
Therefore more equitable distribution would increase total utility
o Inequality can reduce economic growth
Lower incomes spend higher proportion of income therefore
o Inequality reduces consumption and investment
In short term, Higher incomes = MPC = C = AD = Eco. Growth = Unemployment
Less incentive to invest = Investment = AD
o Inequality creates poverty and social problems
Creates relative poverty which leads to underclass of low income earners
Creates cycles of disadvantage due to lack of education opportunities, health disadvantages etc.
o Inequality increases cost of welfare support
Government provides support to low income earners and other people with disadvantages
o Inequality creates conspicuous consumption (not very important)
Creates leisure class which spends to just show off wealth
Social costs
o Inequality decreases level of well-being
Increases social problems e.g. mental illness, crime, lower life expectancy
o Inequality creates social class divisions
E.g. Upper class, middle class, working class
o Inequality creates high level of poverty
Creates cycle of low income and limited economic opportunities
Unemployment
Unemployment is the situation where individuals want to work but are unable to find a job
o Labour resources are not being utilised and output is less than maximum
o Full employment is major goal of government
Not zero unemployment rather where AD is point where there is no unemployment to lack of demand
Unemployed persons are people aged 15 and over, who are available for work and are actively seeking work
o Actively seeking work includes
Regularly checking job advertisements
Willing to respond to job advertisements and apply for jobs and attend interviews
Registered with employment agency linked to Job Services Australia
Number of person employed 100
o Unemployment rate % =
Total labour force 1
Importance of unemployment rate
o Measure of proportion of labour force that is under-utilised
o Indicator of the performance of economy
o High UE% = Limited employment opportunities in over supplied labour market
o Low UE% = Tight labour market, potential scarcity of skilled labour and future cost pressure from wage
demands for workers
o Unemployment rate for different groups identifies areas of social concerns (e.g. younger people)
Labour force = Total part time and fulltime employed people over 15 + Total unemployed over 15 (12.5 million)
Labour force 100
Labour Force Participation Rate (%) =
Popilation aged 15 and over 1
o Possible to have rising unemployment and employment at the same time as LFPR can lead to UE%
o Jobs increasing but as LFPR rises, more people competing for those jobs
Official interest rates do not take underemployment into consideration
o People who are working but for less hours than they would like (e.g. Part time workers want to be full time)
o May 2015 - Underemployment was 8.5%
o Labour force under utilisation rate = Unemployment rate % + Underemployment rate %
Types of unemployment
Cyclical Unemployment
o Caused by contraction in economic activity or aggregate demand
o Rises during downswing as spending and GDP growth fall causing employers to cut labour and stop hiring
Structural Unemployment
o Due to structural changes in economy caused by changes in technology, pattern of demand for goods and
service and microeconomic reform
o Mismatch of skills and labour
Frictional Unemployment
o People who are temporarily unemployed as they change or find jobs
Seasonal Unemployment
o Frictional unemployment for occupations characterised by seasonal work e.g. Ski instructors, fruit pickers
o Official figures are seasonally adjusted to take this into account
Hidden Unemployment
o Includes those who are not reflected in official ABS statistics
o E.g. Women with children who could not find child care or those who received income support from support
o Also includes discouraged job seekers who have given up on looking for work
Underemployment
o People who work less than full time hours per week but would like to work full time
o Has risen in recent years due to high creation of causal and part time jobs
Long term unemployment
o People who have been unemployed for 12 or more months
o Difficult to reduce as people can lose skills and confidence and employers may treat them with suspicion
Hard core unemployment
o People who are consider unemployable, often due to physical, mental, emotional or attitude difficulties
Non-accelerating inflation rate of unemployment (NAIRU) a.k.a. natural rate of unemployment
Level of UE at which there is no cyclical UE
At NAIRU, economy is experiencing structural, frictional, seasonal and hard core UE - these are inevitable
At NAIRU, economy is at full employment
If UE is above NAIRU, increased economic growth will create jobs and reduce Cyclical UE
o Once Cyclical UE is eliminated, economic growth will see firms raise wages to compete for existing workers
o Economic growth will also increase AD without increase in aggregate supply
o These two factors will cause inflation
Trends in unemployment
Unemployment had upward trend from 1970-1990 after very low levels during 1960s and early 1970s
In early 1990s, structural changes and microeconomic reforms contributed to unemployment problem
o Peaking at 10.7% in 1992-93 which was highest since Great Depression
o Skill mismatch between workers who lost jobs and areas were labour was required
Unemployment rate fell gradually from 1990s to GFC 2008 where is rose by 2%
o However with stronger growth it fell back to 4.9%
With slow growth again, it started rise with UE at 6.25% for 2014-15
Due to resource boom there is two speed economy
o Mining states such as WA and NT have low UE% while non mining states have higher UE%
UE% tend to be higher in regional areas in comparison to metropolitan areas
Part-time employment
Part-time employment is defined as those employees regularly working 20 hours or less per week
Casual employment occurs when employees have occasional working hours with no set pattern
o Considered most insecure as they do not have any certainty about future work prospects
Proportion of part-time work as grown considerably over recent decades
Australia has also experience large increase in casual employment (casualization of workforce)
Positives
o Some employees prefer part time work, allowing them to balance with other responsibilities such as family
o Employers have greater flexibility in staffing arrangements is a lot of their employees are less than full time
o During busier times, they can increase hours and vice versa
o Also can avoid some responsibilities they have to give to full time workers e.g. holiday leave, sick pay etc.
Negatives
o Less job security
o More difficult for employees to plan for future without secure income
o Less staff loyalty and less development of workforce skills
Labour market policies are macroeconomic policies that are aimed at influencing the operation and outcomes in the
labour market
Centralised labour market: Government or industrial tribunal determines wages and working conditions for all
employees, regardless of which firm they work for
Decentralised labour market: System in which wages and working conditions are determined through negotiations
between individual firms and their employees (at enterprise level) with limited role of industrial tribunals
Recent trend
Australian industrial relations system has moved from highly centralised to more decentralised system
Benefits of a more decentralised labour market
o Improved allocative efficiency of labour resources and promotes structural changes
More profitable/growth industries attract skilled workers e.g. Mining industry
o Increase productivity
Increased incentives as labour rewarded with higher wages which then decreases inflationary pressures
o Reduces unemployment
Downward wages flexibility acts a shock absorber during downturns and troughs in business cycle
Disadvantages of a more decentralised labour market
o Increases income inequality (wages dispersion)
i.e. Workers doing the same jobs in different industries or firms have different pay and working conditions
Low skilled workers have less bargaining power
o Wage-push inflation more likely when economic growth is strong and labour is close to full employment
Workers use labour supply shortage to demand higher wages rather than increased labour productivity
o Limits policy tools of government
Dispute resolution
Industrial dispute occurs when employers or employees take action to disrupt the production process in order
to highlight a disagreement between employers and employees
Industrial action includes strikers, work bands and lockouts
o It is lawful if it occurs during process of enterprise bargaining
Industrial tribunals are government agencies that oversee industrial relations system and attempt to prevent or
resolves workplace conflict between employers and employees. E.g. Fair Work Commission
Conciliation is process where firms and employees meet to discuss differences in presence of third party who
attempt to bring the parties to an agreement
o Third part does not have any power to impose agreement on those firms
Arbitration is process which an industrial tribunal hands down a legally binding ruling to firms and employees
o Fair work commission will only intervene (i.e. arbitration) when:
Enterprise agreement includes provision for compulsory dispute resolution system
Industrial actions is occurring, and this action poses threat of significant harm to economy or population
When employers or employees do not bargain in good faith e.g. not participating in all meetings
Benefits of effective dispute resolution system
o Helps resolve disputes that have become deadlocked, reducing length of strike action
o Faster resolution can limit damage of industrial action to firms and employees
o Can balance interests of employers and employees
o Economy can avoid disruptions of supply that can cause damage to other sectors of economy