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Jobs growth not quite as robust as statistics suggest

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Australia’s unemployment rate is currently at 5.8%, down from 6.3% in July 2015. However, it is suggested that the actual figure is higher than this, given that the rate of labour market growth is outstripping economic growth. This disconnect can also be attributed to:

  • An understatement of economic growth
  • The transition of labour from mining to services adding less value to output

How does this relate to the HSC syllabus?

  • Labour is a derived demand (Preliminary Topic Four – Labour Markets). In other words, businesses demand more labour when there is more demand for goods and services. Hence, we expect labour market growth to be around the same as economic growth.
    • Note: There are some businesses that experience more growth during recessions such as liquidation and bankruptcy firms.
  • An explanation for the discrepancy between labour market and economic growth may be due to the transitioning composition of Australia’s economy. Given that the mining boom is receding, the economy has been shifting away from resources and towards services. Thus, there has been increased jobs growth in services such as finance, real estate and education which has contributed to the declining unemployment rate. However, these services have been adding relatively less value to output as resources did. Therefore, while the labour market has been experiencing growth, economic growth continues to appear low.
  • Wages in the services sector are, on average, 40% lower than those in the mining sector. This has caused wage growth to decrease. Given that labour is a factor of production, wages contribute to the prices of goods and services. With lower wage growth, the prices of goods and services also decrease, leading to decreasing inflation.
  • The combination of the potential for unemployment figures to be revised higher and falling inflation could lead to the need to loosen monetary policy (HSC Topic Four – Economic Policies and Management).
    • Note: Glenn Stevens, governor of the RBA, has stated that there is ‘reasonable prospect for growth in the [Australian] economy following a decision to keep the cash rate on hold at 2% in February 2016.

Australian dollar hangs on Fed announcement

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The Federal Reserve has planned Federal funds rate increases for 2016. However, the turmoil in both equity and commodity markets since the beginning of the year casts this plan in doubt. The possibility of the Federal Reserve not executing all of the scheduled rate increases would support the appreciation of the Australian dollar.

How does this relate to the HSC syllabus?

  • The Federal Reserve’s plans to increase the Fed funds rate (the US version of the Australian cash rate) represents a tightening of monetary policy (HSC Topic Four – Economic Policies and Management).
  • A central bank would only tighten monetary policy if the economy is experiencing high levels of economic growth and inflation. By tightening monetary policy, the central bank restricts the supply of money in the economy and makes the more expensive for firms to borrow funds to invest in their funds. Without this investment, firms generally produce less and therefore economic growth decreases.
  • A tightening stance within the context of declining equity markets (The S&P 500 has lost 10% of its value since January), commodity prices (such as oil) and cash rates around the rest of the world can be viewed as unusual. However, it is argued that the U.S.’s job growth and struggle to fill existing positions indicates increased strength in the economy.
  • Other central banks that have lowered their cash rates to negative territories this year include Japan and Sweden. See Economics Update 31 January 2016.
  • The Federal Reserve rate decision is expected to be a major contributor to movements in the Australian dollar (HSC Topic Two – Australia's Place in the Global Economy).
    • If the Federal Reserve softens its stance on monetary policy (i.e. does not tighten as much as expected), the Australian dollar will most likely appreciate. This is because Australia, with a cash rate of 2%, has one of the highest cash rates in the world. This makes investment into Australia attractive since investors earn a higher return. To invest into Australia, investors need Australian dollars. This increases demand for the Australian dollar, causing an appreciation.
    • If the Federal Reserve maintains its stance, the Australian dollar will likely depreciate.

Further reading

Negative rate talk ‘premature’, economy fine

Sydney’s ‘war on fun’ is ridiculous. But what does it mean for the tech sector?

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Sydney residents have been expressing their annoyance in regards to the Sydney lock out laws. The existence of these laws extends beyond discontent Sydney residents however, as it can also adversely affected the flow of skilled labour into Australia, particularly in the technology sector.

How does this relate to the HSC syllabus?

  • Australia is currently shifting away from a resource based economy to a services based economy. This means that it is crucial to attract and retain skilled labour in Australia to support the growth of these services (Preliminary Topic Four – Labour Markets).
  • The lock out laws detract from Sydney’s quality of life which has deterred potential employees from migrating to Australia (HSC Topic 1 – The Global Economy). Quality of life in this case refers the availability of leisure. Conversely, it has also encouraged Australian residents to migrate for employment opportunities. The combination of reluctance to move to Sydney and residents move away can contribute greatly to the ‘brain drain’ phenomenon that Australia already struggles with.
  • One response to the need for skilled labour to support the services sector may be to implement microeconomic policy including educational programs so that existing unskilled workers become skilled (Preliminary Topic Four – Labour Markets, HSC Topic Four – Economic Policies and Management). However, microeconomic policy has a long time lag. This means that the response would probably not be effective during the current transition of the Australian economy into a services based economy.

Theresa Dang THERESA DANG

Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.

Gary Liang GARY LIANG

Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.

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