Unit 1
Unit 2
Population and Employment
Supply Factors Affecting Employment
The link between aggregate supply and the unemployment rate is not quite as simple as the previous relationships that we have explored. When you were learning about the demand side impact, we were able to conclude that any time the equilibrium point moves to the right, the unemployment rate will fall. With supply factors, you will need to look for certain types of economic conditions before you can make any conclusions.
Recall that there are three “links” that you can use when working with supply factors:
Costs of Production
Efficiency
Availability of Resources
It is only when costs of production change that we can make a definitive statement about the impact on unemployment. If workers become more productive, then it is possible that employers will be more enthusiastic about hiring new people. However, it is also possible that they won’t need as many employees to complete the work that needs to be done. As a result, the impact can not be assessed with any certainty.
Previously we examined the impact of the changing value of the Australian dollar from a demand side perspective. However, it is also true that we can expect a supply side impact when the value of the dollar changes. We are now in a position to make a more detailed analysis of the data.
Once again, we will start with a question that could appear on one of your assessment tasks:
Around 80% of all goods and services imported into Australia are used in the production process. As such, if it is cheaper for us to buy things from overseas then our margins will increase, and the aggregate supply curve will shift to the right. With this information in hand, we are now ready to write a six mark answer:
The Trade Weighted Index is a trend line showing the value of the Australian dollar against all of our major trading partners. When the TWI appreciates it will be cheaper for Australian businesses to purchase the goods and services that they use in the production process, and as such costs of production will fall. At this time, we can expect the aggregate supply curve to shift to the right. When this happens, the lower production costs could result in lower levels of unemployment. This can be seen in the data presented above; between 2000/01 and 2005/06 the TWI appreciated from 49.7 to 64.9. During the same period, the unemployment rate fell from 6.9% to 5.0%.
Eventually you will become comfortable analysing the impact of any supply or demand factor, and the impact that it will have on the Australian market. You should take note of one additional piece of information at this stage: There are three factors which will affect both aggregate demand and aggregate supply. These are the more challenging factors for analysis:Interest Rates (you might also see this referred to as “The Cash Rate”)
Wages
The Value of the Australian Dollar (including the TWI)
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