Population and Employment

Demand Factors Affecting Employment

The Australian unemployment rate changes all the time, and it can be affected by both supply and demand factors. To understand the impact of demand side factors is easy; all you need to keep in mind is that when we increase output we will probably need to increase the number of resources that we use. One of those resources is labour. As such, it makes sense that any time the aggregate demand curve moves to the right, the unemployment rate will fall.

We can explore this relationship by looking at an example. Imagine that you were asked this question during an assessment task:

Explain the demand side impact that a depreciation of the exchange rate could have on the unemployment rate in Australia.

Note that we have isolated the demand side impact here because the Australian dollar will also affect aggregate supply. For now, it is sufficient to examine one side of the market.

In previous sections, you have learned to follow a four step process when answering a question like this. Using that process in this case results in the following answer:

The exchange rate is the value of the Australian dollar expressed in another currency. When the value of the Australian dollar falls, we would expect to see demand for the goods and services we export to increase. As a result, the aggregate demand curve will shift to the right. Higher levels of production will require more resources, and as such the demand for labour might also increase; this would lead to a fall in the unemployment rate.

It is possible to extend this response by adding some supporting evidence to your statement. For this to occur, you will need to have access to the relevant statistics. In this case, you will need to see the change in the unemployment rate when compared to changes in the value of the Australian dollar.

In the graph below, the term Trade Weighted Index has been used. This is a measure that you will look at in more detail later in Unit 2. For now, all you need to know is that the Trade Weighted Index (or TWI) is a measure of the Australian dollar against all of our trading partners, rather than just with one other country.

Unemployment and the TWI

With this data, we can enhance our original answer. The first step is to consider the information that we have written in the first part of our response to this question. At that time we suggested that a fall in the value of the dollar will result in a fall in the number of people who are unemployed. The second step is to analyse the graph and see whether or not there are any instances in which this situation has occurred.

At first glance it will appear that this graph shows us the exact opposite! In order to explain this, we will need to use a fairly sophisticated analysis. Being able to explain a situation like this is one of the key skills involved in securing a high score in Economics. Careful analysis allows us to add the following three sentences to the answer that we started above:

Between 2009/10 and 2010/11, the TWI increased from 67.3 to 77.8. At the same time, the unemployment rate fell from 5.1% to 4.9%. This apparent anomoly can be explain by the fact that the appreciation of the dollar was caused by an increase in demand for our exports (especially from China), and this also helped to cause a decline in the unemployment rate.

With these three sentences, we have turned a four mark answer into a six mark answer.

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