Full Employment

Demand Factors and Full Employment

In general terms, we can say that an increase in aggregate demand may lead to a fall in the rate of unemployment. In theory, this can be explained by using a supply and demand graph.

With an increase in quantity, producers will need to use more resources. One of these resources is labour – as such, an increase in demand can lead to an improvement in the unemployment rate. Once again, an example with help to make this clear.

The link is difficult to discern in recent data. Business confidence fell to only -4.9 on the index in 1999/2000, and as a result there was a slight increase in unemployment in the following year. Strong increases in business confidence in the following years coincided with a marked downturn in the unemployment rate; by early 2003 the jobless figure had fallen below 6% for the first time in many years.

Despite falls in business confidence in recent years, the unemployment rate continues to fall. By late 2006, the unemployment rate was recorded at 4.8%. Once again, you must remember that there are always multiple forces acting on the economy. The former government attributed the continuing low unemployment to the changes in workplace legislation which were seen in 2006, while the Rudd Labor government believes that it has more to do with external factors which are beyond the control of the party that was in power at the time.  With a slight increase in the unemployment rate at the end of 2008, it certainly does appear that external factors are influencing the unemployment rate in this country.  It is also likely that the dramatic fall in business confidence in the second half of 2008 will affect unemployment in this country in 2009.

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