Full Employment

Demand Factors and Full Employment (2)

Demand Factor	Theoretical Link to Full Employment	Evidence
Interest rates	When interest rates are decreased the discretionary income of consumers and businesses will increase. As a result, we may see increased spending on consumption items (C) and business investment (I). (It is important to remember that there is an 18 month impact lag with changes in the cash rate.)	During 2008 the cash rate was increased to 7.25%, which is the highest figure that has been seen in the last five years. By mid 2009 (after allowing for the impact lag) the unemployment rate had increased to 5.8%.
Consumer Confidence	As consumers become more confident about their economic future, they are more likely to spend the disposable income that is available to them. This will increase the consumption component of aggregate demand, and as a result we will see an overall increase in AD. This may create the need for more workers to satisfy the increase in consumption spending.	During 2007 consumer confidence increased, reaching a figure of 121.5 (according to the Westpac Index of Consumer Sentiment) by June of that year. As a result despite uncertain global conditions consumption spending increased, and the unemployment rate fell to 4.2% during the following twelve months.
Wage levels	If wages increase this will allow for higher disposable incomes amongst the public. Again, this should lead to an increase in consumption spending (C) and therefore an increase in aggregate demand. There may be a slight lag in the impact on the economy associated with changes in income levels. (It is important to note that wages will affect both supply and demand – this is particularly true of the impact on employment growth.)	Australian workers have experienced an extended period of strong wage growth. This has resulted in an increase in consumption, and with it a fairly consistent fall in the rate of unemployment. Specifically, in 2007/08 the average wage increased from $1027.80 to $1079.00 (per week for a full time, adult worker), and in that year unemployment fell from 4.8% to 4.3%.
The value of the Australian dollar	Changes in the value of the AUD will affect the willingness of people and businesses overseas to purchase our exports. If the AUD depreciates, this will lead to our products appearing relatively cheaper on the international market, and therefore our exports will increase. This equates to an increase in aggregate demand. At these times, there may be an increase in the rate of employment in the export sector. However, jobs that rely on imports may be at some risk.	In early 2009 the TWI fell to 53.2 – one of the few occasions during the reference period in which it fell. Despite significant instability in the external sector at that time, exports were encouraged. Even though there was a strong recession in the USA, exports to that country increased at this time. This helped to create jobs, as was a major contributor to the fact that unemployment did not go above 6% during 2009.
Income Tax Rates	If income tax rates fall, consumers will have a higher disposable income. Even though their actual pay has not changed, they will have more money to take home. This will lead to higher levels of consumption spending (C) and therefore higher levels of aggregate demand. Once again, this may lead to the need for higher levels of employment.	Ongoing tax reform in recent years has resulted in income tax rates being reduced several times. In the 2009/10 federal budget the treasurer announced tax cuts, and as a result consumption spending increased during that year. This factor also helped to ensure that the unemployment rate peaked at 5.8% in that year, which was well below forecasts that had been published by both the federal government and international organisations (like the IMF).
Government Spending	By choosing to increase their spending, the government is directly adding to the level of aggregate demand in the Australian economy.	In 2008/09 and 2009/10 the federal government used large budget deficits to try and stimulate economic activity. Their efforts at that time were successful, because (as noted above) the unemployment rate peaked at 5.8% in that year, which was well below figure that had been anticipated when the budget was handed down.
Overseas Economic Conditions	If our major trading partners are experiencing strong economic conditions, then it is likely that they will demand more of our exports. The increase in demand for these goods and service will lead to an increase in aggregate demand. Once again, this should have a strong impact on jobs in the export sector.	Exports improved during 2007/08, despite the fact that the Australian dollar was operating at a much higher level than had become the norm over the preceding decade. This was due to the extraordinary economic growth seen in China during this period. This contributed to the record low rates of unemployment seen at that time - the rate fell as low as 4.2% by mid-2008.

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