| 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.)
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During 2006 the cash rate was increased three times, and then twice more in 2007. Despite a strong global economy, by the end of 2007 the unemployment rate in Australia had started to increase for the first time in several years; after falling as low as 4.2%, by the end of 2007 the rate had increased to 4.5%. |
| 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.
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In 2000/01 the consumer confidence index fell to 101 – the following year the unemployment rate increased from 6.4% to 6.6%. Between 2001/2 and 2003/4, the consumer confidence index increased steadily, peaking at 120. During this period, unemployment fell below 6% for the first time in many years.
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| 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.)
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Australian workers have experienced a decade 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 2004/05 disposable income increased by 5.1%. At that time consumption spending increased, and the unemployment rate fell from 5.1% to 4.6% in the following year.
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| 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.
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In 2000/01 the TWI fell to 49.7 – one of the few occasions during the reference period in which it fell below 50. At the same time, export spending increased by 7.3%, and therefore the unemployment rate fell from 6.6% to 6.4%. Although this is a very modest fall, it is significant in light of the fact that interest rates had been increased, and the tax system was being restructured at the same time.
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| 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.
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During the implementation of the new tax system in July 2000, income tax rates were significantly lowered. At the same time, consumption spending continued to increase despite the fall in confidence associated with the introduction of the new tax system. As a result, the unemployment rate continued to fall in 2000/01, and only slightly increased in the following year (back up to 6.6% from 6.4%).
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| Government Spending |
By choosing to increase their spending, the government is directly adding to the level of aggregate demand in the Australian economy. The Keating government used this policy in an attempt to reduce the number of unemployed in 1993-1996.
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In 1993/4 the Keating government ran a budget deficit of $17 billion. At the same time, the unemployment rate fell from 10.2% in that year to 8.7% in the following year – the largest fall in the unemployment rate from one year to the next in the last fifteen years. (Note: These figures are "old" because the Federal Budget is no longer used to stimulate aggregate demand in this way.)
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| 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.
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Exports improved during 2006, despite the fact that the Australian dollar was operating at a much higher level than had become the norm over the preceeding decade. This was due to the extraordinary economic growth seen in China during this period. It was also significant that Japan was beginning to re-emerge as an economic force, and the US economy was continuing its strong run. This contributed to the record low rates of unemployment seen at that time - the rate fell as low as 4.2% by mid-2007.
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Unit 1
Unit 3
