| Supply Factor |
Theoretical Link to Full Employment |
Evidence |
| Interest Rates |
When interest rates increase producers will need to use more of their revenues and profits to repay existing loans. They will also be discouraged from taking out new loans, and so investment rates may fall. As such any increase in the cash rate will lead to higher costs of production, and this in turn may mean a decrease in aggregate supply. Businesses may try to compensate by lowering other costs, such as wages. Therefore unemployment may increase.
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In 1999/2000 the cash rate increased to 6.0%. Remembering the impact lag associated with a change in the cash rate, 18 months later the unemployment rate increased from 6.4% to 6.6%. This occurred despite a return to confidence by both consumers and businesses after the introduction of the New Tax System.
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| Wages |
Wages are another very significant cost of production. When wages increase businesses are faced with the prospect of paying more to produce the same level of output. Once again, with the increase in production costs it is possible that aggregate supply will decrease. Producers will tend to consider the real unit labour costs, as an increase in wage levels can be sustained if productivity levels increase at a similar rate. There is a direct link between a change in wages and a change in the unemployment rate – if it is more expensive to employ people then we will employ fewer workers.
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In 2001/02 real unit labour costs decreased by 1.2%, the most significant single year decrease for the reference period. As a result, in the following year the unemployment rate decreased from 6.6% to 5.9%.
On the other hand, between 2001/02 and 2005/06 real unit labour costs have increased each year. This reflects the skills shortage that the Australian economy experienced during this period. As the increase in wages was due to the high demand for workers, it is not surprising that the unemployment rate continued to fall despite the increase in real unit labour costs.
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| The Exchange Rate |
As the value of the Australian dollar increases, the impact on aggregate supply may be very positive. When the dollar is strong we are able to purchase more productive imports. This equates to lower costs of production, and hence aggregate supply may increase. With lower costs, it is possible that businesses will be more able to offer new positions – the unemployment rate may fall.
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In 2004/05 the value of the AUD increased – up to a trade weighted index of 62.4 from 61.0 during 2003/04. As a result the unemployment rate fell to 5.1% from 5.6% the previous year.
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| The Participation Rate |
Labour is an important productive resource. As more people are encouraged to enter the labour force it means that businesses will have access to more resources (ie more people). Therefore, any increase in the participation rate should lead to an increase in aggregate supply. However, the impact on the unemployment rate is unclear. If the new people entering the market are unable to find work, the unemployment rate will increase despite the increase in aggregate supply.
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Between 2001 and 2006 the participation rate increased from 63.8% to 64.9%. This meant that more people were looking for jobs at this time. New jobs were able to be created during this period, and as a result the unemployment rate fell from 5.9% to 4.6% during this period. In 2007 the participation rate peaked at 65.2%, and yet the unemployment rate continued to fall until the last months of that year.
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| The Price of Raw Materials |
Raw materials are those products which are used to produce other goods and services. If the price of raw materials increases, businesses will be making a lower margin on each item. This may mean that they are less willing to allocate productive resources to these items, and so aggregate supply may decrease. One of the resources that may be used in lower quantities is labour – the unemployment rate may increase.
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During 2000/2001 the price of raw materials increased significantly – by 14.4%. Partly as a result of this change, the unemployment rate increased in the following year. In 2000/2001 the unemployment rate was 6.4% - the following year it had increased to 6.6%.
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| Company Tax Rates |
Again, the company tax rate represents a significant cost of production. If the tax rate falls then it is probable that company managers will see the possibility of making a higher profit. As such they should allocate more resources to the production process, and aggregate supply may increase. One resource that may be needed in higher quantities is labour – the unemployment rate may fall.
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During the tax reforms of 2000, the company tax rate was lowered from 36% to 33%, and then to 30% in the following year. As a result the unemployment rate fell consistently after 2001. More recently, the company tax rate has been steady at 30% since 2001/02. Stability in the tax rate is also significant when considering the job creation process. This period resulted in a signifcant number of jobs being created in Australia.
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Unit 1
Unit 3
