Full Employment

Supply Factors and Full Employment (2)

Supply Factor	Theoretical Link to Full Employment	Evidence
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.	The wage price index has consistently increased by around 4% per annum over the last few years. As a result, when economic conditions became more difficult in 2009 the unemployment rate quickly increased to 5.8%. On the other hand, prior to 2009 the increase in the wage price index can largely be attributed to the ongoing 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 costs.
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.	In the second half of 2009 the trade weighted index increased, increasing by over 20% during the year. This helped producers to keep other input costs down, and as a result many workers were able to maintain their positions. This helped to prevent the unemployment rate from increasing above 6% during that year.
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.	During the global financial crisis the participation rate remained remarkably steady at just over 65%. Normally during an economic downturn some people lose their motivation to seek work, and the participation rate can fall. As it remained high, the unemployment rate increased at this time, reflecting the fact that those who lost their jobs remained in the labour force.
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.	The price of raw materials increased by only 2.1% in 2008/09, which is below the recent average. Once again this helped producers to keep their input costs down, which encouraged them to support their employees during the difficult economic conditions that occurred at that time. This also contributed to the fact that the unemployment rate did not increase as much as was expected during this period, peaking at 5.8%.

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