Policy Impact

Full Employment

The microeconomic reform process aims to achieve improvements in productivity. By definition, productivity gains result in a higher level of output from a smaller number of inputs. One of those inputs is labour. In other words, the implementation of microeconomic reforms in the Australian economy will almost certainly lead to a short term increase in structural unemployment. Whether or not this short term trend will be rectified in the medium to long term will depend on whether or not those industries which are encouraged to become more efficient are able to do so. Examples of both employment gains and losses can be seen in the Australian experience.

The Short Term

In the short term it is very likely that a restructured industry will experience an increase in unemployment. It is for this reason that any attempt to implement an aggregate supply policy will often be met with resistance. Australia's attempt to implement a meaningful policy in regards to climate change illustrates this point.

Under John Howard Australia was one of only two countries (the other being the USA) that refused to ratify the Kyoto Protocol. In December 2007 Kevin Rudd signed the Kyoto Protocol, and declared that climate change was "the greatest moral challenge of our time". In order to combat climate change, there are two broad options: either we need to find more efficient ways to produce things (so that less carbon is emitted), or we need to produce fewer goods and services. During Kevin Rudd's time as Prime Minister he tried very hard to gain global support for a carbon pollution reduction scheme. His efforts in Copenhagen (December 2008) were ultimately fruitless. Similarly, he was unable to secure the passage of a domestic scheme through the Australian parliament.

The problem is in the mechanism. If we reduce output then some people will undoubtedly lose their jobs. On the other hand if we find more efficient methods of production (such as alternative energy sources), this could take a significant amount of time. During this period it is possible that other countries will continue to offer products at a lower price (while also continuing to pollute). This will result in people seeking the lower priced items, and Australian businesses will lose customers. Once again jobs will be lost.

As we now know, Kevin Rudd ultimately lost his position as Prime Minister as a result of this impasse.

The Long Term

In the long term any increase in aggregate supply should result in new jobs being created. This is especially true in a globalised economy such as Australia, because the size of the market is constantly growing.

When you were studying Unit 3, you learned that there are basically two different types of investment spending. Speculative investment occurs when inflation is high; it involves purchasing an asset, and then hoping that it will increase in price so that a gain can be realised. Policies that are designed to increase aggregate supply should help to keep inflation low, and so this type of investment spending is minimised. Instead we should see more productive investment. This is when people use their money to start a business, or buy some other type of asset that will generate revenue. The significance of this is that it is productive investment that will generate employment, and so in the medium to long term aggregate supply policies should help to reduce unemployment, despite the short term increase in structural unemployment.

In the Australian experience there are clear examples of this. Shop hours were deregulated, and now there are many more people employed in the retail sector. The same is true for aviation, telecommunications and the banking sector. In each case the industry has been through significant supply side reforms, and in each case their are more people working in that industry today than there were prior to the reforms.

Therefore we can conclude that the government’s commitment to the microeconomic reform process does not contradict their commitment to maintaining a low rate of unemployment. Those industries in which jobs are lost are generally perceived to be those in which the allocation of the labour resource is inefficient. Maintaining an inefficient industry is not considered a viable way to ensure long term employment. As such, labour in those industries may need to be re-allocated into areas in which Australia is able to maintain its international competitiveness.

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