VCE Economics Unit 2 AOS 2: Economic Activity

Labour market

A market for labour services, where buyers and sellers of labour services come together in exchange and where the rate of exchange is the price of labour.

Is the labour market a supply and demand market?

Yes, as price of labour rises, businesses will be incentivised to reduce the demand for labour.

The employed

When someone, over the age of 15, working more than hour per week in return for some form of measured remuneration (wage).

The unemployed

When some, over the age of 15, is without work or working less than an hour week, and actively looking for work.

Examples of unpaid work

Cooking, cleaning, ironing and gardening and volunteer work. As this work is not captured in GDP figures, the value of this work is not measured.

Shifts in the demand for labour

Any non-price factor that changes an organisation’s willingness to employ labour that will shift the demand curve for labour to the left (a decrease) or to the right (an increase).

Shifts in the supply of labour

Changes in non-price factors determine whether the quantity of labour supplied by households at any given wage will increase or decrease and shift the supply curve.

Stronger labour market conditions

Conditions develop when the demand for labour rises relative to the supply. These conditions generally occur during periods of rising economic activity.

Weaker labour market conditions

Conditions develop when the demand for labour falls relative to supply. Generally occur during periods of slowing economic activity.

Calculating labour force rate

Total number of employed + total number of unemployed

Calculating rate of employed

number of people employed/labour force x 100

Calculating the rate of unemployed

number of people unemployed/labour force x 100

Calculating the participation rate

labour force/ working age population x 100

Calculating the underemployment rate

underemployed/labour force x 100

Calculating the underutilisation rate

Unemployment rate + Underemployment rate

NAIRU

Full employment exists at the lowest rate of unemployment possible before it causes excessive rates of inflation.

Cyclical Unemployment

Generally associated with economic downturns of the business cycle.

AD impacts on low unemployment rate

When more incomes are being earned across the economy, this will lead to high levels of expenditure. When this exceeds the economy’s capacity to produce, shortages will occur in the economy, which will lead to price increases.

AS impacts on low unemployment rate

A tight labour market can cause excessive growth in wages, which will increase cost of production for suppliers. Suppliers will pass these increases on their consumers, thus causing price increases.

Structural Unemployment

Occurs because of a mismatch between skills that unemployed persons have and their skills businesses requires.

Frictional Unemployment

Persons who are currently moving from one job to another

Hidden Unemployment

Persons who would like to be working, but have given up or become discouraged from looking for work.

Long-Term Unemployment

Persons who have been unemployed for a period longer than 52 weeks.

Consequences of unemployment on individuals

Reducing a person’s income, and can negatively effect a persons enjoyment of life.

Consequences of unemployment on society

One of the major causes of inequality of income distribution.

Consequences of unemployment for businesses

Large pool of unemployed means that businesses will have more people to choose from, leading to businesses recruiting higher quality workers. However, high unemployment will lead to a huge number of households with reduced disposable income. Reducing consumption demand and thus AD.

Consequences of unemployment for the government

The government’s two biggest sources of income come from income tax and company tax, reduction in unemployment means the government will reduce the level of income tax collected.

Two broad policy types that the government can use to influence the labour market

AD Policies: Policies that focus on increasing expenditure in the economy.

AS Policies: Policies that focus on reducing structural unemployment in the economy.