IB Economics – Internal assessment summary portfolio cover
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Title of the article
Long-Term Unemployment In Australia Rises,
Affects Overall Wellbeing
Source of article
http://www.ibtimes.com.au/long-termunemployment-australia-rises-affects-overallwellbeing-1451330
Date the article was published
07/06/2015
Date the commentary was
written
23/06/2015
Word count (750 words
maximum)
748
Section of the syllabus
Please tick the one that is
most relevant
 Section 1: Microeconomics
 Section 2: Macroeconomics
 Section 3: International economics
 Section 4: Development economics
Commentary
Unemployment is when someone between the working age of 16 – 64 who is able
and willing to work is seeking employment but cannot find a job. The work force
consists of individuals employed or unemployed and seeking work. The Australian
government’s target is to reduce its long-term unemployment due to the
consequences it is having on the economy including deterioration of overall
wellbeing.
Australia’s unemployment is due to lower aggregate demand, which is total demand
for the economy’s goods and services, caused by long-term unemployment. It
includes consumer expenditure, government spending, investment, and net exports.
Long-term unemployment increased due to less people being able to demand the
goods and services firms provide. Lower consumer expenditure forces firms to lower
prices to meet low demand and lower their costs. Employees are made redundant
instead of cutting salaries due to worker contracts, government policies or minimum
wage laws. Figure 2 shows this by a shift in Aggregate Demand for Labour to the left
meaning less labour is demanded at each wage level.
The 18% rise in long-term unemployment is due to more unemployment in the
population of younger people searching for jobs. Frictional unemployment is due to
individuals, like early school leavers and young university graduates, attempting to
find their first job but cannot due to lower demand for labour from firms trying to
keep costs low due to low AD. Unemployment in the younger population is mentally
and physically stressful. Their inability to find employment could cause health issues
due to stress, which could lead to increased welfare costs for the government in
tending to sick unemployed people. The opportunity cost for the government could
Figure 1
Figure 2
be reduced spending in other areas of the economy like education and public
infrastructure.
Figure 1 shows how AD impacts the labour market in figure 2. Due to long-term
unemployment in Australia, the economy is not producing at full employment Y FE.
AD does not intersect LRAS and SRAS at the equilibrium points PE and YFE
The labour market is affected by low demand for labour from firms who are keeping
costs of production low while lowering prices. ADL shifts left since at each wage level
fewer workers are demanded. To reduce costs, firms make employees redundant, as
they cannot lower wages due to sticky wage regulations, which is why wage levels
stay at WE. Aggregate Supply of Labour (ASL) and Total Labour Force (TLF) do not
change and the gaps between Q1 and QFE show cyclical unemployment due to lower
AD.
Figure 3
Helping young job searchers not only reduces welfare dependence but also
increases AD in both the short and long run. When individuals find work from firms
employing more workers, they will demand more goods and services due to more
disposable earned from jobs leading to more consumption, which is a component of
AD. This increases AD and shifts the AD curve to the right as shown in figure 3 from
AD to AD Short Run then to AD Long Run. Unemployed young people, the economy, and
firms benefit as young people find jobs. Firm’s costs are reduced since costs of taking
on new staff is reduced, output increases due to larger workforces, and the
economy’s AD increases in the short and long run. An employed young generation
benefits the economy in the long run because they can eventually take the place of
the older generation of workers. It also reduces the 3.9 billion dollar unemployment
welfare cost and additional costs of physical and mental welfare.
The strategy to reduce firm’s costs of production by making it cheaper to hire more
workers is an effective strategy in the case of Australia’s long-term unemployment.
Aggregate demand increases due to higher consumption from younger individuals
who have more disposable income due to the wages they are now receiving from
firms. This leads to more goods and services being demanded so firms will have to
increase aggregate supply to meet aggregate demand. Firms will be able to achieve
this as the government reduces their costs of production when hiring more workers,
allowing them to produce more with less cost. However, it depends on the
population of unemployed younger individuals. If this population consists of a small
proportion of the 2 million unemployed Australians, then aggregate demand may
not increase much as the strategy is focused towards helping young individuals. The
plan also doesn’t consider those who are not young but are still unemployed
meaning that there could still be high unemployment after the strategy comes into
effect.