Year 12 Economics Test – March 9, 2020
Sample answer in red.
Essay plan: Australia is a small, open, mixed market economy with a role for government.
The Australian government has a number of important macroeconomic objectives it tries to
achieve. These include economic growth, internal balance (price stability and full
employment), external balance, a more equitable distribution of income and environmental
sustainability:
 A sustainable rate of economic growth to create employment opportunities and achieve
rising living standards and improvements in the quality of life.
 Price stability in terms of minimising the inflation rate to 2% to 3% which is the Reserve
Bank’s inflation target for conducting monetary policy.
 External balance by ensuring that the current account deficit is sustainable, the exchange
rate is relatively stable over time, and the foreign debt is serviced through interest
payments.
 A more equitable distribution of income to ensure minimum standards of living and to
prevent an increase in poverty.
 Environmental sustainability in terms of minimising pollution and preserving natural
ecosystems.
Fiscal policy an labour market policies are used by the Australian government to improve the
efficiency and fairness of the labour market. The labour market is an important factor market
in the Australian economy where labour resources are bought and sold. This involves
employees gaining jobs with employers to carry out activities in the production of goods and
services that contribute to Australia’s national output or Gross Domestic Product (GDP). One
of the main goals of the Australian government is to achieve full employment in the labour
market. This means that all people of working age 15−64 years who are willing and able to
work and actively looking for work can find jobs. The Non Accelerating Inflation Rate of
Unemployment (NAIRU) is a close approximation of the situation where there is full
employment in the labour market…currently around 4.5 to 5%.
The rate of unemployment that is consistent with the economy operating at or near its
potential level of output will be associated with a stable rate of inflation. This level of
unemployment is known as the Non Accelerating Inflation Rate of Unemployment (NAIRU).
When the unemployment rate deviates from the NAIRU it suggests that the economy is
producing a level of output that is above or below its potential. For example, in 2018 the
economy is producing a level of output below its potential and this has led to an
unemployment rate of around 5.5%.
The NAIRU was estimated at 5% by the Reserve Bank in 2015 and this suggests that there is
currently an unemployment gap of 0.2% of the labour force in the labour market. The NAIRU
of 5% consists of frictional and structural unemployment, with cyclical unemployment having
been reduced to zero. Therefore, the Australian labour market currently has some cyclical
unemployment or spare capacity equivalent to 0.2% of the labour force. The Australian
government’s labour market policies are very much targeted at reducing cyclical, frictional and
structural unemployment.
The Fair Work Act 2009 (Commonwealth) is one of the key Commonwealth statutes governing
the employment of mature age workers. It provides for terms and conditions of employment
and sets out the rights and responsibilities of employees, employers and employee
organisations in relation to that employment. The Fair Work Act regulates the national wage
system for employers and employees and creates a compliance and enforcement regime and
establishes several bodies to administer the Act, including Fair Work Australia (FWA) and the
FWO.
The Australian government has a broad strategy of achieving “Jobs and Growth” in the
Australian economy. Between 2013 and 2018 over one million new jobs have been created.
As suggested in the extract from Budget Paper No. 1 (2018) the labour market has
strengthened over the last year with full time jobs accounting for around three quarters of the
growth in employment. There has been broad based growth in employment across a range of
industries and in most states and territories. With a low interest rate environment because of
the expansionary stance of monetary policy, and increased government spending on new
infrastructure projects, economic growth was forecast to increase from 2.75% in 2017−18 to
3% in 2018−19. This would help to reduce the incidence of cyclical unemployment and hence
spare capacity in the labour market, with the unemployment rate forecast to fall to 5.25% in
2018−19.
Fiscal and labour market policies used by the Australian government include expenditure in
its annual budget on education, training and employment programmes to increase the
productivity and skills of workers such as young people and those unemployed but actively
looking for work. An example was the Youth Jobs PaTH programme in the 2016−17 budget
($752m) which included pre-employment skills training, internship placement and wage
subsidies to employers. The youth unemployment rate was 12.6% in April 2018 and this was
2.3 times the unemployment rate for the Australian labour force. This may reflect a number of
factors:
 A lack of education, skills and training
 A lack of work experience and job search skills
 Difficulty in finding part time or full time work to complement education or training
commitments
 A lack of job vacancies in some regions and suburbs of metropolitan areas
A much higher proportion of young people are in part time employment (54.1% in April 2018)
compared to the labour force as a whole (31.7%). This means they may not receive high
wages and conditions such as leave, superannuation and job security. A significant amount of
Australian government budgetary expenditure is allocated to education, training, employment
programmes and industrial relations.
In the 2018−19 budget the Australian government forecast spending of $9,756m on higher
education and $1,810m on vocational education and other education. Two of the major
expenditure programmes in vocational education included the National Agreement on Skills
and Workforce Development, and the Skilling Australians Fund. Expenditure on schools was
forecast in the 2018 budget to increase by 4% in real terms to $19,468m with the
implementation of the Gonski 2.0 reforms and increased school enrolments. Total expenditure
in the education portfolio was forecast at $34,736m or 7.1% of total budget outlays.
Total labour and employment affairs was forecast to receive funding of $3,782m in the
2018−19 budget consisting of the following:
 Vocational and industry training
 Labour market assistance to job seekers and industry
 Industrial relations
$1,214m
$1,899m
$669m
Assistance to the unemployed and sick comes under the Social Security and Welfare portfolio
with $10,165m forecast to be spent in 2018−19. This represents a 10.8% decrease in real
terms as the unemployment rate has fallen and there is increased enforcement of compliance
activities including the 2018−19 budget measure of Social Welfare Debt Recovery.
The Australian government’s medium term fiscal strategy and Budget Repair Strategy are
based on reducing the budget deficit and achieving budget surpluses from 2019−20. This is
likely to be put back until at least 2020-21 due to the effects of the Coronavirus on the
domestic and global economies. However, the Australian government is also committed to
creating new jobs to achieve full employment.
One of the main budget priorities in 2018−19 is $24.5b in new spending on transport and
infrastructure projects that will benefit every Australian state and territory. For example, in
NSW the construction of the new Western Sydney Airport is estimated to create 28,000 new
jobs by 2031 and act as a catalyst for the development of the broader Western Sydney
region.
An important part of the Australian government’s suite of labour market policies is its support
for enterprise bargaining arrangements under the Fair Work Act 2009 which is administered
by the Fair Work Commission and enforced by the Fair Work Ombudsman. Enterprise
agreements encourage employees usually represented by a trade union to bargain with
employers directly over wages and conditions. Enterprise agreements encourage productivity
improvements by employees at the workplace or industry level. This may encourage
employers to hire additional labour and help to reduce unemployment.
Single enterprise, multi-enterprise and Greenfields agreements are encouraged under the
Fair Work Act 2009 for employees represented by a trade union or those that engage in
collective enterprise bargaining. This allows workers to improve their training, skills and
productivity in return for higher wages and entitlements. Those involved in the bargaining
process for enterprise agreements are required to bargain in ‘good faith’. This means that
employees and employers must attempt to reach an agreement. Good faith bargaining
requirements include a bargaining representative attending and participating in meetings;
responding to proposals made by others; giving genuine consideration to proposals made by
the other party; refraining from unfair conduct; and recognising and bargaining with other
bargaining representatives over the enterprise agreement. Enterprise agreements are subject
to both a No Disadvantage Test (NDT) and a Better Off Overall Test (BOOT) to ensure that
workers are better off than under a Modern Award or the National Minimum Wage.
In seeking to achieve a more equal distribution of income the Australian government relies on
the systems of progressive taxation and expenditure on transfer payments in the budgetary
framework. Part of the 2018 budget strategy was to lower taxes for small and medium sized
businesses to encourage investment and employment. For individual taxpayers the first stage
of the Personal Income Tax Plan was to raise the 32.5% tax threshold to $90,000 and to
provide a new non-refundable tax offset of up to $530 to low and middle income earners for
the financial years between 2018−19 and 2021−22.
Some of the revenue raised by progressive taxation is redistributed to mainly low income
earners in the form of transfer or welfare payments such as Job Search Allowance and
Newstart Allowance to the unemployed and age pensions to the elderly who qualify for
income support through income and assets tests.
However, labour market policies are also used to create and support a safety net for low
income earners in the labour market such as those on adult minimum and award wages.
Under the Fair Work Act 2009 the safety net for Australian employees is made up of the
National Employment Standards, adjustments to the National Minimum Wage and
adjustments to the system of Modern Awards.
The National Employment Standards (NES) provide ten minimum standards that cover the
following conditions of work:
(i) Maximum weekly hours of work
(ii) Request for flexible working
arrangements
(iii) Parental leave and related
entitlements
(iv) Annual leave
(v) Personal/carer’s and compassionate
leave
(vi) Community service leave
(vii) Long service leave
(viii) Public holidays
(ix) Notice of termination and
redundancy pay
(x) A Fair Work Information Statement
Annual adjustments are made to the National Minimum Wage so that low paid workers are able
to maintain their real wages or purchasing power to keep up with inflation of the price level.
Annual increases are based on increasing the wages of the lowest paid workers to protect their
living standards and to reduce the incidence of poverty.
Any increase in the National Minimum Wage tends to flow on to those workers on Modern
Awards. Workers on Modern Awards (e.g. in retailing and other services) make up a large
share of part time and casual employment and often work fewer hours and earn lower wages
than other workers under enterprise agreements or individual contracts.
Large employer organisations such as the Australian Industry Group and the Business
Council of Australia are critical of these adjustments in the National Minimum Wage because
they argue that they increase business costs, reduce profitability, cause wage inflation and
lead to higher unemployment especially youth unemployment. However, the evidence
gathered by the Fair Work Commission does not generally support the assertion that higher
minimum wages cause youth unemployment. The Fair Work Commission has tended to put
more weight on improving equity in the distribution of income amongst the low paid when
handing down its annual National Minimum Wage decisions. The Reserve Bank estimated
that the 2017 increase in the NMW added 0.5% to the Wage Price Index.
As of 1st July, 2019 the minimum wage is $19.49 an hour, or $740.80 per week. Casual
employees get at least a 25 per cent loading.
At the 2019 National Minimum Wage hearing the Fair Work Commission increased the
National Minimum Wage by 3% or $19.49 per hour to $740.80 per week. It is hoped that this
large increase above inflation would lead to a rise in the real wages and living standards of
the low paid and increase equality in the distribution of income. This comes at a time when
wages growth is low at around 2% per annum and employment is increasing. The Fair Work
Commission argued that the increase was unlikely to create undue inflationary pressure and
highly unlikely to have a negative impact on employment. Many commentators argued that
the large increase in the National Minimum Wage in 2018 compensated some employees,
especially casual and part time employees, for the decision by the Fair Work Commission in
2017 to cut Sunday penalty rates in the retail, fast food, hospitality and pharmacy industries.
Any increase in the National Minimum Wage tends to flow on to Modern Awards. The Awards
Modernisation process began in 2008 under the Transition to Fairness Act 2008. This led to a
reduction in the number of federal awards from around 4,000 to 122 in 2010. Modern Awards
contain around 20 terms, ten of which are covered in the National Employment Standards.
These terms include minimum wages, types of employment, overtime and penalty rates of
pay, leave entitlements, allowances and superannuation. Modern Awards are a significant
part of the safety net in the national workplace relations system and protect around 22.7% of
Australian employees.
Modern Awards have increased the flexibility of the labour market with the inclusion of
flexibility clauses in many Modern Awards. This encourages employees and employers to
negotiate changes in workplace arrangements to meet their individual needs and enterprise
conditions. It is very important that employees know which Modern Award they are covered
by and the wages and conditions they are entitled to.
The Australian labour market has become less regulated and more flexible over time because
of legislative changes to the industrial relations system. These changes include the
introduction of enterprise bargaining and more flexibility in the administration of Modern
Awards. In 2016 the main types of employment contracts were common law contracts (37.3%
coverage), collective agreements (36.4% coverage) and awards or pay scales (22.7%
coverage). The labour market has more relative wage flexibility with the decentralisation of
wage negotiations through common law contracts and collective agreements. This means that
wage levels respond to changing economic conditions and help to support employment. For
example, during the Global Financial Crisis in 2008−09 and the economy’s transition to nonmining sources of growth between 2014 and 2018 the unemployment rate did not rise
significantly as employers tended to switch some full time employees to part time work,
helping to contain wage costs during periods of below trend growth.
While the economic objectives of the Australian government include the pursuit of full
employment, this objective is traded off with another economic objective, namely a more
equitable distribution of income to ensure minimum standards of living for all Australians and
to prevent an increase in poverty for the nation’s most vulnerable citizens. The Australian
government uses fiscal and labour market policies through its annual budget as well as the
national workplace relations system to achieve these objectives.
By giving up some of the full-employment objective the Australian government provides a
safety net for those most vulnerable in the labour market such as young people, the
unemployed, those who have been retrenched and the low paid. This helps to make the
distribution of income more equitable by providing a minimum standard of living for low
income earners and protecting the minimum entitlements of workers in the labour market and
thus ensuring Australia continues to be a land where every citizen is given a “fair-go.” [Just
one final word, with the world in the midst of a Coronavirus pandemic many experts from all
over the world are predicting a substantial fall in economic growth this year, both globally and
domestically, with many experts going so far as to forecast a major global recession as many
industries are negatively impacted by this virus.]