Impact of Weak Wage Growth on Economic Growth

This document discusses the impact of weak wage growth on economic growth and productivity. It explains the AS/AD model and its role in determining long-term economic growth. It also explores the increase in part-time employment in Australia and its effects on the labor market. Additionally, it provides insights into the natural rate of unemployment and the long-run aggregate supply curve.

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Economics
Answer – 1
Weak wage growth implies that the revenue from tax has been less in terms of
expectation, higher payments to the government that includes family tax benefits,
and less consumer spending. Further, lower economic growth is seen owing to the
weak wage growth. The weakness in the wages is one of the vital results of the poor
performance of the living standards, as well as dissatisfaction among the public.
The weak wage growth can even be linked to the automatic enrolment of employees
into scheme of pension with mandate contribution of the employer (Mankiw et. al,
2011). In this scenario, the cost of employment is rising at a rapid pace other than
the salaries. This clearly indicates the weak wage growth puts enormous pressure on
the short-term economic growth. This results into weak productivity and thereby the
economic productivity fails to increase.
Figure 1 Weak Wage growth through AD & AS model
(Source: economicshelp.org)
Answer - 2
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Economics
The AS/AD model is one of the most important tools of economics because it is said to
provide a very basic framework for all the economic factors that present together diagram.
The diagrams and models doesn’t generally determine the speed of the economic growth
rather the aggregate demand and supply model helps to create an observation of the long term
economic growth faced of the organizations.
It has been generally observed that the cyclical unemployment is related to the rise in
importance of the framework of aggregate demand and supply because the equilibrium is
below the initial level of GDP and also a decrease in the level of GDP is observed when the
equilibrium is near the initial point (Yamarone, 2012). It is generally observed that the natural
rate of unemployment can be determined with the help of the labor market institutions present
in the economy that are built with the help of initial GDP rate. Also, they are not presented in
the diagrams. There are various abbreviations present for ascertaining the precious for
inflation are going to rise or fall also movements from a particular equilibrium to another
state that change in the price level (Egert, 2015). The model of aggregate demand and supply
will not only help us to make assumptions based on the economic structure but will also help
us to analyze other economic factors as well.
Macroeconomic is also very important in order to analyze the economic condition. It is
basically using three concepts consisting of growth, inflation rate and the low unemployment
rate in order to judge the economy. The elements of aggregate demand and aggregate supply
can be divided on the basis of economic events and policy decision making can also be
assessed (Braeutigam, 2010). The basic demand and supply model is one of the most
important instruments in economics because it helps us to bring all factors together in one
diagram and then assess the functionality and growth of the organization (Braeutigam, 2010).
The framework is observed to be very flexible because of the capability to focus on short
term aggregate demand changes and also at the same time long term changes in the aggregate
supply.
Generally, it is observed that both long and short term changes are observed in GDP which
can be analyzed easily with the help of the AS/AD model. The vertical line which is said to
represent the initial GDP rate will not only help to improve the employment level of the
organizations but also will help to increase the GDP with the gradual increase in time. The
shifts in the vertical lines can also be noticed in the diagram mentioned below which states
the pattern of economic growth over 3 years.
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Economics
There are many other factors that can help us to find the speed of the long term economic
growth rate after analyzing the investments made in human and physical capital, technology
or any other type of economic advantage that are not directly appearing in the diagram.
Figure 2 AD-AS model
(Benmelech et. al, 2018)
It is observed in the short run that GDP varies in every economy because of the different
periods that are faced by a country. However, in the aggregate demand and supply diagram, it
is clearly stated that the equilibrium level of the real GDP is considerably below the actual
GDP.
Figure 3 Equilibrium level of the real GDP
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Economics
(Kari, 2017)
Answer – 3(a)
Part time employment has increased considerably across the globe and Australia is no big
exception. Australia ranks third when it comes to the highest proportion of workers who are
employed on a part-time basis (Blanchard & Leigh, 2013).
The structure of the Australian labor market has increased with the due passage of time and
there have been major changes in the labor supply and demand of Australian labor market.
The major significant change is noted in the part-time employment. The unemployment rate
stood at a high of 11.22% in 1992 while it dropped to 5% in the year 2018. An observation in
the increase in part-time employment has been made which is considerable because it
consists of more than one-third part of the employment. The supply function of the
organization not only uses the physical labor of employees but also it needs to combine with
other paid activities like education, caring of family members and leisure(Blanchard & Leigh,
2013). Hence, in the current scenario, it is essential the firms are prone to have a strong labor
force and when the demand surge they need to hire employees on a part time basis. Such a
change in the scenario has changed the entire perspective. Hence, increment in the part time
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Economics
work force has been entirely due to the demand fluctuations wherein both the companies, as
well as the workforce can benefit.
What is the natural rate of unemployment?
The term natural unemployment can be described as the lowest rate that can be obtained in
terms of unemployment by an economy. It is also mentioned to be normal because of the
variations caused by the effects of a bad economy. Frictional employment is also a part of
natural unemployment and this type of unemployment is said to be caused because of the
changes in jobs and the shift of people from one City to another in search of other options
that and provide them with better amenities. It is a common knowledge that irrespective of
stability in the economy, there will be unemployed people always, who are in search of jobs.
Another important part of natural unemployment is the structural unemployment which
consists of the workers who fails to find the job of the organization all the organizations fail
to find the employee who is in need of a job. This problem is generally observed in the
economy during the long term. The most common economic changes that are observed to
create structural unemployment are the rapid reallocation of available jobs and technological
advances that have been made in various fields. Surplus and employment is also a part of
natural employment and is constituted of the weight control measures that are put in by union
or minimum wages law. This is also said to force the organizations to minimize their
workforce so that they can stay within the budget. This type of unemployment is observed in
every situation no matter how good the economy of a country is. Also, there is no solution to
this economic constraint. Hence, it has been stated by the most economists that if the
economy reaches a natural level of unemployment rate then the economy said to have full
employment. Generally, it has been accepted by the economist that the normal rate of
unemployment should be around 4%.
Long run aggregate supply curve
Generally, in the long run, only capital, labor, and technology measures are affected because
of the aggregate supply curve. When this point is reached, it can be stated that everything is
being used optimally in the economy. Generally, the long run aggregate supply curve is static
in nature because of the slow shift of the three ranges of the aggregate supply curve
(Benmelech et. al, 2018). This curve is perfectly vertical and reflects the belief of economist
about changing aggregate demand on the basis of the total output of the economy. Also, in
the long run, there is one quantity that will be supplied.
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Economics
Answer 3(b)
The NAIRU cannot be ascertained in a direct manner but it is real. Whether it is 5 percent or
4 percent ascertains how many people and how much money is being paid. It can be
commented as one of the important numbers for knowing the economy. Incorrect assumption
regarding will lead to issue because in this scenario it will be assumed that the workers are
scarce and companies need to start increasing pay so that new workers are recruited (Autor et.
al, 2017). Moreover, when workers are scarce, companies need to further enhance the price
that lead to further demand for increment in wages.
Figure 4 AD-AS model of NAIRU
(Kari, 2017)
The above scenario provides an apt example that the natural rate of unemployment is 6
percent. If the unemployment rate is reduced by way of increased demand then a temporary
drop in the unemployment will be witnessed but with a higher level of inflation. On the
contrary, the fall in the unemployment is unsustainable and the short run Philip curve will
move to SRPC2 and it reaches to a new point C.
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References
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