Impact of Skill Shortage on Wage Growth in Australian Labor Market

The Reserve Bank of Australia gives an optimistic view regarding the trend of wage growth in the labor market. The wage growth is mainly resulted from increased labor shortage in different industries. The article analyzes the impact of skill shortage on wage growth, discusses the positive outlook of wage growth, economic analysis, and recommendations to improve skills. The article is relevant to economics and labor market courses.

Running Head: ECONOMIC ASSIGNMENT
Economic Assignment
Name of the Student
Name of the University
Author note

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Table of Contents
Introduction......................................................................................................................................2
Overview of the article....................................................................................................................2
Economic Analysis..........................................................................................................................4
Skill shortage and wage growth...................................................................................................4
Positive outlook of wage growth.................................................................................................5
Recommendation.............................................................................................................................6
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

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Introduction
In modern technologically sound world, every industry is trying to shift their production
technique to a more mechanized work. Industries thus need trained workforce for proper
utilization of such advanced technology. The availability of human resource thus become a
crucial aspect for production operation in these in this industries. Shortage of human resources
creates the main obstacles to expansion of production (Conger and Lawler 2015). Some vital
industries in Australia today have come across the problem of having workers with sufficient
training. Construction, telecommunication, hospitality, automotive are the main pillars of
Australian industry. Shortage of human resources in these industries thus have a detrimental
effect on the entire economy.
Overview of the article
The Reserve Bank of Australia give an optimistic view regarding the trend wage growth
in the labor market. The wage price index of December revealed that there is a moderate growth
of wages especially in the public sector. Employment report of this year suggests that employers
in some industries faces difficulty to have workers with demanded skills. The strong demand on
the part of employers will contribute to a decline in prominent position of underutilized laborers
in the market.
RBA has a positive outlook for the wage growth. The higher wage growth is expected to
stimulate economic activity from the resulted inflationary pressure (businessinsider.com.au
2018). The wage has increased inflationary pressure to the extent that RBA needs to take tight
monetary policy in form of rising interest rate in since late 2000s.

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Figure 1: shortage of skilled labor force
(Source: businessinsider.com.au 2018)
The report published by National Australian Bank indicates that a significant proportion
of employers are no getting desired workers from the vacant positions. The net proportion of
firms facing difficulty in hiring workers in further divided between major and minor difficulty.
The latest statistics show that it is the more than half of the Australian firms are suffering to
desired employee. This is the highest proportion ever since global financial crisis of 2008
(thewest.com.au 2018). In line with trend in recent business survey, the chief market economist
of NAB, Ivan Colhoun suggests that communication with business customer base in the last few
week has boosted confidence that pressure of high wage is expected to continue in near future. In
his last visit to corporate business houses in Queensland and Tasmania, a much improved
confidence has been observed even in areas where state has recorded significant
underperformances.
In Tasmania and Queensland major skill shortages have been experienced in mining,
manufacturing and construction services. Similar scenario has also been observed in Western and

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South Australia as well. The skilled shortage has been considered as an important sign of
economic recovery.
Economic Analysis
Skill shortage and wage growth
The balance between demand and supply is necessary to achieve a stable state of market.
The rationale is equally relevant for labor market as well guided by demand and supply of labors.
In the presence of sufficient labor supply, employers cab hire workers according to their need.
The demand and supply dynamics help to determine wage and equilibrium level of employment
in the market (Estrin, Laidler and Dietrich 2012).
External forces causing a change in demand or supply condition marks a deviation from
stable of equilibrium causing a change in wage and employment. This is exactly what is
happening to Australian labor market. Different industries in Australia faces the problem of labor
shortages (Healy, Mavromaras and Sloane 2015). More than 50 percent firms in Australia now
finds it extremely difficult to find worker to fill vacant position. Sectors like mining,
manufacturing and construction now face a shortage of qualified workers (smh.com.au 2018).
Queensland, Tasmania, Western and South Australia have accounted significant shortage of
skilled laborers. The consequence of a decline in labor shortage is graphically presented in figure
1.

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Figure 1: Effect of labor shortage
(Source: as created by Author)
The initial demand supply equilibrium in the labor market is at A. With a contraction of labor
supply due to shortage of necessary skills shifts the supply curve to S’S’. The equilibrium is now
moved to B where a higher wage (W2) has be to be hire a comparatively small number of
workers (L2).
Positive outlook of wage growth
While employers in different industry suffers from lack of labor, RBA evaluates the
positive consequences of wage growth. A higher wage resulted from supply shortage helps to
boost demand in the economy. The increased demand enhances consumption and stimulate
economic growth from demand side inflationary pressure (Boyes and Melvin 2013).

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Figure 2: Wage growth and economic growth
(Source: as created by Author)
A higher wage growth stimulates aggregate demand by increasing consumption
expenditure. This causes a shift in the aggregate demand curve to AD1. A higher national output
is obtained along with an increase in price level to P1.
Recommendation
RBA is optimistic about the wage growth in Australia. The continuous increase in wage
because of a supply shortage cannot sustain economic growth in the long run (cso.com.au 2018).
The decline in growth of major economic sectors like mining, construction and manufacturing
drag long run economic growth. Therefore, focus needs to be given to improve skills of the
laborers.
Education and training program should be arranged for providing proper training to
workers. Specific sectors as well as government should come forward for funding such training

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programs. Skill development program should be arranged from students just completed their
high school education so that the new members in the labor force acquire necessary skills.
Conclusion
Australian economy has experienced a growth in wages in the last few years. The wage
growth is mainly resulted from increased labor shortage in different industries. It has become
increasingly difficult for many Australian firms to get workers with sufficient skills and
knowledge. NAB had observed the labor shortage and prospects of wage growth in state in
Western Australia, Queensland, South Australia and Tasmania. The labor shortage though
contributes to an increases in wages but have adverse impact of industrial output. Remedial
measures thus should be taken to enhance skills.

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References
Boyes, W. and Melvin, M. (2013). Macroeconomics. Mason, OH.: South Western.
Conger, J.A. and Lawler III, E.E., 2015. Addressing the human resources knowledge gap in
corporate boardrooms. People and Strategy, 38(2), p.28.
Estrin, S., Laidler, D. and Dietrich, M. (2012). Microeconomics. Harlow: Pearson.
Healy, J., Mavromaras, K. and Sloane, P.J., 2015. Adjusting to skill shortages in Australian
SMEs. Applied Economics, 47(24), pp.2470-2487.
Scutt, D. (2018). Skill shortages are increasing in Australia. [online] Business Insider Australia.
Available at: https://www.businessinsider.com.au/australia-skill-shortages-wage-growth-rba-
interest-rate-implications-2018-3 [Accessed 25 Apr. 2018].
The West Australian. (2018). Invest in training during quiet times. [online] Available at:
https://thewest.com.au/news/north-west-telegraph/invest-in-training-during-quiet-times-ng-
b88793214z [Accessed 25 Apr. 2018].
Tomazin, F. (2018). How Australia's education debacle is still creating victims. [online] The
Sydney Morning Herald. Available at: https://www.smh.com.au/politics/federal/how-australia-s-
education-debacle-is-still-creating-victims-20180419-p4zal3.html [Accessed 25 Apr. 2018].
transformation, L. (2018). Lack of security skills has become a drag on Australia’s digital
transformation. [online] Cso.com.au. Available at: https://www.cso.com.au/article/640267/lack-
security-skills-has-become-drag-australia-digital-transformation/ [Accessed 25 Apr. 2018].