Spencer Hu 11Ec3 Mr Flood.

Labour market essay plus notes

Economics
Explain what is meant by the labour market. Discuss the facts affecting the
demand and supply of labour and how these have changed in recent years in
Australia.
The labour market is the place where workers and employers interact with each
other. Employers compete to hire the best, whilst workers compete for the best
satisfying job. Similar to a product market, there is a supply and demand for
labour. In this market, demand for labour comes from firms and businesses
whereas the supply of labour is provided by individuals or households. However,
the labour market is inherently more complicated than the product market. The
reason for this can be simplified down to the human factor. As such there are
many variable factors which affect the supply and demand of labour with the
labour market.
The demand for labour is often known as a derived demand, meaning that its
demand is determined by the level of demand for goods and services. Since
workers are required to produce goods and services, it would make logical sense
to think so. However, the demand for labour also comes from a broad number of
other factors including

Changes in the use of other factors of production

Firms may decide to use capital over labour due to decreased costs and
productivity. In Australia however, labour intensive sectors have been
emerging in the economy thus allowing for the unemployment rate to
stabilise despite cyclical factors.
Changes in technology
Changes in technology can affect the demand for some workers and
reduce the demand for others. Often changes in technology can improve
productivity of workers causing many firms to hire fewer workers to
increase profit margins.
Changes in product demand
The demand for labour is a derived demand. An increase in the demand
for a product will generate and increase in the demand of factors of
production, including labour. However this principle only applies in the
short run. If productivity is also taken into account then it becomes more
complicated. If the increase in demand is higher than the increase in
productivity, then firms will acquire more labour. However if productivity is
higher, firms will decide to stick with the labour they have to avoid excess
capacity. In the long run, productivity will generally increase the demand
for labour.
Changes in the industry
Emerging industries can shift the demand curve of labour to the right
whereas fading industries generally cut their demand for labour. One such
example in the Australian economy would be the end of the mining boom
and hence the reduction in the demand for mining-related labour. On the
other hand, aged care services are thriving amidst the backdrop of

Spencer Hu 11Ec3 Mr Flood. Labour market essay plus notes

Australias ageing population. This has led to a significant increase in the
demand for labour in this industry.

All these factors affect the demand for labour within the economy. However a
broad generalisation is not enough to come to conclusions given the broad
number of labour markets catering for different occupations within the economy.
Since many jobs are different, there exists different level of qualifications and
skill set requirements hence the term human capital. As such an exploration into
the supply of labour provides further insights into the labour market.
The supply of labour is provided by individuals and households and generally
determined by wage rates. It follows then that an increase in wage rates for an
industry will attract more workers. However in reality, this principle functions to a
certain extent, inhibited by two main reasons. Firstly, it would be illogical to
assume generalise labour into a single category. For different occupations, there
exist different supplies of labour. Take the finance sector for an example which
accounts for 10 percent of total jobs, it would be impossible for any worker to
easily acquire a job within the industry. The reason for this comes down to the
skills and educational requirements necessary inherent within each different job.
The second reason why the increase in wage equates to an increase in supply
principle fails to work is the backwards bending nature of the supply curve. As
wage rates increase, it will reach a point where workers are earning enough
money and therefore wish to spend more time on labour. At this point the supply
curve bends backwards, however this case usually only applies for a small
percentage of the labour market. In order to provide a thorough analysis in the
labour market, it is best to restrict the study to an upwards sloping curve of
supply. That aside, there are many general factors which affect the supply of
labour including:
1. Substitute occupations
If real wage differentials between occupations are significant, shifts in
labour from one occupation to another can occur from the desire to earn
higher incomes.
2. Barriers to entry
There may be artificial limits placed upon an industrys supply of labour.
For example for legal professions and medicine, there is often a strict
entry criterion as opposed to other occupations such as teachers. This
restriction often results in higher wage rates.
3. Occupational mobility
Occupational mobility refers to the ease at which labour can shift from one
occupation to another and hence between markets. If more people are
trained with the necessary skills, the supply of labour that occupation will
increase.
4. Non-wage outcomes

Spencer Hu 11Ec3 Mr Flood. Labour market essay plus notes

This include factors such as working conditions, job security, nonpecuniary benefits, opportunities to travel, flexible working hours. This
also affects the supply of labour for a certain job.
5. Net migration
Ultimately the supply of labour is limited by the population of a country.
Net migration refers to the final increase in people migrating to a country
with those permanently leaving subtracted from that figure. In Australia,
migration accounts for 40% of the population hence playing a significant
role in the supply of labour.

With the supply and demand of labour consistently changing throughout the
years, it becomes important to study trends in the labour market. These trends
can be summarised in the following points:

The demographic of the workforce has considerably changed with the rise
in womens participation rates attributed to changing societal attitudes. As
such, the current workforce is 72% male down from 80% in past decades.
Over 53% of women are working, up from 40 percent since 1979.
Changing work conditions within Australia has been seen as desirable by
some workers whilst undesirable for others. Over the last few decades, a
general increase has been seen in the weekly hours of work from an
average of 35 to 45 hours. However many employers and businesses are
providing more flexible and fairer arrangements for workers in return.
The increasing role of technology in our lives has altered the skill
requirements of workplaces around Australia. Structural changes can lead
to widespread unemployment. One major example would be the
replacement of bank jobs through the growth in ATMs and online banking.
Moreover, advancements in technology have led a shift from blue collar
jobs to white collar jobs.
The demise of union influence and membership, which in certain cases
leaves workers vulnerable to the individual actions of employers. The
removal of centralised wages has allowed workers to negotiate wages with
employers however this has had an adverse effect with many employers
choosing to replace these workers with others willing to work for lower
pay.

The labour market is similar to the market for goods and services however as a
result of the human factor, it also varies significantly. Generally the demand for
labour will derive from the performance of firms and ultimately the economy
while the supply of labour is determined by wage rates and the population. Many
factors such as skill requirements and education also come into play, thus
making it hard to create a perfect economic model for the labour market.

Spencer Hu 11Ec3 Mr Flood. Labour market essay plus notes

Further notes:

Nominal wage growth rose 2.3 percent over the year

Wages are rising at their slowest annual pace in at least 17 years
Private sector wages are rising at their slowest pace since 1998
Real wages increased only modestly over the past yearWith household
spending continuing to rise, household savings have been forced to
decline significantly (as households try to maintain their living standards)
Wage growth with depend on employment growth and terms of trade
End of mining boom comings with job losses as well as the end of
Australias automotive industry (unlikely the economy will absorb without
some rise in unemployment)
Falling terms of trade weighs on national income although export has
increased, total income has fallen
This has flowed through to household and business sheets resulting in
weaker wage growth and profitability

It is easy to view the current weakness in wages growth and household incomes
in Australia as simply a function of the economic cycle (loss of high wage jobs in
mining sector and their replacement by lower wage jobs in other sectors).
However it would be a mistake to blame everything on the cycle and inevitable
post mining adjustment. Focusing solely on the cycle ignores the beneficial
impact that structural reform of the labour market could have on household
incomes.
Examining wages and productivity growth over three distinct episodes shows
how important labour market reform and productivity are to wages growth. The
three episodes
1. Regulated labour market (1979-1992)
2. Labour market deregulation (1993-2007)
3. Partly re-regulated labour market after 2007

Spencer Hu 11Ec3 Mr Flood. Labour market essay plus notes

Average productivity growth was highest during the period of labour market
deregulation. Real wages also grew more rapidly during that period. If over the
past year, Australia has been able to produce the same real wage and
productivity outcomes as we averaged over 1993-2007, then average earnings
would have risen by around 2050$ instead of just 250$.
Strong wage growth matched by higher productivity expands the overall size of
the economy thus helping the unemployed get jobs as well. E.g. Australia from
1993 to 2007 had unemployment rates fall dramatically. A new round of labour
market reform that sees workers share in some of the rewards could provide a
material life in household incomes and east the post-mining transition for all
Australians. Australias labour market has been performing better than expected
this year. Unemployment will remain steady through 2016. The reasons for this
resilience come from:
1. Slower population growth (reduced immigration)
2. Low wages
3. Increase in labour-intensive services sector