CHAPTER 8 ECONOMICS WORKBOOK

QUESTIONS
1.
a. Outline ONE economic cost and ONE social cost of unemployment. (2 marks)
An economic cost of unemployment is lower living standards, and a social cost of
unemployment is income inequality. Unemployment results in lower disposable incomes for
unemployed workers as they are reliant on social welfare payments for income. Thus, they
experience lower material living standards. Further, unemployment is more frequent in low-
income earners (e.g., young & unskilled individuals) compared to high-income earners. As
unemployment reduces the income of low-income earners further, income inequality within
the economy rises along with poverty.

b. Explain the relationship between unemployment and inflation. (4 marks)

Unemployment and inflation share an inverse relationship, whereby rises in unemployment
result in falls in inflation. When there is low unemployment, usually below the non-
accelerating rate of unemployment (NAIRU) at which there is no cyclical unemployment,
there is a shortage of skills on the labour market, so wage pressures increase as firms compete
for a limited pool of labour. This results in increased costs of production for firms (labour is
an input for production) which is transferred to consumers through a general increase in the
prices of goods and services, i.e., inflation rises. In comparison, when there is high
unemployment, there is spare capacity in the labour market, so wage pressures decrease along
with inflation. This inverse relationship between unemployment and inflation can be seen
through the Long-run Phillip’s curve:

[insert Phillip’s curve here]

c. Discuss the limitations of the official measurement of unemployment. (4 marks)

The official measurement of unemployment negatively overestimates the utilisation of labour
resources in the economy by not accounting for hidden unemployment and
underemployment. Since the official measurement states that individuals that work more than
one hour per week are considered ‘employed’, it does not account for the relative hours and
skill levels of workers. This means that highly skilled workers in low-paying or low-skill jobs
and workers who work less hours than they desire are still considered ‘employed’, even
though they are being underutilised. Thus, the measurement disregards underemployment.
Furthermore, the official measurement does not account for individuals who have become
discouraged from searching work but would take up suitable employment if it were available,
that is, the hidden unemployed.

2.
a. 85.3%

b. 10.3%

c. Hidden unemployment

d. -5.2%
 e. Briefly explain how changes in the level of underemployment might not affect the
unemployment rate. (2 marks)
Changes in underemployment might not affect the unemployment rate because
underemployed individuals are still considered ‘employed’ by official statistics. If
underemployment falls, individuals are working more hours, however, they were considered
employed prior to this as well. If underemployment rises, more individuals are working less
hours than they desire, however, they are still considered ‘employed’. Thus, unemployment
might not be affected by changes in the level of underemployment.

f. Discuss what measures the government might take to increase the labour force
participation rate. (4 marks)  TBH I HAVE NO CLUE
The government may utilise expansionary fiscal policy through increased government
expenditure or may make changes to the federal minimum wage rate to increase the labour
force participation rate. Through increased government expenditure on social welfare, skills
training and Jobseeker payments, individuals are encouraged to join the labour force and
search for work, thereby increasing the labour force participation rate. However, this will be
seen as a short-term increase in the unemployment rate. Then, by increasing the minimum
wage rate, individuals will be encouraged to work due to the higher possibilities of earning,
thereby increasing the labour force participation rate again. However, firms will search for
more skilled labour due to the higher production costs that the minimum wage will entail.

3.
a. Outline the relationship between economic growth and unemployment. (3 marks)
There is a high correlation between economic growth and the unemployment. As economic
growth increases, the level of demand for goods and services in an economy increases, also
known as growth in aggregate demand. Since the demand for labour is a demand derived
from the demand for goods and services within an economy, firms employ more labour to
satisfy this increase in demand, thereby reducing unemployment. Conversely, if economic
growth decreases, the level of demand for goods and services in an economy also decreases,
also known as a fall in aggregate demand. This means that firms are selling less products and
so they lay off workers to maintain profits, thus unemployment increases.

b. Outline ONE cause of unemployment. (1 mark)

Unemployment may be caused by structural changes in the economy. This type of
unemployment is known as structural unemployment, whereby there is a mismatch of labour
skills with the skills required by firms usually due to technological change or changes in
consumer demand.

c. SKIPPING.

d. Explain the relationship between productivity and unemployment. (3 marks)

There is a high correlation between labour productivity and unemployment in the short-term.
As labour productivity rises, unemployment also rises in the short-term as less labour is
needed per unit of output produced so firms save production costs by laying off workers. As
labour productivity falls, more labour is needed to produce the same amount of output.
However, in the long-term, high labour productivity results in increased amount of output and
 thus, economic growth. Thus, in the short-term, productivity results in an increase in
unemployment.

Mining Boom GFC Pre-Covid Early COVID Mid-Covid COVID

(2001 to 2008, (2008 - (2015- (2019- early (2020 - Recovery
then 2011 to 2010) 2019) 2020) 2021) (present) 
2013)

Economic 3.4% 1.9% 2.6% -7% in June 3.3% 4.1%

Growth 2020

Unemployment 4% 5.6% 5.3% 7.4% 4.5% 4%

Inflation 5% 1.8% 1.5% -0.3% 3.8% 5.1%

Wage Growth 4.3% 2.15% 1.4% 2.3% 2.3%

Savings Rate 4% 5% 23% 11% 13%