Federal Government about the Australian Labour Market and Issues Relating to Unemployment- Economics Assessment Answers

August 21, 2017
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Question:

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Economics Assignment

You are an Economist and have been asked by the Gold Coast Council of Queensland to provide advice on the policy options to deal with the increasing use of jet skis on the Broadwater. The increasing use of jet skis has had an adverse effect on other water uses and people who live in the near vicinity have complained about the excessive noise.

Question 2 

You are an Economist advising the Federal Government about the Australian Labour Market and issues relating to unemployment. The issues that you have been asked to report are:

a) if the labour market is working properly why does Australia experience simultaneous periods of unemployment and job vacancies?

b) does the minimum wage prevent lower rates of unemployment?

c) what types of unemployment are the most serious? Explain your answer.

Rationale

The questions address the following learning outcomes:

  •   be able to apply demand and supply analysis to make a range of market related decisions
  •   be able to explain and defend why it is important to understand the structure of the market in which a firm operates
  •   be able to critically examine and demonstrate why it might be necessary for government to intervene in the production of goods and services and in the distribution of income
  •   be able to examine critically the health of the economy as a whole through analysis of major economic variables and advise on likely policy alternatives

 

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Solution:

Question: 1

You are an Economist and have been asked by the Gold Coast Council of Queensland to provide advice on the policy options to deal with the increasing use of jet skis on the Broadwater. The increasing use of jet skis has had an adverse effect on other water uses and people who live in the near vicinity have complained about the excessive noise.  

Part 1

Introduction

The growing use of Jet skiers in the Gold Cost Broadwater is an issue of serious concern today. The increasing use of Jet Ski has created a noise pollution in the area. It is severely affecting the people in the near vicinity and also the marine life in the water. Exposure to the loud sound for a substantial period time is no doubt annoying and irritating. The people staying in the neighborhood is vulnerable to the disease like hair impairment, high blood pressure, heath attach and others due to constant exposure of such noise.  The marine life in the water like the fish is adversely affected by this noise pollution. On the whole, the constant use of Jet Ski is affecting adversely to the people of the area but they are not getting any appropriate compensation for that. This is known as negative externality in economic theory. Noise pollution creates negative externality like water pollution and air pollution. Negative externality, occurs when the activity of an individual adversely affect the third party but not getting paid for that. It is nothing but the external cost suffered by the third party. The noise pollution created by increasing use of jet skis on the Broadwater is a classic example of negative externality.

The Gold Coast Broadwater is really an asset for Queensland and has a huge biodiversity value.  The Gold Cast Broadwater is an important part of ecological footprint- an attraction to the visitors, residents and commercial activities. The importance of   Broadwater is not only bounded by its recreational value but thousands of people residing the area consider the fishing or the marine industry as the primary source of livelihood. Thus the environmental, ecological and economic value of Broadwater is huge. The impact of noise pollution is even more tremendous in such an important area like Gold Coast Broadwater. The increasing use of jet ski has a spill - over effect on the environment, human health and also to the marine life. This is an example of market failure with inefficient outcome that involves a deadweight loss to the society (Baseline Report - Gold Coast City Council, May 2012).

The growing concern is to find out the policy options that would help to minimize the effect and thereby internalize the negative externality. The key objective is to protect the area and its people from the ill effects of noise pollution. According to economic theory, the market is not producing a social optimal outcome, rather is the outcome much higher than the social optimal level.  Economists suggest several approaches to deal with negative externality and restore the social optimal level. One such approach is Pigouvian tax – the basic principle is let the polluters pay for the social cost generate by their activities. If some tax is imposed on the jet Skiers, it would definitely provide some incentive to reduce their production or consumption. Government intervention can easily resolve the problem with imposition of tax. As an alternative option, economist Coase has suggested the negotiation between the two private parties can also bring a feasible solution.  He believes government intervention is not required - the polluters and the pollutants can negotiate between them and come to a desirable outcome (economics online,2016)

Part: 2 Analyses

Economic analysis:

Economic analysis perceives this market failure issue as a negative externality. The heavy sound of the Jet skiers does harm to the people in the neighborhood, commercial activities in the surroundings and marine habitat residing in the huge water body.  Constant exposure to loud sound for an extended period of time pose significant problems to the third party but no suitable compensation are being paid for that. This cause a huge social cost to the society that involves a deadweight loss. The noise pollution can lead to many health issues  that involves hear impairment, high blood pressure, severe headache, hearth attack, nervous breakdown and others. Commercial activities and the business are also severely affected by the constant exposure to loud sound. Exposure to heavy noise has severely reduced the productive efficiency of the business and commercial activities in the area that involves a direct cost to the local economy. As noise pollution is a great social concern now, we have to look forward to internalize the negative externality problem by considering the external cost to the society. The Gold Coast Council has to adopt a regulation combating the noise pollution among several policy alternatives.

Graphical analysis:

The negative externality problem can be demonstrated with the help of following diagram:

Graphical analysis

In the above diagram, DD is the marginal benefit curve which is also the demand curve for jet ski. Competitive equilibrium occurs at the point A, the intersection between the marginal private benefit and the marginal private cost curve. At the private market competitive equilibrium, we have Q* as the equilibrium quantity and P* is the equilibrium price.  

But the noise pollution created the constant use of jet skiers causes a social cost to the society. Thus the marginal social cost is higher than the marginal private cost. the difference between the marginal social cost and the marginal private cost is  positive and called marginal external cost .

MSC=MPC+MEC

Socially optimal level of outcome is occurred at the point B where the marginal benefit curve intersects with the marginal social cost. QSE is the socially optimal output at this equilibrium point B. The social optimal quantity is much less than the Q* implying market is producing a greater quantity than social optimal level.  Hence it is an inefficient outcome. This involves a deadweight loss to the society as shown in the shaded triangle. The area of the triangle ABC is the deadweight loss caused by the negative externality.

Policy options through government intervention:

One major policy option to internalize the negative externality is the imposition of the corrective tax, known as the Pigouvian tax. Pigoivian tax is the tax that can be levied each unit of the output an externality generator ( here the jet skiers) agent  produce . In order to eliminate the negative externality, a tax equals to the marginal external cost must be imposed to the Jet skiers. Gold Coast Council can impose a tax (t=MEC) to the Jet skiers so that their private cost will escalate. Due to increase in their private cost, the Jet skiers will have a sufficient incentive to reduce the use.

The impact of imposition of corrective tax t can be shown in the above figure. Since the jet skiers will consider this as their private cost, the MPC curve will shift upwards from MPC to MPC’. The output will come down to the socially efficient level and our purpose will solve and the negative effects of the externality can be eliminated. Gold Coast Council can consider this policy option and carefully implement the corrective tax to the Jet skiers, reduce their production and minimize the adverse consequences (Pigouvian tax, n.d).

Private sector solutions:

Another policy option is suggested by the economist Coase that can be implemented without the intervention of the government. According to Coase theorem, if the property rights are well defined and the transaction cost is zero then the two parties can negotiates between them to reach a socially efficient solution. The affected people of the area and the pollutants can negotiate among them and can obtain the socially efficient level of production. Coase advocates that government has an important tough limited role to define the property rights. It does not depend which party is assigned the property right, the negotiation can work well as long as the property rights are well assigned. If Government can assign the property rights then Coase theorem is definitely a feasible policy option. There is no need for government intervention to get remedy from the consequence of negative externality. As a private market solution, the two parties, the externality creators and the affected population can negotiate between them, get compensated and thereby bring a fruitful solution. The private market outcome vastly depends on the bargaining power of the two parties.

Part 3:

Conclusion:

We, the people of Queensland are well aware of the huge importance of Gold Coast Broadwater. But the growing use of Jet skiers and the excessive noise created by their activity pose a serious threat to the society. The noise pollution is imposing serious environmental, economic and social impact where the impact is largely borne by the local community people. A continuous exposure to such an excessive sound for a longer period of time make the local people vulnerable to the diseases like hearing impairment or severe headache. Several research studies also confirm the direct link between the noise pollution and the life threatening diseases like heart attack or high blood pressure. The severe noise pollution is a detrimental to local economic growth as the commercial activities are also getting affected. The excessive sound leads to reduction of the productive efficiency and thereby doing harm to the local business. Moreover the marine life is also under severe threat –too much noise can cause a lot of injuries even death to the fish and other marine lives. This has a direct impact to the local economy as many of them depend on fishing and other marine industries for their livelihood. the overall well being of the people whi are residing in the area are massively  affected by this spill- over effect but they are not getting any compensation for this impact. The Jet skiers may fulfill their recreational demand but on the other hand it contributes to environmental degradation, ecological imbalance, and severe damage to human health and reduces the economic prosperity.

The key challenge is to find out the policy alternative that would reduce the harmful impact of the noise pollution. We have discussed various approaches that can be implemented to accomplish this objective. While some policy measure needs government interventions, others can be pursued by the initiatives of the private parties, without the government intervention.  Whether the government intervention is required or not to pursue the policy issues, the primary objective is to reduce the spill- over effect and restore the socially optimal solution

Going forward, I would believe the corrective tax is the best policy option in this perspective.  Jet skiers have to bear the external cost in terms of tax and thereby reduce their use. The tax revenue can be used for the developmental project of the local community. The Gold Coast council could fiancé various welfare projects of the area with this tax revenue. As an economist of Gold Coast Council, my recommendation is to impose a Pigouvian tax on the jet skiers and thereby reduce their use.

Question 2 

You are an Economist advising the Federal Government about the Australian Labour Market and issues relating to unemployment. The issues that you have been asked to report are:

  • if the labour market is working properly why does Australia experience simultaneous periods of unemployment and job vacancies?

Unemployment rate is recognized as one of the major economic indicators to assess the economic health of any economy. It is calculated as the total number of unemployed divided by the total labor force in the economy. Unemployment rate has direct relation with the business cycle fluctuation in the economy.  The economic downturn or recession is well reflected in the higher unemployment rate where as during the economic boom, the unemployment rate remains substantially low. A higher unemployment rate for a longer period of time is great economic worry across the countries and difficult to solve. Here the key problem is the co-existence of the unemployment and job vacancies in Australian labor market.

Our ongoing analysis about the current situation in Australian labor market should start with the different types of unemployment. An individual can be unemployed for various reasons and the economists categorize the unemployment in four different categories: cyclical, structural, frictional and seasonal. Cyclical unemployment is the direct impact of economic recession.  During the period of economic contraction, when the production remains low due to insufficient demand, there is huge lay off in the economy. Even many industries are forced to shut down that sincerely contributes to escalate the unemployment rate. Frictional unemployment is caused by some people who are always in search of a new job. Economists believes that there are some people who are not happy with the current job and look forward to a better or new job. This is termed as the frictional unemployment. Structural unemployment is caused by the mismatch between the skills required for a job and skills available in the labor force.  The structural unemployment is a long term phenomena because it definitely takes a longer time to develop the new skills and make the workforce competent for the new job. The rapid pace of technological advancement largely contributes to structural employment. Seasonal unemployment occurs due to the seasonal fluctuations of the demand.

Unemployment rate is obviously a complex economic indicator because of its measurement issue. Australian Bureau of Statistics (ABS) officially publishes the unemployment rate data on a monthly basis. Unemployment rate also denotes the spare capacity of the economy. We can provide the economic interpretation of the current problem of Australian labor market with the concept of structural employment.  As the economy has undergone severe structural reforms, the industrial structure of the activity also evolved and nature of job openings changed due to tremendous ace of technological advancement. The workers are currently lacking the skills required for such job vacancies and this mismatch causes the unemployment in the economy. Since the workers are unable to fulfill the requirements of the highly technologically advanced industries, they remain unemployed despite the job vacancies.  It must be noted that this issue cannot be solved in the short run, sufficient time and money must be invested to develop the new skill and close the persisting skill-gap. Since Australian economy is undergoing structural reforms with adoption of advanced technology, the structure unemployment becomes prominent and severe in the economy (Alexander Ballantyne, Daniel De Voss and David Jacobs, 2014).

  • Does the minimum wage prevent lower rates of unemployment?

Minimum wage is considered as one kind of price control imposed in the labor market. Minimum wage is defined as the minimum amount set by the government that must be legally obeyed by all the employers. No employer can hire an individual at the lower wage than minimum wage.  It is the minimum amount that every employers are bound to pay for every employment. This minimum wage was first implemented in the year 1938 under the Fair Labor Standards Act. Minimum wage is very important concept in micro economics and has vast implications in the labor market dynamics.  Any change in the minimum wage level can significantly alter the labor outcome.

Minimum wage is identified as a price floor. In order to have an effective and meaningful outcome, the minimum wage must be set above the equilibrium level. Minimum wage set below the equilibrium wage does not make any economic sense.

The impact of minimum wage: Demand – supply diagram

Let us analyze the impact of minimum wage with the help of demand supply diagram.  The price of the labor, equilibrium wage is also determined by the intersection between the demand for  and supply of labor. In the above graph, N* is the equilibrium employment and W* is the equilibrium wage.

Let us assume Wm is the minimum wage set above the equilibrium wage level. As the minimum wage is higher than the equilibrium wage it will lead to an inefficient outcome. The supply of labor will be N2 but the demand for labor falls short of N1. The direct impact of minimum wage is the voluntary unemployment of the level of N2N1.

The conventional view on the effect of minimum wage has changed to a significant extent. David Cooper, an Economic analyst at the Economic Policy Institute offers   a different view in his article The Case for Raising the Minimum wage published on May 2013 in US News. The author advocates that higher minimum wage can bring economic prosperity instead of increasing unemployment in the economy.  He proposed that higher minimum wage will help to bring many people out of the poverty line and can bring economic stability in many families. They can buy the necessary goods, pay the taxes and thereby contributes to economic growth (Cooper D. 2013).

Though the critics view, minimum wage still contributes to higher unemployment, there is empirical evidence to support their claim.  In US, the job growth rate is substantially higher in the states with the minimum wage higher the federal level. The economic rationale is higher wage leads to better productivity and greater efficiency because higher wages reduces the absenteeism, training cost and also reduce the turnover. Moreover the business can compensate the higher wage cost by raising the prices. Thus the claim that minimum wage will have an obvious effect on unemployment does not have much economic sense ((Aaron Pacitti, 2015).

  • What types of unemployment are the most serious? Explain your answer.

 

Economists have explained four types of unemployment as discussed above. Though any type of unemployment is harmful to the economy, structural unemployment hurt the most. Some critics are on the view that frictional unemployment is also dangerous but short term nature of this type of unemployment dilutes their claim. Frictional unemployment may be the refection of a economic recession but with the help of suitable monetary policy and lower interest rate, RBA can fix the problem. As soon as the economy rebounds back from the recession, the cyclical unemployment will disappear. But the structural unemployment is deeply rooted in the growth of the labor market itself and thus more dangerous. Moreover there is no short term solution eliminate the structural unemployment. If the mismatch between the requirement for the job vacancies and the available skill set of the workers are found, it is hard to resolve. It needs both time and money to train and educate the workforce and make them capable to manage the new job positions. The problem of structural unemployment is embedded in the labor market in such a way that RBA cannot fix it.

Some economists argue that during economic contraction, the line between the structural unemployment and the cyclical unemployment getting blurred. The people who become unemployed due to economic recession for a longer period of time lack significantly fell behind the current trend of industrial production procedure and technological advancement. As their skills erode , the cyclical unemployment is turned into the structural unemployment overtime (Cyril Morong, 2012).

But structural unemployment poses serious challenges to the economy. Government has to reform the policy issues especially the supply side reforms with active labor market policies like training and development.  Hence I believe structural unemployment is most serious type of unemployment with a deep and profound impact on the economy (The Economist, 2014).

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