Demand and Supply of Labour Essay PDF

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Concise essay on the demand and supply of labour with diagrams...

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Outline factors affecting the demand for and supply of labour and evaluate the impact of changes in economic activity on wages and employment in the Australian economy. Analyse the factors that influence the labour market in the Australian economy.

Introduction The Australian labour market involves the availability of employment in terms of the factors that determine the demand and supply of labour. Wages equilibrates the demand and supply of labour; reflecting the value of the product produced from labour. In exchange for wages, workers supply labour with employment. The labour market condition has declined during COVID-19 as unemployment rose from 5.3% in 2019 to 7.5% in July 2020.

Demand for labour The demand for labour is a derived demand meaning the value of labour is derived from the value of the output in the goods and services market. It is influenced by the firm's output, labour productivity and labour costs. In the short run, factors of production are fixed, therefore demand for labour only changes in the long run, with variable factors. However, during COVID-19, the employment to population ratio fell from 62.07% in 2019 to 59.8%, an exceptional circumstance. Reduced household spending and social distancing crushed demand for goods and services. Thus small and medium-sized enterprises (SMEs), expecting a poor return on investment, have reduced investments, further depressing productivity growth as the profit gained from the output does not offset labour costs—including wages and labour on-costs. This reduces aggregate demand, giving rise to a "supply-demand doom loop". SMEs are forced to lower their prices, creating cyclical unemployment and underemployment as the NAIRU level is passed and derived labour demand falls, evidenced by the 9.2% decline in hours worked.

The aggregate demand curve in the aggregate demand and supply curve (Figure 1) shifts to the left, reducing real GDP and consumer income, thus reducing consumption. The demand

for goods and services falls meaning employers will devalue labour as output falls. Thus, derived labour demand will decline, and the factors of production will fall as unemployment and underemployment increase.

Supply of labour Supply of labour refers to the amount of labour, measured in person-hours, offered for hire during a given time-period, determined by the labour force participation rate. Individuals are more likely to work when higher wages are offered, as it makes their leisure more expensive relative to working. The high minimum wage of $19.84, in normal circumstances leads to the income effect, where consumers increase consumption due to higher real income. However ****the COVID-19 pandemic has halted work and lowered wages amidst business closures and lockdowns. The Australian Council of Trade Unions has called for the Morrison government to implement a paid pandemic leave plan to guarantee displaced workers reimbursement on their wages. Currently, 44% of workers have no paid leave due to being in insecure work. Paid pandemic leave is a crucial public health measure, dissuading low-wage workers from continuing work sick. This will better working conditions and ensure the productivity and employment of existing workers and thus the supply of labour in the industry. The Fair Work Commission extended paid pandemic leave to workers in the aged care sector, which is mostly casualised. Thus alleviating economic stress by increasing financial security as currently, 60% of residential care homes have reported a loss. Due to the inelastic supply of labour for jobs requiring high education and training qualifications, casualised workers must seek entry-level jobs. However, structural change means the demand for jobs vastly exceeds vacancies with a ratio of 20.69:1 in 2020 meaning COVID-19 is stagnating the economy and the labour market. If unskilled workers are displaced, they will be unable compete for vacancies, thus reducing labour supply. Further, wages will continue to stagnate until unemployment falls below 4.5%—the RBA ideal level. In the medium term, the cost of living will outpace individual income and wages, thus increasing bankruptcy filings. The labour market will take considerable time to recover from the unemployment and wage stagnation of COVID-19.

Conclusion Achieving a balance between the demand and supply of labour is crucial in maintaining economic growth; especially amidst the COVID-19 recession which spells short and long term impacts on wage and employment....