Question

Australia's Sticky Unemployment Rate Underscores Reserve Bank of Australia (RBA)'s Monetary Policy
Challenge
Australia’s jobless rate held above 5% in May despite a surge in hiring, underscoring the Reserve Bank’s
challenge to drive down unemployment and stoke inflation.
RBA Governor Philip Lowe has made clear that easing monetary policy is not the ideal path to boosting hiring
and investment, and has urged the government to undertake structural reforms. The government is trying to
pass tax cuts that is estimated could stimulate the economy.
While the economy added 42,300 roles last month, new entrants were absorbed by a jobs market that
swelled to a record, the statistics bureau said in Sydney Thursday. That left the jobless rate at 5.2%, which is
well above the 4.5% level the RBA estimates is needed to revive price pressures.
The result was further diminished by most jobs being part-time and fewer hours worked, suggesting a less
robust labour market and likely explaining the currency rate decreasing. RBA Governor Philip Lowe resumed
cutting interest rates last week after a three-year hiatus as he bids to spur hiring and return inflation to
target.
Australia’s labour market has shown surprising resilience as hiring persisted despite weakness across much
of the economy. One explanation is that much of the hiring is coming from government-related programs
that are unrelated to prevailing economic conditions.
For much of the past year, Australia’s debt-laden households have cut spending as they grapple with
stagnant wages and watch falling house prices erode their wealth. Consumption accounts for almost 60% of
GDP and weaker spending has slowed economic growth.

Questions

1. Using a diagram, illustrate and describe Australia’s rate of inflation since 2000.

2. Using examples from the article, explain the following microeconomic concepts.

i. Diseconomies of scale

ii. Negative externalities

Answer 1

1. In the diagram below, you can find the inflation rate trends in Australia over the years from 2000.

As you can see in the diagram, the inflation rates pertaining to each year is being plotted and joined. Below the curve you can see bar plots resembling the percentage change in the inflation rate: green implies increase in inflation rate and red implies decrease in inflation rate when compared to the previous year. The fluctuations in inflation rates can be attributed to the demand-supply mechanics, fiscal policies, monetary polices and overall consumer behavior.

2. Diseconomies of scale:

We refer to diseconomies of scale when the production costs associated with the factory increases as we increase the production capacity. Quite opposite to economies of scale as you might know. In the case above, due to the increase in unemployment rate and the decrease in work hours, a less robust labor market is formed which promotes the diseconomies of scale as mentioned, i.e. increase in marginal costs associated with the production of one extra unit.

Negative externalities:

The negative externalities are the conditions in which consumption or production of the good causes harm/loss to the third party. A typical example seen in the case is the rise in jobless rate despite a change in monetary policy. This very well defeats the purpose of the RBA to counter the increasing unemployment across Australia although the hiring surged across the nation. The reason attributed to this trend is that most of the hiring is done through governmental programs which stand no relevance to most of the population and this is seen as one of the negative externalities as well.

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