Question

Growing inequality has become a trending topic in international macroeconomics and public debates. Some of the known drivers of long-term inequality are (i) skill-biased technological change, (ii) globalisation, (iii) automation and artificial intelligence. Discuss potential effects of the drivers above on unemployment, wages, output (aggregate demand and supply) and trade balance in a small open economy such as Australia

Answer 1

Factor of skill based technological change and use of automation and artifical intelligence, are considered as structural change in the economy, while globalization affects business environment, international trade and global sourcing . Due to structural changes and global sourcing, the unemployment rate will increase in Australia, because non-skilled workers and semi-skilled workers will get unemployed due their inability to do the jobs in high end technology environment. Structural unemployment will also increase in the country of Australia.

Wage inequality is going to increase, where workers who are more skilled are going to have higher productivity due to the technological support. Due to higher level of productivity with increased level of marginal productivity, wage rates of these skilled employees increases. But for the lower skilled workers, wage rates will decrease due to more supply than the demand, so inequality will rise in the country of Australia.

Real output of Australia will increase. It will increase first, due to the technological advancements, and second due to the specialization and international trade. Trade balance will also improve as export will increase to make the country in a better position due to the price advantage in the international market. This price advantage comes with the technological advancements and structural changes.