Economic_Poicy_and_Management_Latest (1).pptx

Economic
Policy And
Management
• The Objectives of Economic Policy
• Fiscal Policy
• Monetary Policy
• Microenomic Policy
• Labour Markey Policies

Broad Objectives of Economic
Policies and Management
Economic Policy has a number of general objectives in relation
to:
economic growth and quality of life
achieving full employment
maintaining price stability
maintaining external stability
achieving environmental sustainability
achieving a fair and equitable distribution of income

Broad Objectives of Economic
Policies and Management
Economic Policy has a number of MAJOR objectives in relation to:
1. Economic Growth: An increase in the level of goods and services
produced in an economy, increasing the number of material wants
satisfied, and raising the living standards of individuals in the economy
2. Internal Balance: Pursuing goals of price stability (low inflation) and
full employment
3. External Balance: Keeping the CAD, foreign liabilities and exchange
rate at stable and sustainable levels.

Economic Growth and Quality of Life
FULL EMPLOYMENT
The economy aims to be at the NAIRU —
there is always a certain level of frictional
seasonal, structural and hard-core
unemployment in the economy caused by
supply side factors rather than deficiency in
demand
If Full Employment can be achieved,
benefits will flow to the economy generally
these will include, but not be limited to the
following:
• Fully utilising the economy’s current
capacity to produce, increasing living
standards
• Minimising the adverse economic and
social problems associated with
unemployment (e.g. loss of workforce
skills, inequality)

Economic Growth
and Quality of Life
PRICE STABILITY
The aim of Macroeconomic Policy
Measures is to:
• Keep inflation at an acceptable level to
cause minimal distortion to the economy
• The Government is aware of the impacts
of High inflation in 1970s and 1980s in
industrialised nations, including Australia.
• The govt and RBA aim to sustain the
average rate of inflation at 2-3% over the
course of the business cycle.

Economic Growth
and Quality of Life
PRICE STABILITY
What are the consequences of Price Instability
(high Inflation):
• Reduced real income and wealth
• Reduced international competitiveness due to rising
costs of production
• Depreciation in exchange rate as forex markets lose
confidence in an economy
• Uncertainty about future costs and distorted
economic decision making
• Distorted patterns of resource allocation >
encourages speculation in relatively
unproductive activities (e.g. buying and selling of
existing real estate) that simply
redistribute income, discourage savings and
investment in productive activities that contribute to
higher output

External Stability in the
Economy
Policies will aim at
Achieving a sustainable
Position on the CAD
What is it that will help us achieve this?
• Balancing payments for imports of goods and services, as well as other
income payments, with our receipts for exports of goods and services as well
as other income receipts. Recent economic times has seen Australia benefit
greatly from net good receipts through exports in the Mining sector. Exports
from Services still remain critically important
• Maintaining a Low CAD!
 Net foreign debt as a % of GDP
• The economy must be able to afford to make interest payments on debt and
not be exposed to risk of financial crisis due to reliance on foreign inflows
from overseas
 Net foreign liabilities as a % of GDP
• Foreign investment facilitates growth and encourages job creation within the
economy
• However, at the same time, it also creates income outflows over the long
term which go down as a deficit item on the Current Account. We should
aim to keep net foreign liabilities at an acceptable proportion of net GDP.

External Stability in
the Economy
Policies will aim at
Achieving a
sustainable Position
on the CAD
What is it that will help us achieve this?
Harnessing the benefits of Positive
Terms of Trade
• Improving Terms of Trade improves
external stability as it indicates that Aust can
buy more imports with a given quantity of
exports.
• Governments cannot directly target
improving the Terms of Trade with any
Policies, but can introduce policies that
facilitate shifts of the economy’s resources
towards industries that produce goods and
services with greater value, harnessing the
benefits of positive terms of trade.

External Stability in the Economy
Policies will aim at Achieving a
Stable Currency /Exchange Rate
and International Competitiveness
What is the importance of a stable
currency that is absent of large and
volatile fluctuations?
• An Australian dollar that is
strengthening is a Measure of
international confidence in the
economy.
• High volatility in the Australian Dollar
reflects a lack of external stability
• A stable exchange rate reflects
Australia’s competitiveness in the long
term
• Improving international
competitiveness minimises the
leakage from a trade deficit, reducing
the CAD and reducing the growth of
foreign debt over time

Environmental
Sustainability
• Economic activity may cause side effects such as pollution
and depletion of natural resources. These are known as
Negative externalities to Economists. Economists are
always required to come up with ways to minimise the
production of negative externalities while still allowing the
economy to make use of the resource in question.
• Environmental objectives are a part of a Governments
overall economic framework of management and a major
amount of money will be spent by Commonwealth and
State Govt’s on Environmental Programs.
• Traditionally, Govt’s have been willing to trade off longer
term Environmental objectives in favour of some shorter
term economic objectives.
• The growing world recognition of Climate Change as a
global economic and environmental issue of concern has
meant that every nation should stop, listen and take a
concerted approach when it comes to that particular
environmental issue of sustainability.

The Goals of
Government
Policy in 2022
The Accepted Broad Goals of Government Policy in
2022 are:
Execute Economic Recovery
Minimise the Rise in Unemployment
Increase Productivity and the Sustainable Rate of
Growth in the Longer Term
Monitor the Rate of Inflation which has become
problematic in the 2nd half of 2022
Minimise the Budget Deficit and Maintain Investor
Confidence
Improve the Distribution of Income and Wealth in
Australia
Promote and Improve Environmental Sustainability.

The Goals of
Government
Policy in 2022
ECONOMIC RECOVERY
• A priority is to continue the level of economic growth as Australia emerges from
the most severe economic down turn since the great depression in the 1930’s.
Our long term potential growth rate needs to be 2.75%.
• Last year’s Budget forecast a resurgence in growth of 4.25%, before falling back
to 2.5 % in 2022 and 2023. This has not quite been our tracked route.
• Fiscal policy has played a major part in our policy mix, with the largest fiscal
stimulus in our history being applied to the economy. By Mid 2021, the Govt
had committed 311 Billion in health and Economic Support initiatives and the
budget deficit had sored to 161 billion and 8% of GDP.
• Specific sectors felt the pandemic worst than others, like international aviation,
the arts and international education. The government provided special
assistance to these sectors.
• Monetary policy played an important role, with the cash rate reduced to its
lowest level in history to encourage household consumption and business
investment.
• The reserve bank launched a program of purchasing a 100 billion dollars of
government bonds, known as quantitative easing, to keep long term interest
rates low. IN 2021 it announce that the program would be extended for
another 100 billion dollars worth of bond purchases.

The Goals of Government Policy in 2022
REDUCING UNEMPLOYMENT
• By 2021 with the economy recovering, there were more jobs than before the pandemic, with
unemployment forecast to fall below 5% in 2022 and 4.75% the following year.
• An important reason for the optimistic forecasting was the Govt’s Jobkeeper Policy in 2020 and
2021. This policy supported 1.1 million people and 385 000 organisations at the height of the
pandemic, containing the rise in the unemployment rate to just 7%. Had more jobs been lost, it
would have taken much longer to reconnect workers with an employer.
• A number of specific Labour Market initiatives were deployed during the recovery phase. These
included the 500 million Job Trainer fund for free and low fee education courses as well as 2.7
billion for more Apprenticeships.

The Goals of Government
Policy in 2022
INCREASING PRODUCTIVITY AND A SUSTAINABLE RATE OF GROWTH
IN THE LONGER TERM
• Australia’s Policy mix for the last four decades has had a focus of implementing structural changes
aimed at achieving long term economic growth. This has required productivity improvements, greater
workforce participation and policies to address capacity constraints in the economy.
• Policies to increase Australia's weak productivity growth include reforms in Education and Training,
promoting greater competition in key sectors of the economy, and national streamlining of state
regulations.
• Investment in National Infrastructure projects like Ports, railways and National Highways and transport
routes will all aide improvements in long term productivity in the economy.

The Goals of Government Policy in 2022
MAINTAIN LOW INFLATION
• The target of the Govt and the Reserve bank is 2-3% for inflation on average over the Economic Cycle.
• Australia has experienced persistently low inflation since the 1990’s which has been a blessing in many
ways and allowed us to be quite aggressive on tightening cycles when necessary.
• Underlying inflation remained at just over 1% during 2021 and RBA was forecasting that it would
remain there until at least 2023.
• Unfortunately, a number of global factors, including the war in Ukraine have changed, and now
Inflation is one of the worlds greatest economic concerns. Major economies of the world are
experiencing high inflation rates at the same time as Low growth rates. This is the worst possible
combination for policy makers.
• At the time of writing, the following was the case:
• USA Inflation - 9.1% Economic Growth – Forecast 2.4 %
• Aust Inflation - 5.1 Q1 Economic Growth - Forecast 3.6 %
• Europe Inflation - >8% Economic Growth - Forecast 2.7%

The Goals of
Government
Policy in
2022
MAINTAIN LOW
INFLATION

The Goals of
Government
Policy in 2022
THE TWO PHASE APPROACH TO FISCAL POLICY
• THE GOVERNMENT HAS A TWO PHASE POLICY WITH ITS
FISCAL POLICY.
• PHASE 1 – During the Covid Pandemic economic recession
significant Budget deficits will be run while the budget is
used to support economic growth and job creation.
• Phase 2 – Once unemployment shifts back to pre
pandemic levels and the economy is operating at pre crisis
levels of activity, the fiscal strategy will shift to its medium
term strategy where fiscal discipline will be the order of
the day with the aim of stabilising and reducing Debt
levels so that they are a sustainable proportion of GDP.
• This policy is less ambitious than the previous objective of
returning the Budget to Surplus.

The Goals of
Government
Policy in 2022
PROMOTE ENVIRONMENTAL SUSTAINABILITY
• Questions about the significance of environmental sustainability as a
economic issue resurfaced again during Covid in Australia. While many
countries have prioritised low carbon industries and adopted low carbon
infrastructure in their recovery plans, none of the Australian Govt’s 15
priority infrastructure development projects had a focus on
environmental goals.
• Policies such as a reduction in greenhouse gas emissions, an
improvement in energy sustainability efficiency, a reduction in the use of
old growth forests for the timber industry, or a limit on development in
certain areas.
• Traditionally, governments have been willing to trade-off some longer
term environmental objectives in favour of the benefits of increased
economic activity in the short term.
• Ecologically sustainable development: An increasingly important
economic objective with growing recognition of the serious impacts of
economic activity on climate change.
• Australian developers need to remain mindful of the competing nature
of their goals and the goals set for all economies at the 2021 Glasgow
world Leaders summit on Climate Change. At this summit Australia
refused to sign a net zero emissions target by 2050.
• Instead Australia’s current position on Climate change is a target of
reducing greenhouse gas emissions by 26-28% by 2030. This is big
step up from our previous commitment of reducing emissions to 5%
below 2000 levels by 2020.

The Goals of Government
Policy in 2022
Improving Distribution of Income and Wealth
• Governments agree that societies should make provision for the needs of
those whose Income and Wealth will not provide for themselves — aged
persons, people with disabilities or illness, those unable to find work
• They aim to reduce some of the gap between higher and lower income
earners through redistribution policies, higher tax rates for high income
earners, social security payments for lower income earners.
• Policies to improve opportunities for younger Australians who grew up in
disadvantaged areas or have limited educational opportunities,
addresses poverty trap issue. Other policies covering this include:
Education funding reforms for disadvantaged schools, welfare changes
involving increases to the aged pension, Changes to the National
Disability Insurance scheme to advantage those with significant disability.
• Besides Jobkeeper during Covid 19, the Govt also temporarily doubled
the unemployment benefit and made it easier to access for unemployed
workers in the economy.
• In the 2021-22 budget the Government allocated 3.4 billion dollars to
woman’s safety economic security and wellbeing, including more
childcare funding.

Conflicts in Government
Policy Objectives
Achieving simultaneous reductions in Unemployment and
Inflation.
• Stronger aggregate demand causes unemployment to
fall, but it is also likely to put upward pressure on prices.
Likewise, falls in aggregate demand will cause a rise in
unemployment but most likely a corresponding
reductions in price pressures. The relationship between
Inflation and Unemployment is an INVERSE relationship,
so policy makers often have to trade one off against the
other. This relationship is shown by the Phillips Curve.

Conflicts in
Government
Policy
Objectives
Achieving Economic Growth and External Balance
• Strong Economic Growth often results in a deterioration in the
Current Account on the Balance of Balancements.. Higher
Economic Growth is usually associated with higher levels of
Consumption and Investment, which causes the volume of
imports to rise. Causes the CAD to worsen , and ultimately
helps to restrict economic growth.
Achieving Rapid Economic Growth and Environmental
Sustainability.
• Rapid Economic growth will often result in environmental
degradation, overuse of natural resources, destruction of
natural landscapes and landforms by multinational companies
such as Mining Companies.

The Budget
as the
Centrepiece
Policy Plan
• Australia entered the COVID-19 pandemic from a
position of economic and fiscal strength. The Budget was
in balance for the first time in 11 years with workforce
participation at a record high and welfare dependency at
its lowest in a generation.
• A strong fiscal position allowed the Government to
respond decisively to the once-in-a-century pandemic
with $291 billion in economic support. The speed of our
economic recovery exceeded the most optimistic of our
expectations and Australia outperformed every major
advanced economy. The Government's Economic and
Fiscal Strategy will secured the economic recovery by
supporting strong and sustainable private sector led
growth and job creation to drive the unemployment rate
down to pre-crisis levels or lower.

The Budget as
the
Centrepiece
Policy Plan
• This Budget is the next stage of the Government’s economic
plan to secure Australia’s recovery. Monetary Policy remains
difficult with Interest Rates at Low Levels, but now on the rise.
• The Budget and Fiscal Policy Measures creates jobs,
guarantees essential services and builds a more resilient and
secure Australia.
The Economy
 Economic growth is forecast to hit 3.5 per cent in 2022-23, an
upwards revision from a year ago. It will then cool to 2.5 per
cent.
 Australia’s 3.5 per cent unemployment rate (June 2022) is
already the lowest it has been since 1974 and it’s forecast to
fall further. This well below the 5.5 per cent forecast last year
and the worst-case predictions of 8 per cent.
 Wages growth remains incredibly flat and a continued
concern for policy makers.

The Budget
as the
Centrepiece
Policy Plan
• KEY FISCAL OUTCOMES FROM THE BUDGET in 2022/2023:
Debt and Deficit
 The Budget Deficit for 2022-2023 is 78 Billion
 The 2022-23 net debt has been revised down from the $835
billion forecast a year ago to $714.9 billion. Higher
employment rates, lower welfare payments and higher
revenues from resources are driving this $121 billion
improvement.
 The forecast net debt for the following two years is a
combined $1594 billion – a huge figure, but a $307 billion
improvement on the $1901 billion forecast a year ago.
 Net debt is now expected to peak in 2025-26 at 33.1 per cent
before slowly beginning to decline.

The Budget as the Centrepiece Policy Plan
KEY FISCAL MEASURES FROM THE BUDGET:
• From 1 July this year, over 10 million individuals will receive a one-off $420
cost of living tax offset.
• Combined with the low and middle income tax offset (LMITO), eligible low-
and middle-income earners will receive up to $1,500 for a single income
household, or up to $3,000 for a dual income household.
• This builds on the estimated $40 billion in tax relief under the Personal
Income Tax Plan that has flowed to households since the start of the
pandemic, and will help individuals meet rising cost of living pressures.

Targeted
Fiscal support
to boost the
recovery:
Tax Cuts for
Individuals

Targeted
Fiscal
support to
boost the
recovery.
Tax Cuts for
Businesses
Last Budget, the Government provided
$105 million in tax relief for around 20,000 small
to medium businesses to access ten small
business tax concessions. The Government will
deliver more than $16 billion in tax cuts to small
and medium businesses by 2023-24.
The extension of these measures will deliver an
additional $20.7 billion in tax relief to businesses
over the forward estimates period. The measures,
including the extension, are estimated to support
around $320 billion worth of investment and
create around 60,000 jobs by the end of 2022-23

The Economic Policy Mix
• Governments use a mixture of Macroeconomic and
Microeconomic policies to achieve their economic
goals for the economy. This mixture of policies is
known as the Policy Mix.
• Macroeconomic Policies like Fiscal Policy (Taxation
policy) and Monetary Policy (Interest Rate Policy) will
impact on the whole economy. Macroeconomic
policies tend to be working the demand side of the
economy. Microeconomic Policies will be targeted at
particular firms, industries or markets as they attempt
to change the supply side of the economy.
MACROECONOMIC POLICY
• The main role of the role of Macroeconomic Policy is
to Flaten the Business Cycle, ensuring the distance
from crests to troughs is not too high.

The Economic
Policy Mix
MACROECONOMIC POLICY
Government Macroeconomic Policy is designed to minimise the fluctuations
in the business cycle so that inflation is not too high at the peak of the cycle ,
and unemployment is not too high at the depth of the downturns.
Macroeconomic Policies are what are known as Countercyclical. They can be
adjusted to counter the economic cycle if the economy is running too fast or
too slow.
- Higher taxes will reduce Consumer disposable income, thus reducing levels
of aggregate demand and the pressures on inflation and the CAD.
- Reduced Govt Spending will also reduce the level of aggregate demand by
lowering the total level of aggregate expenditure in the economy.
- Higher Interest Rates make borrowing money less attractive and saving
money more attractive. This reduces the level of consumption and
Investment in the economy.
- The Covid 19 downturn , as well as previous downturns, have proven that
Macroeconomic tools like Fiscal Stimulus , Expansionary Monetary Policy
Settings (Low Interest Rates) are effective at stimulating aggregate demand.

The Economic Policy Mix
MICROECONOMIC POLICY
Microeconomic policy is action taken by
govt to improve resource allocation
between firms and industries in order to
maximise output from scarce resources.
Microeconomic policies are central to
ensuring an economy removes long term
constraints to achieving low inflation and
economic growth.
Microeconomic Policy over recent decades
has reflected a change to focus on the
Supply Side of the Economy and not just
the demand side. Govt’s have wrestled
with the fact that Macro Policies that
purely focus on the demand side of the
economy fail to address the issues of
productivity, worker participation and
international competitiveness.

So what
about
Monetary
Policy into
the future???
• What do the RBA minutes currently say?
• Turning to the labour market, members noted that labour market conditions were
the tightest in decades. At 3.9 per cent in April, the unemployment rate was at its
lowest level in nearly 50 years, when the participation rate was also much lower
than it is currently.
• Members agreed that inflation in Australia had increased significantly owing to both
global and domestic factors; it had also become more broadly based. Domestically,
capacity constraints in some sectors and the tightening in labour market conditions
had contributed to this. Higher prices for electricity and gas and recent increases in
petrol prices meant that inflation was likely to peak at a higher level than expected a
month earlier. A particular source of uncertainty related to future wage outcomes
during a period of high inflation and tight labour market conditions.
• Global factors, including COVID-19-related disruptions to supply chains and the war
in Ukraine, accounted for much of the increase in inflation. However, domestic
factors were increasingly playing a role. Capacity constraints in some sectors and the
tight labour market were contributing to upward pressure on prices. The east coast
floods earlier in the year had also affected some prices.
• Housing prices had declined in some markets over preceding months, but remained
more than 25 per cent higher than prior to the pandemic, thereby supporting
household wealth and spending.
• The decision on the 7th of June was The Board decided to increase the
cash rate target by 50 basis points to 85 basis points.

So what
about
Monetary
Policy into
the future???
• What do the RBA minutes currently say?
• In considering the policy decision, members observed that inflation
in Australia had increased significantly and was expected to
increase further in the near term. Global factors, including COVID-
19-related disruptions to supply chains and the war in Ukraine,
accounted for much of the increase in inflation. However, domestic
factors were also playing a role. Strong demand, a tight labour
market and capacity constraints in some sectors were contributing
to the upward pressure on prices
• Members noted that inflation is forecast to peak later in 2022 and
then decline back towards the 2 to 3 per cent range in 2023.
Inflation is expected to moderate as global supply-side problems
continue to ease and commodity prices stabilise, even if at a high
level. Higher interest rates will also help establish a more
sustainable balance between the demand for and the supply of
goods and services.
• The decision on the 5th July : The Board decided to increase
the cash rate target by 50 basis points to 1.35 per cent.

Fiscal Policy
The meaning of fiscal policy
• Fiscal policy is a macroeconomic policy that influences resource allocation,
redistributes income and reduces fluctuations of the business cycle. Its
instruments include government spending, taxation and the budget outcome.
• It involves the use of the Budget, which is a statement of the government’s
planned expenditure and revenue for the next financial year, to achieve the
government’s economic objectives.
• The Budget includes all forms or revenue including direct taxes, indirect taxes
and other revenues (e.g. dividends from PTEs). It also includes expenditure
items (e.g. welfare, health, education and defence).
• Mid-Year Economic and Fiscal Outlook statement includes revision forecasts for
the economy and the budget

Fiscal Policy
Budget outcomes
• The budget outcome gives an indication of the overall impact of fiscal policy on
the state of the economy.
• The budget can either be in – Budget surplus: G < T – Budget deficit: G > T –
Balanced budget: G = T,
• There are 2 measures of budget outcomes: – The fiscal outcome: calculated as
total revenue minus total expenses minus net capital investment, using the
accrual accounting method. It is the most accurate long term indicator of fiscal
policy.
• The underlying cash outcome: calculated in a similar way to the fiscal outcome,
but uses the cash accounting method. It is the best indicator of the impact of
fiscal policy on economic activity for that year.
• The Government’s main fiscal policy aim is to achieve fiscal balance, on
average, over the economic cycle.
• One-off transactions are shown on the headline cash budget outcome

Fiscal Policy
Changes in Budget outcomes.
• Discretionary changes in fiscal policy involve deliberate changes and influence
the structural component of the budget outcome.
• Non-discretionary changes in fiscal policy are caused by changes in the level of
economic activity and influence the cyclical component of the budget outcome
• Automatic stabilisers are policy instruments in the Budget that changes in the
level of government revenue and expenditure from changes in the level of
economic activity. They are designed to play a counter-cyclical role. The 2 main
automatic stabilisers are: – Unemployment benefits – The progressive income
tax system.
• Automatic stabilisers alone are rarely strong enough to counter the effects of
the economic cycle

Fiscal Policy
Impact on economic activity
Expansionary stance: the government plans to increase the level of economic
activity in the economy
Contractionary stance: the government plans to decrease the level of economic
activity in the economy
Neutral stance: the government plans to have no effect on the level of economic
activity

Fiscal Policy
Impact on resource use
Fiscal policy can directly affect resource use through government spending in
certain areas.
Governments will use direct measures if they expect that markets will not
provide resources quickly enough (e.g. natural disaster) or may pay directly to
provide a public good that is unlikely to be paid for by the private sector,
Governments can use the indirect influence of fiscal policy, such as tax and
spending policies, to change resource use by making it more or less attractive
for resources to be used a certain way (e.g. tax on tobacco.

Fiscal Policy
Impact on income distribution.
• Changes to taxations arrangements – a reduction in the top marginal tax rates
makes the tax system less progressive or an increase in the GST, increases
income inequality.
• Budgetary changes involving government spending – greater spending on
community services and welfare payments reduce income inequality Impact on
savings and the current account deficit .
• A budget deficit decreases national savings as governments finance it by
borrowing from private sector savings, leading to the crowding out effect,
making it more expensive and difficult for private sector investment.
• As such, there needs to be an inflow of funds for domestic consumption and
investment, worsening the net income deficit and the CAD as net foreign
liabilities require servicing

Fiscal Policy
Methods of financing a deficit.
• Borrowing from the private sector leads to the crowding out effect.
• Borrowing from overseas in an era of globalised financial markets, minimises
crowding out effect but can have implications for the currency and for the CAD.
• Borrowing from the RBA via printing money. This involves increases to the
money supply and adds to inflation.
• Selling public assets to pay down debt is a possibility, but you do then lose that
asset into the future.

Fiscal Policy
Using budget surpluses
Surpluses can be handled in a range of ways. In the past they have been:
- Deposited with RBA (low interest rates) or,
- Used to Pay off public sector debt (frees up funds on financial markets)
- Placed the money in a specially established, government-owned investment
fund (e.g. The Future Fund, Building Australia Fund, Education Investment
Fund, Health and Hospitals Fund.

Fiscal Policy
Public sector borrowing and debt
• The overall impact of the public sector on the economy is reflected in the
public sector underlying cash outcome, showing the borrowing needs or
surplus funds from all levels of government, government authorities and PTEs.
• This gives the most comprehensive indication of the fiscal impact of the public
sector on the Australian economy.
• Over time, running public sector deficits results in the accumulation of public
sector debt, which is owed both domestically and overseas.
• Overseas borrowings involve a greater risk for the economy, increasing the
level of foreign liabilities and their servicing costs and placing a future burden
on the current account The impact of recent fiscal policy.
• Fiscal policy changes are less important when the economy is achieving stable,
sustainable rates of economic growth. However, when the economy
experiences a downturn, fiscal policy has a more important role to play.

The Impact of Recent Fiscal Policy in Australia

Micro Economic Policies
 Microeconomic policy influences the aggregate supply in an economy, such as by improving
the competitiveness, efficiency and productivity of industries and increasing workforce
participation
• It is action taken by the government to improve resource allocation to maximise output from
scarce resources
• It is central to long term aims of addressing potential constraints on economic growth (e.g.
CAD and inflation)
• Microeconomic reform aims to encourage the efficient operation of markets.

• Microeconomic policies (Microeconomic Reform) is action taken by govts to
improve the 3 efficiencies between and within industries, in order to maximise
output from scarce resources. It is central to the govt’s long terms aim of
increasing the level of sustainable growth in Australia, and reducing the extent
to which Current Account and inflation problems constrain economic growth
• Microeconomics is broadly based on supply-side economics, where the focus is
on aggregate supply, rather than on aggregate demand as in Keynesian
economics. The principal determinant of economic growth is seen as the
allocation and efficient use of the factors of production, especially labour and
capital. Microeconomic reforms are therefore designed to improve productivity
and economic efficiency. Encourage the efficient operation of markets

Microeconomic policies are characterised by the following important features:
• They attempt to improve the economy’s allocation of resources in the long-run.
• They are directed at product markets where final goods and services are sold and factor
markets where productive inputs such as land, labour, capital and enterprise are bought and
sold.
• They impact on both the tradable (export and import competing firms) and nontradable
(mainly domestic public sector enterprises) sectors of the economy
• They target both government owned and privately owned operated business enterprise.
• They are also complementary to the government’s macroeconomic strategy. If the government
can achieve internal and external balance in the short to medium term, micro policies can
operate simultaneously to improve the efficiency of resource allocation in the economy in the
long term.

The goals of Australia’s Micro Policy
1. Increase the rate of growth: By increasing the supply potential of each business area, the
equilibrium point moves to the right, and the growth potential of the economy is increased.
2. Remove pressure on prices: Microeconomic reforms are supply side reforms. By aiming to
shift the supply curve to the right, not only will the equilibrium point shift right, it will also
move down. This means that there should be no upward pressure on prices – the inflation rate
should remain low.
3. Efficiency in resource allocation: Perhaps the major goal of all microeconomic reform
policies is the desire to improve the efficiency with which resources are allocated in the
Australian economy. If the Australian economy is able to create a higher level of output with a
smaller quantity of inputs, then our growth will be sustainable and prices should remain stable.
4. External stability: If businesses within Australia are more efficient, then it follows that they
will be more internationally competitive. This means that our goods and services will be more
attractive on the international market, and therefore our exports will increase. This should help
to make the CAD stable, and therefore the currency should benefit.

The past outcomes of Australia’s Micro Policy
Past decade’s sustained improvements in productivity is the single best explanation for
Australia’s strong economic performance over the past decade – strong growth, rising living
standards, falling unemployment, sustained low inflation, and (to a lesser extent) lower CADs –
and this improved productivity performance is in turn attributable to microeconomic reform.
According to the Productivity Commission, Australia’s GDP was 2.5% higher in 2005-‐06
because of Australia’s extensive reforms of the 1990s. However, this figure is significantly
lower than the 5.5% estimate when the reforms were implemented. In the 1980s average annual
labour productivity growth grew by an average 2% per year, while in the 1990s this increased
to a rate of 3% per year.

The ongoing costs and benefits of Microeconomic reform
In a very basic sense, microeconomic policy is a reform that is implemented in one sector of the
economy to improve efficiency. Although the reforms are aimed at specific sectors, the ultimate goal is
to achieve an increase in the productive capacity of the economy. In other words, when implementing a
microeconomic reform, the government is aiming to shift the aggregate supply curve to the right. Once
the policy has become effective, we should see a higher level of output, with no upward pressure on
prices. Microeconomic reform usually results in a number of short term costs associated with the
process of structural adjustment, but a number of long term benefits.
Lower unemployment
Microeconomic reforms should help to reduce unemployment rate and create jobs in newer industries,
hence more individuals will gain employment as job opportunities arise in efficient industries.
Businesses have greater flexibility and incentives to improve production processes and management
(E.g. telecommunications and electricity the importance of promoting competition and reducing
regulations). Raising the level of efficiency, productivity of the factors of production Firms will be able
to produce more output with the same input, resulting in greater aggregate supply and structural change
in the economy. (E.g. labour market policy aims to tie increases in wages to increases in productivity,
which gives workers an incentive to increase productivity.)

The ongoing costs and benefits of Microeconomic reform
• Improve allocative efficiency - Over time, resources will flow from inefficient to efficient
industries and increasing aggregate supply. (E.g. reductions in protection improve the level of
allocative efficiency as inefficient import competing firms close. This frees up resources
which can flow to areas in the economy in which Australia has a comparative advantage)
• Improvements in technical efficiency - Reforms such as privatisation and corporatisation of
public trading enterprises can lead to improvements in technical efficiency as profit motive of
the new firm encourages it to adopt world’s best production practices.
• Lower underlying inflation because of greater competitive pressures. Higher aggregate
supply creates sustainable economic growth and higher income levels without higher
inflation. If aggregate supply is increasing, it is able to match increases in aggregate demand,
achieving higher dynamic efficiency, which ensures that prices do not need to rise by as much
in response to increases in aggregate demand and minimising demand
• Improvement in CAD in long run Efficient Australian exporters will gain access to new
markets overseas. As domestic producers increase the quantity and quality of their products,
demand for imports may fall. As a result, the current account balance may improve.

Micro Economic Policies and Increases in
Productivity
Productivity refers to the quantity of output which can be produced with a given level of input
such as capital and labour. An increase in productivity will lead to:
• · The economy would be able to produce more output with the same number of inputs As a
result, aggregate supply increases.
• · Increases the incomes of the factors of production seen by an increase in economy growth
• · Inflationary pressures remain low despite economic growth, as productivity increases allow
for economic growth that can be sustained into the long term.

National Competition Policy
• Importance: It began with the Hilmer Report in the early 1990s, but became
policy in 1995 and continues today.
• National Competition Policy is generally regarded as the most extensive single
package of microeconomic reforms in Australian history.
• The reforms have had a major effect on the economy because they affect
businesses in many different sectors of the economy, and increased the level of
competition across many sectors of the economy.
• Key elements of the National Competition Policy are: • establishment of the
National Competition Council (NCC) and Australian Competition and Consumer
Commission (ACCC). The ACCC continues to play a significant role in the
overseeing of competitive practises today.
• - The National Competition Council dictates policy initiatives. The ACCC enforces
the Trade Practices Act and is responsible for consumer protection and
maintaining competition to ensure the efficient allocation of resources in the
product market.

Industry Policies
• This involves measures to support the development of key industries and increase the
competitiveness of domestic industries against foreign competitors.
• Industry policies can have an indirect impact on our trading performance, if they lead
to the emergence of successful and competitive exports.
• More recently, the focus of industry policy has shifted towards fostering innovation
within key industries and across the economy.
• innovation policy aims to encourage firms to develop new goods and services and
more efficient ways of doing business so as to become more competitive (thus indirectly
improve trade performance)
• Innovation strategies with the aim of increasing the proportion of businesses engaging
in innovation by 25% and doubling the level of collaboration between businesses,
universities and publicly-funded research agencies were developed back in 2009.
• Measures to promote innovation across the economy have included: • Introduction of
a 45% Research and Development Tax Credit for small firms (40% for large) to
encourage R&D • Commonwealth Commercialisation Institute to help Unis, research
orgs and small firms commercialise ideas and research into innovative G&S • A
network of 12 Enterprise Connect centres that advise small and medium businesses on
how to improve their skills, competitiveness and productivity

Industry Policies
Measures to promote innovation across the economy have included:
• Introduction of a 45% Research and Development Tax Credit for small firms (40%
for large) to encourage R&D
• Commonwealth Commercialisation Institute to help Unis, research orgs and
small firms commercialise ideas and research into innovative G&S
• A network of 12 Enterprise Connect centres that advise small and medium
businesses on how to improve their skills, competitiveness and productivity.
Research two things out of this year’s Budget that will assist with levels of
Research and Development in the Australian Economy. Report on them here.

Environmental Management Policies
• Environmental Management Policies are designed to address issues of
Environmental Sustainability. These include the preservation of the natural
environment, pollution and climate change, and managing renewable and
non renewable resources.
• Like Micro-Economic Policies, Environmental Policies aim to influence the
behaviour of individual households , businesses and industries.
• The two main policy tools for environmental management are regulations
and market based policies to influence behaviour and reduce
environmental impact.
• Like other areas of policy, environmental management is guided by
research bodies such as the productivity commission and by targets set by
Government and is influenced by international agreements between
governments from around the world.

• The Centre piece of Australia’s emissions reduction policy in recent
years has been the Emissions reduction Fund. This was introduced to
replace the previously existing Carbon Pricing Program. Firms are
paid out of the fund to reduce emissions from their production
processes.
• Projects are submitted to the governments Clean Energy Regulator
for approval. Projects enter an auction for Govt funds which are paid
to projects with the lowest carbon emissions rates. (Emissions
trading scheme).
• The only criticism of this style of policy is that it doesn’t impose any
costs or constraints on businesses that increase their
emissions.https://youtu.be/ReOj12UAus4?t=1

Targets
The Australian Govt uses many targets to guide its Environmental Policy. A
good example is Australia’s Renewable Energy Target, which played a major
role in creating an incentive to investing in and use renewable energy sources.
• https://youtu.be/zBJ9FtFSbvE
• Guides environmental management policies. Increase use of renewable
energy is supported by Mandatory Renewable Energy Target (MRET) of
sourcing 20% of Australia’s electricity supply from renewable energy sources
by 2020. Unfortunately in 2021 we are currently only sourcing 18.54% of our
Electricity from renewable resources. MRET places legal liability of electrical
companies to contribute to target by producing or paying for renewable
energy

Targets
• NSW Government Targets
• 4000 GWh of annual electricity consumption savings through energy efficiency programs;
• increase water recycling from 15 billion litres per year in 2005 to 70 billion litres of water per
year by 2015; save 200 billion litres of water per year 2025.
• - Under Kyoto Protocol, Australia will reduce its emission by between 5 – 25%. Australia must
reduce carbon emissions by 60% by 2050.
• A number of policies have been put in place over time to help achieve these targets like the
emissions reduction fund, and the National Energy Productivity Plan.
o Mandatory renewable energy target; 20% of electricity was to be supplied by renewable
sources by 2020
o The Climate Change Authority has recommended to govt , cuts in Carbon emissions of 30%
by 2030, and a 40 – 60% reduction by 2030

Regulations
• Regulations are Laws that govern economic behaviour. Amongst other
things they may prohibit a person from littering, producing polluting
chemicals, and other environmentally damaging practices.
• Regulations may specify how a good or service is produced or
consumed. - Fuel Quality Standards Act 2000 regulates the quality of
fuel, aiming to reduce the levels of pollutants and emissions.

Regulations
• Environmental Protection and Biodiversity (EPBC) Act provides a
framework for the protection and management of significant national
environmental matters.
• This includes the protection of World and National Heritage sites,
Commonwealth marine areas and nationally threatened species.
Under EPBC Act, developers must provide an environmental impact
assessment of proposals. - To regulate climate change, new standards
of lighting introduced in 2007 saw incandescent bulbs replaced by
more energy efficient fluorescent light bulbs.

Market Based Policies
Market Based Policies create an incentive for environmental
protection. They have been used more and more in Australia and other
global economies in recent decades.
Market based policies Involve financial incentives and disincentives to
influence the behaviour of households and businesses.
Environmental costs, known as negative externalities are borne by the
whole society and not taken into account by producers and consumers
in the market place. This results in the equilibrium price being too low
and production being too high.
Write ½ page -What is the Role of the Australian Renewable Energy Agency?

Market Based Policies
Market-based response would be to levy a tax or fee on production
that is approximately the same as the environmental costs associated
with this economic activity. A tax equal to the vertical distance
between curves shifts the supply curve from S1 to S2. (see text page
338 fig 16.4) This internalises the externality as consumers and
producers pay for environmental costs.
Taxes can increase government revenue, which can then be used for
environmental programs
Subsidies are grants that aim to reduce costs of production and
promote environmentally beneficial activities. $2 billion Carry for our
Country scheme subsides projects that improve biodiversity and
sustainable farming practices.

International Agreements
For environmental management policies to be successful, they often require international co-
operation. Collective action is necessary because individual actions cannot address global
environmental problems on their own. Individual countries are often reluctant to impose strict
environmental management policies on their own economy if other nations are not willing to
do the same.
Having said that, their have been a number of successful international agreements over the
years in terms of co-operations, even if they haven’t given rise to longstanding improvements
in environmental outcomes. These have included:
- 1987 Montreal Protocol phased out production of chlorofluorocarbons by 2000 to tackle the
depletion of the ozone layer. Ozone layer over the Antarctic has shrunk by 15% in recent
years.
- Kyoto Protocol required that industrialised countries reduce average national emissions by
5% below 1990 levels over the period 2008-2012. - United Nations Framework Convention on
Climate Change in Copenhagen 2009 aimed to negotiate successor agreement to Kyoto
Protocol. Key challenge was to balance interests of high income countries, which have large

- Kyoto Protocol required that industrialised countries reduce average national emissions by
5% below 1990 levels over the period 2008-2012. - United Nations Framework Convention on
Climate Change in Copenhagen 2009 aimed to negotiate successor agreement to Kyoto
Protocol. Key challenge was to balance interests of high income countries, which have large
per capita greenhouse gases, and developing countries, which have rising levels of emissions
as they rely on cheap fossil fuels to expand output and improve living standards.
- https://youtu.be/pE8mBdAOF0Y?t=1
• The Paris agreement of November 2016. The Paris Agreement is a legally binding
international treaty on climate change. It was adopted by 196 Parties in Paris, on 12
December 2015 and entered into force on 4 November 2016. Its goal is to limit global
warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial
levels. To achieve this long-term temperature goal, countries aim to reach global peaking of
greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-
century.The Paris Agreement is a landmark in the multilateral climate change process because, for the first
time, a binding agreement brings all nations into a common cause to undertake ambitious efforts to combat
climate change and adapt to its effects.

- What is the Current Status of the Paris Agreement?
The Paris Agreement formally entered into force on November 4,
2016. Other countries have continued to become parties to the Paris
Agreement as they complete their domestic approval procedures. As of
January 2021, 190 parties have ratified the Paris Agreement.
https://youtu.be/3tnDjCA4peY

Labour
Market
Policies
What’s the Role of State and National Systems?
The history around Australia’s Industrial Relations Systems is that
the Australian Constitution only gave the Commonwealth the
power to resolve industrial disputes that cross state barriers, but
the Commonwealth has expanded regulation of labour markets
through other constitutional powers. Over time, Inefficiency of
separate state and federal systems created growing pressure
towards a national industrial relations system.
Howard Government announced in 2005 that it would legislate
to override the states and establish a single national industrial
relations system by using its constitutional powers to regulate
companies. Workplace Relations Amendment (Work Choices)
Act 2005 was opposed by state governments while it sought to
reduce existing minimum employment standards.

Labour
Market
Policies
What’s the Role of State and National Systems?
Work Choices caused a period of industrial strife in our country that was not
seen before and was ultimately abolished and replaced by the Fair Work Act
2009. This established a unified national industrial relations system for the
private sector. This caused reductions in compliance costs by approx. $4.8
billion over a ten year period.
Through the Fair Work Act, the modernisation of the award system resulted in
around 4300 state and federal awards to be replaced by a system of just 122
modern awards that apply at a national level. A national system of
occupational health legislation was also established.
The Fair Work Act (2009) expanded the coverage of the federal system to
include private sector employees in all states except Western Australia from
2010.
In addition to the national workplace relations system, the Commonwealth
replaced most state-based awards with simpler federal awards and also
established a national system of occupational health and safety legislation,
replacing separate state systems.
The national system is overseen by the Fair Work Commission.

Labour
Market
Policies
AUSTRALIA’S WAGE DETERMINATION SYSTEM
• Australia’s national wage determination system directly covers around 7
out of every 10 workers, or approximately 9 million people. The rules of
the national system are set out in the Fair Work Act 2009 and related
regulations, and it establishes three main streams that determine the pay
and conditions of employees – industrial awards, collective agreements
and individual employment contracts.
• A snapshot of the labour market shows that among Australian employees:
 38% of employees are covered by some kind of collective agreement
 38% of employees are covered by an individual agreement
 21% of employees are covered only by industrial awards
• Around 3 in 10 of Australian workers (just under 4 million people) are
outside of the national wage determination system but their conditions
can still be influenced by the national system. These workers are divided
into two main groups:
1. Individuals whose conditions are unregulated (17% of Australian
workers)
2. Individuals whose conditions are regulated by a state workplace
regulations system (12% of Australian workers)

Labour
Market
Policies
Minimum Employment Standards
Australian employees have 10 guaranteed employment
conditions, which are set out in law through a document
called the National Employment Standards.
These provisions include:
 Maximum weekly hours of work: A full-time employee’s
hours of work must not exceed 38 ordinary hours per week
 Right to request flexible working arrangements: Parents
or carers may request a change in working arrangements to
assist them in caring for a child
 Leave: Employees have the right to paid annual leave,
public holidays, and carers and compassionate leave
 Notice of termination and redundancy pay: Employers are
required to give between one and four weeks of notice of a
job termination

Labour Market
Policies
Minimum Wages
• In addition, a national minimum wage provides a safety net
for any employee not covered by an award. A specialist
Minimum Wage Panel within the Fair Work Commission is
responsible for setting minimum wages and casual loadings.
• The Fair Work Act requires the panel to consider both
economic and social objectives when determining the
minimum wage. The panel must assess the performance
and competitiveness of the national economy, and consider
the macroeconomic impact of its decision.
• As of 1 July 2022 the National Minimum Wage is $21.38
per hour or $812.60 per week. Employees covered by an
award or registered agreement are entitled to the minimum
pay rates, including penalty rates and allowances in their
award or agreement. These pay rates may be higher than
the National Minimum Wage.

Labour
Market
Policies
Awards
• Awards are a set of pay and conditions that are specific to
an employee’s work or industry sector (such as a shop
assistant or a construction industry worker). Awards
provide a safety net of minimum wages and conditions.
Many employers pay above award wage rate, but awards
set the minimum rates of pay and entitlements.
• The Fair Work Commission sets these minimum award
wage rates.
• In the past, awards were comprehensive documents
outlining in detail the wages and working conditions
within certain industries and forms. Under the Fair Work
Act, Australia’s award system was restructured and
streamlined from around 4,300 awards to 122 awards.

Labour
Market
Policies
Awards
• These consolidated awards are known as modern awards, with 156 in
operation in 2022 due to the creation of several enterprise awards.
• Awards continue to be an important part of the industrial relations
system. Even though only 21% of workers have their wages set by awards
one in every five employees were employed under “over-award”
arrangements – employees with individual or collective agreements
where awards influence or guide employment arrangements in some
way. This suggests that in total, around 40% of employees are on “award-
based” arrangements.
• Modern awards extend the protections of the National Employment
Standards, with provisions tailored to the needs of the specific industry
or occupation.
• Further, modern awards (as well as enterprise agreements) must now
include a clause that allows for an individual flexibility agreement (IFA).
This clause enables an individual employee and employer to vary the
effect of an award to meet their individual needs without negotiating a
separate agreement.

Labour Market Policies
ENTERPRISE AGREEMENTS
• The most common method of wage determination in the formal system in Australia is a workplace
agreement that is negotiated collectively between an employer (or employers) and employees,
usually represented by unions. These arrangements are known as Enterprise Agreements
(previously called Collective Agreements or Certified Agreements). The Fair Work Act introduced a
right for employees to engage in enterprise bargaining with employers.
• With coverage of 38% of employees, Australia is slightly above the average coverage of collective
agreements among OECD economies, estimated at 32%.
• As a minimum, all agreements must comply with the National Employment Standards, and cannot
offer pay rates below that mandated by the equivalent award. Workplace agreements must also pass
the “Better Off Overall Test” (BOOT), requiring that the employees be made better off by an
agreement compared to an applicable award. This test is administered by the Fair Work Commission.
The BOOT also applies to any individual flexibility agreement.

• EMPLOYMENT CONTRACTS FOR HIGH INCOME EARNERS
• One of the most important changes introduced by the Fair Work Act was the abolition of individual
contracts as part of the formal industrial relations system. These individual contracts, known as
Australian Workplace Agreements, had been criticised as unfair because employers have much
greater bargaining power than individual employees, as that AWAs were often imposed on
employees with no genuine negotiation process.
• Although the Fair Work Act abolished individual contracts, it made an exception for employment
contracts for high income earners. Under the Act, modern awards do not apply where an
employee is earning in excess of a threshold (set in 2020-21 at an annual salary of $153,600 and
adjusted each year). Instead, such employees are only covered by the provisions in the agreement
they make with their employer, which is known as common law contract, and by the National
Employment Standards.
• The key difference between common law contracts and enterprise agreements is that common law
contracts are made individually, and they generally cannot remove or trade off minimum award
conditions such as penalty rates. In other words, employers must still comply with all award
requirements that apply to such employees.
• These contracts are enforced through ordinary law courts, rather than through industrial tribunals,
and are not considered to be part of the formal industrial relations system.

DISPUTE RESOLUTION
• Disputes can arise because of disagreements over many issues, including changes to wages, work
conditions, business restructuring and specific actions of employers that employees consider wrong or
unfair, such as a decision to sack an employee or some employees.
• One of the aims of an industrial relations system is to solve these disputes quickly, efficiently and fairly,
because industrial action can result in reduced productivity, lower output, lower profits and damage to
a business’s customer relationships.
• The processes for resolving industrial disputes in Australia have undergone major change in recent
decades. Since the early twentieth century, Australia has mostly relied on a unique system of specialist
industrial tribunals to administer dispute resolution processes.
The two main forms of dispute resolution that have been practiced in Australia are:
 Conciliation – a process whereby an industrial tribunal tries to help the parties to a dispute reach a
mutual agreement
 Arbitration – when an industrial tribunal makes a ruling that resolves a dispute and is legally binding
on the parties

• CHANGES TO DISPUTE RESOLUTION PROCEDURES
Australia has shifted from resolving industrial disputes mainly through compulsory arbitration
to a system where arbitration is only used in rare circumstances. In most instances, employers
and employees take responsibility for resolving their disputes. Under the Fair Work Act, the Fair
Work Commission only intervenes to resolve disputes in specific circumstances:
 Compulsory dispute settlement terms: a common feature of such a term is that if parties
cannot resolve a dispute between themselves, they must refer it to a third-party organisation
that can assist in resolving the dispute. This third party might be the Fair Work Commission.
 Bargaining in good faith: good faith bargaining aims to reform the conduct of negotiations. It
obliges employers and employees to adhere to certain provisions when at the bargaining
table. If these provisions are not adhered to, the Fair Work Commission can make legally
binding orders, although these powers are rarely used. The aim of the bargaining rules is to
put pressure on both parties in a negotiation to be constructive and reach agreement.
 Resolving industrial action: industrial action is permitted during the process of enterprise
bargaining. The Fair Work Commission is only able to step in to suspend or terminate such
industrial action if special circumstances exist, including where there is a threat of significant
harm to the economy or the population.

Labour
Market
Policies
• THE IMPACT OF CHANGES TO THE DISPUTE RESOLUTION
PROCESSES
Australia has experienced a very low level of days lost in
industrial disputes since the early 2000s.
The fall in industrial disputes reflects the way in which
employer/employee relations changed in recent decades,
with increased competitive pressures, changes in industry
structures and lower levels of union membership.
There is now less conflict and a stronger focus on employers
and employees (often represented by unions) working
together and resolving disputes themselves through
cooperative processes.

Labour
Market
Policies
• THE IMPACT OF CHANGES TO THE DISPUTE RESOLUTION
PROCESSES
Australia has experienced a very low level of days lost in industrial
disputes since the early 2000s.
The fall in industrial disputes reflects the way in which
employer/employee relations changed in recent decades, with
increased competitive pressures, changes in industry structures and
lower levels of union membership.
There is now less conflict and a stronger focus on employers and
employees (often represented by unions) working together and
resolving disputes themselves through cooperative processes.

• A centralised labour market is one in
which wages and other labour market
outcomes are primarily determined by
a government, or a government-
appointed tribunal such as the Fair
Work Commission.
• A decentralised labour market
determines wage outcomes at an
enterprise or workplace level, with a
more limited role for industrial
tribunals. This means that market
forces of supply and demand for labour,
as well as the individual firm’s capacity
to pay, play a greater role in
determining wage increases. This
ensures that there is more flexibility,
and wage levels can change between
different firms and industries.
DECENTRALISATION
OF THE LABOUR
MARKET IN
AUSTRALIA

Shifting to a
decentralised
system of fixing
wages in
Australia.
• For most of it’s Economic history, a centralised
system of fixing wages had been the norm in
Australia. However, y the early 1990s, the
centralised system was regarded as no longer
appropriate for the needs of a modern economy.
Economists argued that greater flexibility was
needed so that wages could increase faster in
more efficient sectors (to attract more labour),
and wage increases needed to be more closely
tied to productivity growth.
• As a result, from 1991 Australia began shifting to
a labour market where wages were mostly set
through enterprise bargaining, while the highly
centralised award system would only provide a
safety net of minimum wages and conditions.
•

Arguments in
favour of a
decentralised
system of
fixing wages
in Australia.
• A decentralised system can lead to a more efficient
allocation of resources and structural change. Forms that
are more efficient can afford to pay more and therefore
attract higher skilled employees.
• A decentralised system can promote productivity. It gives
employees the incentive to work more efficiently,
because they can be rewarded directly for their
productivity improvements through arrangements at the
workplace level
• Wage flexibility can help the labour market adjust when
the economy is affected by negative shocks, which helps
keep unemployment at a lower rate. If a recession causes
a reduction in the aggregate demand for goods and
services, therefore decreasing the demand for labour, a
flexible labour market can allow wages to fall while
keeping people in jobs

Arguments
against a
decentralised
system of
fixing wages
in Australia.
 Decentralisation tends to lead to greater
inequality through increased “wage dispersion”.
Workers doing the same job in different industries
or firms may receive different rates of pay and
working conditions.
 A decentralised labour market can produce
outcomes that reflect imbalances in bargaining
power between employers and employees
 Enforcement of wage entitlements becomes more
difficult under a decentralised system
 Centralised wage determination provides an
additional policy tool that the government can use
to achieve its economic objectives, such as lower
inflation and reduced unemployment.

EDUCATION,
TRAINING AND
EMPLOYMENT
PROGRAMS
• In addition to regulating the industrial relations system,
governments also influence labour market outcomes
through their policies relating to education and training.
These policies aim to increase participation in the
workforce, improve the productivity of the workforce.
EDUCATION
Following the huge number of job losses associated with the
COVID-19 pandemic, the Government introduced the the
2021/22 Budget contained a total investment of over
6.4billion in the expanded skills and apprenticeship program.
Goals have been set to halve the number of people in the
workforce who do not have a minimum skill qualification
level, increase school retention rates and raise the number
of 25-34-year-olds with a university degree to 40% by 2025
Secondary education (high school) policy has also been at
the centre of policy, with a “needs-based” model that was
recommended in the 2012 Gonski Review being adopted
and large scaled investment in the VET sector in schools and
TAFE taking place. The Govt would like 40% of 25 – 34 year
olds to have a university degree by 2025.

LABOUR MARKET PROGRAMS
• Governments deliver a range of Labour Market assistance programs that aim to
improve peoples readiness for the labour market and increase participation and
productivity.
• READ THE PROGRAMS LISTED ON PAGES 361 AND 362 OF YOUR TEXT AND MAKE
A SUITABLE POINTFORM SUMMARY OF THEM.

EVALUATING LABOUR MARKET OUTCOMES IN
AUSTRALIA
• Australia’s labour market has a hybrid system of wage determination that has an emphasis on
market forces through enterprise bargaining, while still retaining some role for non-market
forces such as labour market institutions like the Fair Work Commission.
• The shift to a decentralised industrial relations system appears to have contributed to
Australia’s recent economic outcomes in several ways:
• Wages growth and inflation: A key objective of industrial relations policy is to control
wage growth at a level that does not contribute to cost-push inflation. The flexibility of the
decentralised system has allowed larger wage rises in specific areas where strong wage
pressures exist, without this spilling over to wage increases across the board.
• Work practices and productivity: The deregulation of the labour market since the 1990s
has heled to bring about major changes in Australian work practices.
• Unemployment: Reforms to the industrial relations system have provided Australian
workplaces with greater flexibility to adjust to variations in the business cycle
• Income inequality: One of the main effects of decentralised wage determination is an
increase in the degree of wage dispersion – that is, a widening of the gap between higher
and lower income earners

COVID 19 and
our Labour
Market
• In 2020, Australia had the second-highest national
minimum wage in the world, alongside below-average
levels of unemployment. Whilst 2021 has seen Australia’s
wage growth levels be particularly slow, a problem
macroeconomically, some would say that is the Flexible
Labour Market doing its job.
• COVID 19 and the downturn in the economy has certainly
put down ward pressure on wages with excess labour
supply at the present time.
• What our flexible labour market was able to do in Covid
pandemic times though , was respond immediately by
reducing hours, negotiating changes to work agreements,
and working conditions, be flexible.

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