Labour Market

Outcomes 10
Multiple Choice
1 A* 6 D* 11 C
2 A 7 A 12 A
3 B 8 D 13 B
4 D 9 B 14 C*
5 D* 10 D* 15 C
*Indicates that an enhanced answer has been provided in the section below.

Enhanced Answers
1 A Non-wage outcomes are benefits given to employees in addition to their ordinary and overtime
payments. A gym membership is an example of a non-wage outcome.

5 D Casualisation of work means that businesses can deploy labour only when they need it, thus
avoiding paying full-time staff during periods of reduced business activity. This is a benefit for small
businesses because it reduces their labour costs.

6 D If nominal wages are growing faster than inflation, then real wages are increasing. If real wages are
growing faster than productivity, this implies that workers are receiving pay rises at a faster rate than
the increase in output. This means that businesses face higher labour costs.

10 D Data suggests that although migrants from non-English-speaking backgrounds often have lower
incomes when they first enter the labour market in Australia, this gap falls as they acquire language
and other work skills.

14 C A person is not counted in the unemployment rate if they usually have one or more hours of work
every week. Therefore, the unemployment rate does not capture the problem of people working
part-time or casually but wanting to work full-time.

Short Answers
Question 1

(a) Non-wage outcomes are the benefits given to employees in addition to their ordinary and
overtime payments.

(b) The distribution of income has been relatively stable over the past two decades, but there has
been a small increase in the proportion of income earnt by the top 20 per cent of households
(contributing to increased inequality).

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 The Market Economy Eighth Edition Workbook Chapter 10: Labour Market Outcomes

(c) Large differences exist between the earnings for workers in different occupations, resulting in
a divergence in labour market outcomes for different workers. Differences in earnings in turn
contribute to income inequality. Managers and professional employees, for example, tend to
earn more than twice the average earnings of retail sales workers, labourers and community
services employees. The main reason for the differences in pay rates are the supply of labour
and the level of skills and qualifications required for certain roles.

(d) Correct answers should include at least four of the following points:
Costs
• Inequality reduces overall utility in the economy because people on higher incomes gain
less utility from an increase in their incomes than individuals on lower incomes.
• Inequality reduces economic growth because as income shifts to higher income earners
(who have a higher marginal propensity to save), a lower proportion of income is spent on
consumption, resulting in lower economic growth.
• Increased inequality may increase the cost of welfare benefits in the budget, as governments
steps in to meet the basic needs of the most disadvantaged members of society.
• Inequality can create higher levels of poverty and social problems. This in turn can lead to
the development of an underclass of workers who are on the margins of the labour market,
whose skills erode and who are likely to have reduced participation in the labour market
over the long term.
Benefits
• Inequality in the distribution of income creates incentives for workers to increase their
levels of skills and education as a means to increase their income. This results in a more
highly skilled, more productive labour force.
• The prospect of a higher income creates incentives for entrepreneurs to take the risks
associated with starting a business, which can increase investment, economic growth and
job creation.
• The increased rewards from working harder and longer may encourage employees to work
more hours and work more productively.
• Differences in incomes between different regions and industries may create incentives for
workers to move to regions and industries where labour is more productive and is most
needed, thus improving the allocation of resources and lifting economic growth.

Question 2

(a) An unemployed person must be of working age (over the age of fifteen), without a job and
actively seeking work.
(b) Unemployment rates can vary between states because of the differences in the makeup of the
economy of each state. For example, New South Wales recorded a lower unemployment rate
in 2019 as the state’s infrastructure investment encouraged jobs growth in the construction
sector, while in contrast Western Australia has been experiencing a rising level of unemployment
as its economy adjusts to the end of the boom in mining construction that took place in the
decade after the mining boom began in 2004.
(c) Unemployment = Number of persons unemployed / total labour force
Unemployed persons = 5 million
Total labour force = 5 + 60 = 65 million
Unemployment Rate = 5/65 *100 = 7.7%
(d) The unemployment rate is not always a good indicator of the performance of the labour market
because it does not reflect all of the developments occurring in the labour market. For example,
it does not include underemployment, that is, the large number of people who have some work
but want to work longer hours. It does not take reflect changes in people’s confidence in the
economy which might persuade them either to step into the labour market or to step out of it
(resulting in changes in the participation rate). It also does not reflect an increased number of
people of working age who are not active in the labour market for social and personal reasons,
such as addictions or work-related health problems. The inadequacies of the unemployment
rate as an indicator of spare capacity in the labour market has prompted the creation of other
measures such as the labour market underutilisation rate and the underemployment rate.
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 The Market Economy Eighth Edition Workbook Chapter 10: Labour Market Outcomes

Question 3

(a) Structural change refers to the process by which the pattern of production in an economy
is altered over time, and certain products, processes of production, and even industries
disappear, while others emerge.
(b) Nominal wages are wage levels, stated in the price level of the year in which they were earned.
A higher level of inflation will generally increase nominal wages, but reduce their purchasing
power. However, if the higher level of inflation does not lead to an increase in nominal wages
then it will lead to a decline in real wages (because the same nominal amount of money will
have less purchasing power).
(c) When the rate of real wage growth is above the level of productivity growth, real labour costs
– that is, the cost of labour per unit of output produced – will increase. Higher real labour costs
will erode the profit margins of businesses. Employers may choose to substitute capital for
labour in production, resulting in a higher rate of unemployment. Firms may also pass on the
higher costs to consumers, resulting in higher prices for goods and services in the economy
and an increase in the level of inflation.
(d) Correct answers could include any two of the following:
• Varying levels of skills and experience will result in differences in wages. Higher skilled and
experienced employees will generally have higher productivity and will be paid a higher
income for their contribution to the production process.
• The productivity of labour in different industries may influence the amount workers are
paid. Among workers who may have the same skills or qualifications, those workers who
are more highly productive may be paid more than others (or promoted into more senior
roles) because they make a greater contribution to the production process; equally those
workers in more highly productive industry sectors may be paid at a higher rate.
• Different firms within an industry may have different capacities to pay, leading to different
wages depending on the firm. Highly profitable firms are able to pay higher wages and
attract better-skilled employees, which can lead to a further improvement in the firm’s
performance.
• The occupational mobility of labour, the ease at which workers can move from one
occupation to another, affects wage rates. When occupational mobility is low (such as
when it takes several years to acquire a complex skill such as for a heart surgeon), the
supply of labour can only adjust slowly and therefore firms will need to raise wages more
in order to attract labour.
• Discrimination may contribute to differences in wage outcomes. For example, women of
similar skill levels to men may be paid at a lower rate because of discrimination (even
though this is officially against the law).

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 The Market Economy Eighth Edition Workbook Chapter 10: Labour Market Outcomes

Skills Revision Activity 1

Labour Force Labour Force Unemployment Rate

(millions) Participation Rate % (%)
1 31 77.50 16.13
2 304 57.90 14.80
3 128 91.43 14.84

Skills Revision Activity 2

1 Structural
2 Hard core
3 Underemployment
4 Cyclical
5 Seasonal
6 Structural
7 Cyclical
8 Frictional
9 Hard core
10 Hidden

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