Discuss the Limitations of Australia’s Economic Growth and Its Effects on Unemployment

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Discuss the limitations of Australia’s economic growth and its effects on unemployment

Economic growth refers to the increase in an economy’s output measured by percentage increases in real GDP. Unemployment refers to the unused labor resources in an economy constituted by individuals who are out of work and seeking work. Since 2012 the Australian economy has been growing below its trend growth rate of 3%, averaging at 2.5%; a rate forecasted to extend over the next two financial years. This is due to both cyclical and structural factors that place limitations on Australia’s economic growth. Cyclical factors such as the slowing resources boom has dampened growth, but will be resolved with structural change as Australia recovers from the Dutch Disease. Structural factors however, such as Australia’s decline in its three Ps – the population of its labor force, its participation rate and work force’s productivity will place constraints on its growth. These constraints are placed on its output – that is, the supply side –, meaning that the maximum rate of growth, which Australia could attain without inflationary pressures, has been constrained. This rate, termed as our trend growth, currently stands at 3% - down 0.25 percentage points prior to the resources boom Mark II. Addressing these constraints, and attaining stronger economic growth would lower unemployment levels. However, that is also dependent on structural features of the economy – during the resources boom Mark II unemployment rates rose as the resources sector at its peak, being capital intensive, employed less than 1% of the labor force. Furthermore, Australia’s NAIRU (Non accelerating inflation rate of unemployment) itself shows the limits of growth in lowering unemployment. The NAIRU, at a range of 5.5%-6.5% has rose from a band of 4.5-5% within the last two years due to productivity declines in the…...

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