Two-Speed Economic In Australia - Case Study Example

Institution : xxxxxxxxxxx Title : xxxxxxxxxxx Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2013 Executive Summary The disparities in terms of Australia’s state economic performance have been extremely large with gains from the mining-related activities and incomes being narrowly concentrated. This has prompted discussions of Australia as having a two-speed economy. This report mainly provides evidence with regards to Australia having a two-speed economy, accompanied by proposals for potential ways forward. In addition, the report seeks to mention the appropriate roles of key agents driving change including where common frameworks might be beneficial. Table of content Executive summary…………………………………………………………………...i 1. Introduction 3 2.Two-speed economy 3 2.1 The mining resource boom 4 2.2 Disparity in terms of Employment and Unemployment 5 2.2.1Due to the Mining and Non-mining states 5 2.2.2 Due to increasing the minimum wages 6 2.3 Disparity in terms of Income 6 3. How the RBA sets the interest rate to reduce the gap of two-speed economy 7 3.1 What is RBA 7 3.2 Monetary Policy 7 4. Recommendations……………………………………………………………………………8 5. Conclusion…………………………………………………………………………..8 6.Reference 3 Two-speed Economy in Australia 1. Introduction With the commencing of the world economic crisis and the associated great recession, the concept of the two-speed economy has turned out to be increasingly familiar with the general global community. According to Jefferson & Preston (2010), Australia has for long been a two-speed economy, with differences in terms of output growth and state employment being larger than normal in the recent years. Reference to Australia as a two-speed economy has in general been taken to mean the comparatively fast rate of growth in its resources compared to the slower growth in its other sectors. On the other hand, despite being one of the Western nations to handle global financial crisis effectively, many economists still contend that it has a two-speed economy. As such, with increasing unemployment, income taxes, interest rates and the cost of living, the RBA and the Australian government resolved to set a policy to help develop the economy. This particular report therefore intends to enlighten why Australia has a two-speed economy, how the RBA sets the interest rate to reduce the gap of two-speed economy, and how the government intends to help Australia economy growth. 2. Two-speed Economy Jefferson & Preston (2010) define a two-speed economy as an economy whose industries are subjected to unevenly distributed growth rates. This section intends to discuss the major reasons why Australia has a two speed economy, with specific reference to mining resources boom, employment and unemployment rates, and disparities in terms of income. 2.1. The Mining Resources Boom As highlighted by Phil (2008), the resources boom has elicited significant debates on Australia as a nation having developed into a two-speed economy. This has increased concerns that benefits or gains resulting from the boom accrue mostly to the Australian states where the resources are concentrated, while the other parts of the nation are hit by higher exchange and interest rates owing to the boom. This implies that the states endowed with resources (mining states) will grow faster than the non-mining states. According to Phil (2008), Australia has recently witnessed a difference in output and growth in employment between the states endowed with resources and the other parts of Australia. However, Phil (2008) argues that although this is less well recognized, it is not a new phenomenon. Nonetheless, even though current growth variations have been larger than normal, the Australian mining states have normally developed faster compared to the rest for a period of time. Table one below compares average rates of growth for key economic variables since 2003-04 with those over the period of the year 1990-91 to the year 2003-04. Table 1: Averages to year 2007-08 for employment and to year 2006-07 for other variables 2.2. Disparity in terms of Employment and Unemployment 2.2.1. Due to the Mining and Non-mining states The difference in terms of the rates of employment between the non-mining and the mining states clearly displays Australia as having a two-speed economy. According to Phil (2008), an available long period assessment in terms of employment growth reveals a faster growth in terms of employment within the mining states of Australia. Similarly, the unemployment rates within the non-mining states are higher compared to the mining states. The below chart also reveals that faster growth within the resources rich states (mining states) has often been the norm.In addition,the chart also indicates that there was a great disparity in terms of employment growth during the early stages of the present mining resource boom,although the disparity of this particular size has often been witness on many occassions during the past. Chart 1: Employment growth trend through the year 2.2.2. Due to increasing the minimum wages According to Jefferson & Preston (2010), it is possible to describe Australia has having a two-speed economy in terms of wages and earnings between the various sectors of the economy. The decision of the Fair Work Australia to increase the minimum wages in view of the fact that a great number of minimum wage earners are working within the slower sectors of the economy, where workers are not able to pay for increased living costs clearly, for instance, shows that Australia is a two-speed economy. As highlighted by Jefferson & Preston (2010), Women who are mostly employed within the slower sectors of the economy, for instance, during the month of February, 2007, the ratio of regular earnings for women and their male colleagues in permanent employment was equal to 84.2%.By the month of February, 2010, the disparity had widened by 1.6% points to reach 82.6%.According to Jefferson & Preston (2010), the disparity was statistically significant. In general this shows that there is a slow track in terms of wage harmonization affecting mostly women who seem to get employment within the slower sectors of the economy. 2.3. Disparity in terms of Income As highlighted by Jefferson & Preston (2010), the Australian Chamber of Commerce and Industry’s argument against an increase in the minimum wages on account of the fact that a great number of minimum wage earners are working within the slower sectors of the economy, where workers are not able to pay for increased living costs clearly indicates that Australia is a two-speed economy. According to the data from the Australian Bureau of Statistics, it is possible to establish significantly the different patterns in terms of earning outcomes witnessed within particular sections of the Australian economy. Industries such as retail trade, finance and insurance service, accommodation and food service and manufacturing industries, for instance, have below average wage growths. For instance, according to Farmar-Bowers et.al (2013), the year 2009 statistics from the Australian Bureau of Statistic confirms that polarity was evident when comparing the increase in terms of the minimum weekly wages for males within the mining industry over 5 years (33 percent) compared to those employees in cafes and restaurants, retail and accommodations who received increases of about 12.3%. In general the Australian mining industry, compared to other industries, continues paying the highest rates of remuneration to the Australian workers, with the minimum take-home earnings standing at approximately $2,388.20 as of the month of May, 2012.The minimum hourly rate within the sector was reported to be approximately $52.30 (MikeyGatal.com).In addition to this, 63% of permanent adult non-managerial workers took weekly earnings of over $2000 weekly. On the other hand, the lowest weekly wages are argued to be sales employees taking approximately $607, community and personal service workings earning approximately $707, and labourers earning approximately $779.The data thus reveals that the Australian labour market is unfair with respect to a comparison between the various sectors of the economy, hence the confirmation of Australia as a two-speed economy. 3. How the RBA sets the interest rate to reduce the gap of two-speed economy 3.1. What is RBA? RBA denotes the Reserve Bank of Australia. This is Australia’s central bank in charge of conducting its monetary policy as well as issuing its currency. The bank seeks out to foster the financial system stability in addition to promoting the efficiency and the safety of payment system. 3.2. Monetary Policy As highlighted by OECD (2000), since the beginning of the financial crisis, a number of central banks across as well as outside the OECD have slashed policy interests; as a result, bring them to a historical low. According to De Brouwer & Gilbert (2002), this reaction functions often have a significant intuitive appeal in that they present a simple organizing principle for examining monetary policy as well as predicting how central banks set their instruments. To reduce the gap of two-speed economy, RBA cuts the interest to attain an exceptionally accommodative position. This puts limit on the level in which traditional monetary policy is able to compensate for a speedy slowing down of the stimulus provided by the fiscal policy as well the unconventional monetary policies (Aquino & Goodman, 2010). The normalization of the monetary conditions also entails the withdrawal of both interventions in credit markets and excess liquidly. This creates good outlook for developing the economy. 4. Recommendations Enhance the competitiveness of the economic sectors lagging behind. The government should focus its investments to other sectors of the economy other than the mining industry, for instance, investing in education and infrastructure. This will improve competitiveness within its many economic sectors, as a result, creating, harmony in terms of wage differences. Slow the appreciation of the actual exchange rates. The government of Australia can make this possible by increasing the number of its investment abroad. This is capable of limiting the exchange rate appreciation. 5. Conclusion The above report clearly reveals that the concerns articulated regarding Australia having developed into a two-speed economy are based on the observation that the disparities in the economic performance of various states during the mining resources boom have been uncommonly large, and that benefits accrued from growth in mining activities and incomes are scarcely concentrated. In addition, it is also clear that there are various complex issues in managing a two-speed economy. The Australian government and the Reserve bank of Australia must therefore move delicately in order to kindle growth in areas experiencing financial slowdown while also trying not to over-inflate the economy amidst the mineral resource boom. References Aquino, K & Goodman, 2010, RBA Seen Cutting Rates to Lowest in 53 Years: Australia Credit, Retrieved on the 1st May, 2013 from De Brouwer, G & Gilbert, J, 2002, Monetary Policy Reaction Functions in Australia Farmar-Bowers, Q, Higgins, V, & Millar, J, 2013, Food Security in Australia: Challenges and Prospects for the Future, Springer Jefferson, T & Preston, A. 2010Australia’s Other Two-Speed Economy: Gender, Employment and Earnings in the Slow Lane, ABL, Vol .36, No.3, Pp.327-332 MikeyGatal.com, 2013, Women to take on men in mining, Retrieved on the 1st May, 2013 from OECD, 2010, OECD Economic Outlook, Volume 2009, Volume 2, OECD Publishing Phil, G, 2008, The resources boom and the two-speed economy, Retrieved on the 1st May, 2013 from Read More