Economics – Unemployment and Welfare
Question 1 – Background
To understand social welfare it is fundamental to get a full picture of what is welfare. According to Williams (1976, p.28), "’well’ in its still familiar sense and fare, primarily understood as a journey or arrival, but later also as a supply of food." Social welfare can be viewed in two different ways; first, it can be viewed through the lens of one's everyday life, and second, it can be viewed through the societal macro level. Most of the times, it is tied with social justice. Yet, in the international definition and framework of social welfare, it is directly tied up with social investments, the transitions of the labor markets and life-source saving models being adopted by the country.
Walker (2005) noted that "the term welfare is used to refer to the goals of social security systems and to measures of the performance of systems, schemes or programmes. Distinctions are made between, first, the welfare or well-being of individuals and families, and (…) secondly, between individual well-being and that of societies as a whole." The stress of social welfare is to get a comprehensive analysis of the social justice with focus on the importance of public aspects including the need of understanding the condition of the labor market as exposed by the tax system and its role in the civil society. Due to the different views on social justice, it is hard to define or to arrive at a theoretical meaning of social welfare, but it is best defined through its indicator such as the Gross National Product of the country, its poverty lines, and other economic metrics that can provide an overview of the different macroeconomic forces that are affected the GDP as well.
One of the first welfare states is Australia. The Australian government pays individuals and families as a way to support them who cannot support themselves through assistance of some costs such as raising their children. However, over the past years, several criticisms have been raised regarding the social welfare system adopted by Australia. In the recent report titled A New System for Better Employment and Social Outcomes, The Reference Group of the Department of Social Services noted the need of providing incentives to those who can actually work, while at the same time providing support to those who cannot really attend work. In the same manner, there is a need of supporting social and economic participation with the focus on measures that help individuals and families to achieve sustainable future.
While the Reference Group's Interim Report demands for a clear redefinition of social welfare in Australia through four fundamental reforms on simpler and sustainable income support system, strengthening of family and individual capacity, engagement of employers, and building of community capacity, it is important to note the statistical report of Australia's social welfare as being exhibited by its health condition, social cohesion, and participation. The report of the Australian Institute of Health and Welfare (2013) noted that there are 6 times more people aged 85 and above in 2012 compared to record of 1972, thus also increasing the support demand. Based on the 2009-2010 household report, 1 out of 4 people who are living in regional and remote areas are living below average household income. In the same manner, Australian's, on
average, earned $314 per week with one-fifth of the total household earning this after tax.
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average, earned $314 per week with one-fifth of the total household earning this after tax.
In the federal budget last year, 34.68% was spent on social security and welfare programs with 13.75% going to the assistance and support need of the aging population, 8.77% went to the raising of children, and only 2.4% going to the unemployed and sick member of the labor market. While the amounts are staggering, it is important to note that Australia ranks low compared to other OECD nations in terms of the welfare spending as a percentage of the Gross Domestic Product or GDP. Its social welfare is only 19.5% of the total GDP.
Question 2 – Supply & Demand
Supply and demand is an economic model being used in the determination of price in the market. It is based on the fundamental principle that, granted in a competitive market, the unit price of a anything will vary until it settles wherein the condition of quantity demanded by consumers is equal to the quantity supplied by producers. There are four basic laws surrounding the supply and demand framework (Braeutigam, 2010). First, if the demand of any product increases without a change to the supply, shortage happens with the price going up. Second, if the demand decreases without a change to the supply, surplus occurs with price going down. Third, if the demand of any product does not change and the supply volume increases, a surplus occurs with the price going down. And lastly, if the demand is not change and the supply decreases, then a shortage occurs with the price going up.
The supply and demand model is usually applied to the labor market or wage determination. In this case, the roles of the supplier and the demand creator are reversed. For this, individuals become suppliers who are selling their labor at the highest price; on the other hand, demanders are businesses who try buying labor they need at the lowest price. Equilibrium of the labor market is the wage rate being created. In this scenario, instead of having normal goods playing in the market for shortage and surplus conditions, labor market involves people who can provide specific skills and qualifications.
Figure 2 Simplistic Illustration of Supply and Demand in the Labor Market
Primarily, the condition of the law of supply and demand in the labor market is that the market should be free or in a sense, competitive for factors and essentials of the model to actively work. The relationship of the supply and demand will only work when the market is allowed to freely move up and down without the intervention of external factors (Vienneau, 2005). The thing about the labor market is that most are shy from studying the supply and demand scenarios because labors are not like goods that are traded freely.
Looking at the graph above, the labor supply curve is the number of individuals who are willing and capable of working at different wages. On the other hand, the labor demand curve is the number of workers that firms are willing and capable of hiring at different wages. In the illustration, it is shown by the different levels of supply and demand. Because firms can hire people at different wages, and individuals want to work at different wages, it is important to plot these differences. However, as shown, there is a certain level of equilibrium wherein the labor and supply curves met. This is the level of wage rate wherein those who are willing to work at different wages and firms who are willing to pay at different wages met.
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For a better understand, let us try to compare two occupations and see how the supply and demand model works.
Based on the illustration, the wage rate for nurses is $44,840 while the wage rate for hotel clerks is $16,380. There is a wide difference between their wage rates, but these wage rates are actively paid by the supply and demand laws. First, it is important to note that the supply of nurses is lower than that of the hotel clerks. With the low supply of nurses, their value or price increases. Second, it is also important to note that the differences of education can also play a factor in the supply and demand. Because only few people would want the lengthy training of nurses, then the supply is low. The wage rate is reached when the hotel clerks agreed to be paid at this rate and firms also agreed to pay the same.
Question 4 – Research
Money wages are wages paid to individuals regardless of the inflation in the market. It does not take into account the purchasing power of money and the wage received by the person is the one being agreed on when the person was hired. On the other hand, real wages take full consideration of the inflation rate or the change of the purchasing power of the wage or salary received by the person. It is the amount of goods or services that can be purchased by the person after considering the impact of inflation. Compared to years ago, the purchasing power of wage has decreased with the increasing inflation rate. Instead of buying 10 boxes of cereals years ago with only $5.00, now the same amount of money can only purchase 5 boxes of cereals (for the sake of illustration). This means that the wage received by the person has reduced in value by 50%.
Money wages are paid by the company regardless of the inflation rate. This includes the basic salary package that the person receives with the additional fringe benefits attached to the provision. For a note, the increase or decrease of the money wages is not dependent on the economy, but is solely the discretion of the employer. In a sense, the employer takes monopoly in the determination of the wage that should be brought home by the person.
Real wages, on the other hand, are more conservative and realistic in terms of consideration of the real condition. It is the actual amount that the person receives with the measurement of amount of goods and services exchanged with the amount (Cox & Alm, 1997). Real wages provide a condition on the purchasing power of the person, and not just on the theoretical framework of wage. For comparison, a person may receive $1,000 as wage, but it can only pay the rent of the apartment. Money wages is $1,000, but the actual real wage is being exhibited or shown by the capability of the person to pay the rent of the apartment. In consideration to the whole need of the person, the purchasing power is way low than the actual need of the person.
In terms of wage index, the most active player is the inflation value of goods as being adjusted and calculated yearly. It is necessary for the country to calculate the value of inflation to be able to make a direct understanding on the wage rate. Because of the growing difference between the real wage and money wage, the equilibrium between the firm who want to pay wage at rate A and that of workers who are willing to work for a rate of A also changes. By properly calculating the level of inflation and how it affects the purchasing capability of the person, then wage rate is determined properly to help both parties to arrive at the equilibrium that is acceptable to both. In a sense, the active player of the wage index is the cost of living change as inflation changes. The geographical demographics of the region play a role in the cost of living change. In urban areas wherein demand for goods is higher, then the cost of living also increases. Active engagement of the labor market plays a role in this condition of nominal wages and real wages.
Question 5 – Conclusion
Generally, there is a direct growth of the number of workers that are joining the labor market. With the increased population of the world, it is but normal for the number of people looking for work to also increase. According to the report of The Economist (2012), emerging markets are responsible for the large volume of workers who are joining the labor market every year. According to the International Labor Organization (2014), there are more than 202 million people who are looking for work but can't find work – they are commonly called as unemployed or members of the unemployment pool. To be noted that the unemployment level may vary as those who are counted are only those who are willing to work at the period. There are those who are capable of working, but are not yet looking for work, and when they do enter the global labor market, and then the unemployment level increases.
However, following the supply and demand model, there is a direct problematic to the way the labor market works. According to the report of The Economist (2012), unbalanced skilled workers resulted to inequality of the labor market. For instance, with the rise of the demand for education, those in emerging markets and countries are still languishing or suffering from the problem of education. Because they are not education, they cannot find jobs in industries that demand for intensive labor. While there is a demand for specific skills and capabilities, the supply of the same is low, thus increasing the wage rate. The surplus of the labor market results to unemployment, but the surplus can also be traced to the incapacity of labor. While there is a demand, surplus in the labor market cannot meet the demand due to the qualification problem.
Another important part of the report made by the International Labor Organization (2014) is the fact that around 839 million workers are earning and living on less than US $2 in 2013. With more than 2.9 billion members of the labor market, a large percentage of the same are paid less. If we are going to apply the nominal or money wages and real wages concept, 839 million workers received nominal wage of $2 only, but the real wage of the said is lower than that. With the high inflation rate that is being faced by most emerging markets, the wage received by workers is considerable lower. The real wage or the amount of goods and services they can receive from the salary is very low. This means that it would be impossible for them to live in considerable above poverty.
The labor market is a very important part of the national and global economy. With the labor market, there is a cycle of money from the business to the people to the business. However, with the low real wage, it is impossible for the economy to be spurred with purchases. It should be the focus of governments to increase the level of employment with direct impact to the real wage received by workers through focus on the wage rate received by workers.
References
Australian Institute of Health and Welfare. (2014). Australia's welfare. Australian Government.
Braeutigam, R. (2010). Microeconomics (4th ed.). Wiley.
Cox, E. (2014). The state of Australia: welfare and inequality. Retrieved from
Cox, M. & Alm, R. (1997). "Time Well Spent: The Declining Real Cost of Living in America."
Annual Report of the Federal Reserve Bank of Dallas.
International Labor Organization. (2014). Weak economic recovery does not extend to jobs.
International Labor Organization.
The Economist. (2012). United workers of the world, The Economist Newspaper Limited.
Retrieved from http://www.economist.com/node/21556974
The Reference Group. (2014). A New System for Better Employment and Social Outcomes.
Department of Social Services.
Vienneau, R. (2005). "On Labour Demand and Equilibria of the Firm", Manchester School, V.
73, N. 5 (Sep. 2005): 612–619.