Unit 1 The supply side of the macroeconomy: Unemployment and real wages

1.1 Family fortunes: Jobs, wages, and the global macroeconomy

Mining was not a job, it was a way of life for Doug Grey, a rigger who operated giant cranes at mines in the Northern Territory, Australia. In the 1990s, he helped construct the MacArthur River zinc mine, one of the world’s largest, where his son Rob got his first job. ‘I ended up driving ore trucks,’ Rob recalled. ‘That was an awesome opportunity.’

Rob, it seemed then, had been born at the right time. He entered the labour market just as the worldwide natural resources boom was taking off, driven by the demand from China’s rapidly growing economy. It was a great life. Rob lived in Thailand for a time, spending little and building up his savings. He would take a flight to his job in Borroloola, a round trip of 10,000 km.

At about the time that Rob started work, Doug, the elder Grey, took a job at the Pilbara iron ore mine in Western Australia, which paid about twice the average family income in Australia at the time. Both father and son were putting away substantial savings.

But by 2015, the natural resource boom was a distant memory, and the price of ore and zinc continued to plummet. Rob and his fellow miners were worried. ‘Everybody knew the economic downturn and commodity prices were a problem. We had that in the back of our minds.’ Their dream economy couldn’t last. ‘It was … obvious … that it was coming to an end,’ Doug said.

And it did. In late 2015, Rob got the bad news: ‘Two days into my break the general manager called and said, “Thanks for your service, we appreciate it, we have to let you go.”’ His father, too, was laid off.

Driving ore trucks was Rob’s passion and he hoped to get back behind the wheel. But that was not going to happen, at least not at the Pilbara mine where his dad once worked. Faced with collapsing demand, the mining company cut production, and also sought to drastically reduce costs. As part of this process, the company replaced human labour with machines wherever possible. In the Pilbara mine, nobody is behind the wheel of any of their giant robot ore trucks that are now being ‘driven’ by university graduates with joysticks 1,200 km away in Perth.

The rise and fall of the Grey family’s economic fortunes is an example of how the workings of the labour market in the mining and construction industries in Western Australia and the Northern Territory are affected by global events and by new technology. The boom in ore prices made mining highly profitable, leading to many years of strong demand for labour, which eventually dried up the pool of unemployed riggers and truck drivers. Mining companies had no choice but to pay extraordinarily high salaries, and while the mining boom lasted, the companies remained highly profitable.

The downturn in commodity prices began in mid-2011 and unemployment began to rise. Born-at-the-right-time Rob Grey’s luck had run out; across the Australian economy increasing numbers were seeking work and not finding it.

Macroeconomics

Having a job and the wage you are paid to do it are a major influence on people’s well-being. The study of the economy as a whole—the macroeconomy—provides a lens for understanding the factors that frame the possibilities for individuals and families. Life is very different if your wage is growing at 2 or 3% per year rather than stagnating, and if the unemployment rate is 5% or twice that rate. And what matters for living standards is the real wage—how much you can buy with your earnings. If your wage rises by 2% but prices in the economy rise by 3%, you are poorer than before.

Unemployment and incomes are affected by global and national events. In recent decades these have included the long period of growing demand for Australian iron ore driven by China’s rapid growth, the global financial crisis, the COVID-19 pandemic, and the energy price shock at the start of the Russia–Ukraine war. Policies such as Brexit or a trade war matter too, as does the organization of unions and the regulation of market power of dominant firms. New technology provides the scope for real wages to grow and for jobs to be created and replaced, as in the case of the robot-driven ore trucks.

This book teaches about what lies behind the average unemployment rate in a country over periods of five to ten years, as well as what causes booms and recessions. We examine how government policy can limit the costs that job loss imposes on workers and families. We examine the role of technology and capital accumulation in job creation and destruction, and in long-run productivity and real wage growth.

We start with a puzzle: why do high-income countries in which firms compete in the same global markets and access the same technology differ in unemployment rates and real wage growth?

Figure 1.1 takes the period between the global financial crisis and the COVID-19 pandemic and shows the average unemployment rate and annual growth of real wages for a group of high-income countries. The space is divided into four quadrants—at the bottom right is the combination of low real wage growth and high unemployment—a poor performance. At the top left is the opposite—low unemployment and high real wage growth. Countries are to be found with all combinations.

Fullscreen

https://www.core-econ.org/macroeconomics/01-supply-side-macroeconomy-01-jobs-wages.html#figure-1-1

Figure 1.1 Unemployment and real wage growth in 15 high-income countries (2010–2019).

OECD. 2021. OECD Statistics; US Bureau of Labor Statistics. 2021.International Labor Comparisons.

One key feature is the disparate performances of the five large economies in western Europe, which are highlighted with red diamonds. For most of this period, all five belonged to the European Union and four of them shared the same currency, the euro.

In the first two units, we start to explore this puzzle by constructing a model that explains the forces that lie behind a country’s real wage and unemployment outcomes.