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This paper develops the Keynesian theory of aggregate demand in the long‐run in which persistently low levels of aggregate demand can generate persistently low levels of activity with the associated persistently high rates of unemployment. Wages are determined by firm‐worker bargaining/sharing. Investment is influenced by monopoly power, aggregate demand and the interest rate. Decreasing rates of deflation of money wages and prices even at high rates of unemployment are prevented by workers being assumed to be loss averse with respect to reductions in their wages below a reference real wage. [ABSTRACT FROM AUTHOR]

We, as taxpayers, face challenging problems in assisting the well‐being of old people mainly because preparing for and living through old age is a risky business. Through government, taxpayers can provide some insurance against the risks of old age, especially the risk of bad health and the risk of a long life. However, the ageing population suggests that maintaining this support will require increased taxation. This article quantifies this challenge for Australia and concludes that although increased taxation may be required it will be easily affordable from the much higher incomes generally received due to the secular increase in productivity. [ABSTRACT FROM AUTHOR]

Using the Keynesian model set out in McDonald (2020), in which downward wage rigidity is supported by worker loss aversion with respect to wages, this article shows that a period of social distancing (SD) can leave a post‐SD economy with both stimulatory and depressive effects. A loss of productive capacity is stimulating. Costs of restarting firms, lower labour productivity when restarted and a desire to restore wealth from debt incurred during the period of SD are depressive. If, as seems highly probable, the net effect on economic activity is negative then a fiscal expansion can restore activity. To avoid an increased government budget deficit, this expansion would probably require an increased tax rate. Reductions in real wages may also be necessary. A desire to balance the government budget combined with no increase in the tax rate would be unfortunate, because it would cause a further contraction in activity from its post‐SD level. [ABSTRACT FROM AUTHOR]

The economics of ageing is the study of economic decision‐making by individuals and government aimed at fostering well‐being in old age. These decisions include preparing for old age and dealing with the risks of old age. The risks are substantial. Using the life‐cycle model, this article considers the risks for well‐being that people face in retirement and the role of government and private insurance in meeting those risks. The perspective of the life‐cycle model is also used to consider the gender gap in wealth on retirement. [ABSTRACT FROM AUTHOR]

In the 1930s, John Maynard Keynes and Joan Robinson observed a flex–fix sequence of money wage adjustment, which is changes in aggregate demand may initially change money wages but then money wages will settle at new levels even if unemployment is high. Their discussion of this pattern alluded to the importance of loss aversion in wage setting. This paper shows how loss aversion in wage setting can explain the flex–fix sequence of money wage behaviour in a way which is consistent with the observations and ideas of Keynes and Robinson. [ABSTRACT FROM AUTHOR]

To address the economic problems facing Australia in 1986 required wage restraint, which required in turn overcoming loss aversion by workers with respect to their wages. The Prices and Incomes Accord was able to do this. Attempts to address Australia's current economic problems are stymied by tax resistance. Addressing tax resistance requires overcoming loss aversion by voters with respect to their post-tax incomes. The success of the Accord suggests that Accord-type policies could reduce tax resistance by broadening people's perspective beyond their post-tax incomes to the broader spread of benefits for them and others. [ABSTRACT FROM AUTHOR]

An introduction to the journal is presented on topics including Household, Income and Labour Dynamics in Australia (HILDA) survey deprivation data; and development of a good public policy.

An introduction to the journal is presented which discusses articles on topics including the well-being of older people based on life satisfaction, the difficulty for households to make decisions about superannuation, and the gender gap in financial resources.

This paper provides a new rationale for Uzawa preferences based on social choice; instead of positing that poor people are more patient because they are poor, it posits that poor people should be more patient if they wish their living standards to catch up with richer people. To provide a setting for this new rationale, the present paper studies the socially optimal choice of living standards over time by social planners for countries that, from low levels of total factor productivity (TFP), experience a gradual catch-up of their TFP level with that of the leader country. In the TFP catch-up scenario, the socially optimal choice of consumption and saving based on time additive preferences leads to no catch-up of living standards. To generate living standard catch-up we propose other-regarding Uzawa preferences, in which the rate of time preference is influenced by the gap in living standards between follower country and leader country. This other-regarding specification is consistent with recent findings emphasized in behavioural economics. The other-regarding Uzawa preferences form is illustrated quantitatively by simulating a model of the world economy. [ABSTRACT FROM AUTHOR]

Conventional economics, which is based on Homo economicus, cannot provide a satisfactory explanation for the global financial crisis. However, behavioural economics, and the concept of present bias, self-serving bias, ‘new era’ stories, money illusion, comparisons with reference levels and herding, can provide an explanation. [ABSTRACT FROM AUTHOR]

This article provides an introduction to behavioural economics, which incorporates psychology, sociology and neuroscience into traditional economic thought. Conventional economics emphasizes human rationality and individual consumption through the utility function. However, this ignores other aspects of human behavior such as patriotism, religion, sexuality and fear. Instead of relying exclusively on statistics and econometric analysis, behavioural economics employs surveys self-reports of happiness and well-being.

The major failures of macroeconomic policy in the last 40 years are the huge increases in unemployment and inflation in the 1970s and the persistence for 25 years of the former. This article uses econometric estimates of a model of the range of equilibria for Australia for the period 1965:4 to 2003:3 to evaluate the role of macroeconomic policies in these failures. Our analysis distinguishes the roles of aggregate supply policies and aggregate demand policies. We conclude from our analysis that macroeconomic outcomes would have been better over this period had monetary policy been guided by a hierarchical inflation target, which is to be set so as to achieve the highest level of activity subject to satisfying the inflation target. [ABSTRACT FROM AUTHOR]

In this paper we compare the estimates of the range model in Lye and McDonald (2005a) with estimates of a natural rate model. We find that the range model is superior to the natural rate model according to econometric criteria and economic plausibility. Our estimates of the range model suggest that a significantly lower rate of unemployment is obtainable at the current time by aggregate demand policy, indeed a rate of 3.1 per cent for 2003:3 compared with about 6.5 per cent for the natural rate model. Thus we conclude that basing macroeconomic policy on the natural rate model would underrate the possibilities for economic welfare in Australia. [ABSTRACT FROM AUTHOR]

This paper combines the microeconomic foundations of earlier models of a range of equilibrium rates of employment to generate a model with a diamond of equilibria. Analysis of the diamond model shows that for a depressed economy an expansionary aggregate demand policy can, without violating rational expectations of inflation, generate a central proposition of Keynesian economics—a non-inflationary expansion (NIE), that is a permanent increase in employment without increasing inflation. The microeconomic foundations of the model draw on ideas of customer markets, reference dependence and loss aversion. It is also shown that the possibility of achieving an NIE is enhanced if a macro price policy, such as incomes policy or inflation targeting, accompanies the expansion in aggregate demand. [ABSTRACT FROM AUTHOR]

This paper updates earlier estimates that show the existence of a range of equilibrium rates of unemployment in Australia. Within the range of equilibria framework, the paper goes on to test the effectiveness of incomes policies, enterprise bargaining and inflation-target based monetary policy for influencing the rate of inflation in Australia in the period 1965 to 2001. Incomes policies, especially the Accord, and enterprise bargaining are shown to have caused permanent reductions in the rate of inflation. The inflation-target based monetary policy is shown to be associated with, but is not shown to have caused, a reduced impact on inflation of changes in the level of activity. [ABSTRACT FROM AUTHOR]

The article discusses the relation between the demographic change and recession in Japan. The first half of the article considers the sources of the post-1991 recession and the ineffectiveness of aggregate demand policy in dealing with this recession. In the second half of the article, attention turns to the future prospects for Japan. The nature of prospective demographic change in Japan is described. Then, taking into account future demographic change, two possible paths of future saving rates and the implied paths of future living standards are described and evaluated. In the conclusion, the challenge of reducing saving is discussed. Since 1991, the rate of employment in Japan has increased steadily, from 2.1 percent in 1991 to 5.5 percent in 2002. Two major policies that government has at its disposal to counter a weakness in aggregate demand, that is monetary policy and fiscal policy, have not been effective in Japan in countering the post-1991 recession. The article has argued that demographic change in Japan, by weakening aggregate demand, is an important cause of the post-1991 recession and that the continuation of this demographic change will cause further weakness in aggregate demand.

Focuses on the issue concerning the viability of social support from the Australian government for old people in the future. Effect of demographic change on government social outlays; Projections in the Intergenerational Report of the Australian Treasury; Introduction of the living standards trade-off between young and old people.

Falling rates of fertility in many countries have led to concerns that low fertility is a threat to future living standards. In this article we report simulations of living standards for Australia that take into account the effect of demographic change. These simulations show that reduced fertility would actually increase living standards, albeit by a small amount. We also present projections of government social outlays. These projections suggest that reductions in fertility will have an insignificant or tiny tax-disincentive effect on GDP, thereby reinforcing our conclusion that reductions in fertility are not a threat to future living standards. [ABSTRACT FROM AUTHOR]

A macroeconomic model is developed in which the psychological concept of loss aversion is incorporated into workers' preferences. The impact of monetary policy in the presence of loss aversion depends on the specification of the reference wage. The plausible specification that a worker's reference wage is the real wage she was paid in the previous period is considered in detail. Specifying the reference wage in this way, we show that an unanticipated change in monetary policy has a permanent, real effect when short term labour contracts are written in nominal wages. [ABSTRACT FROM AUTHOR]

Making allowance for the ageing structure of the population, this paper calculates the levels of optimal national saving and future living standards for Australia for the period 1999-2050. For this period, the optimal saving response to the ageing of the Australian population is for national saving to increase from its current level by 2.7 per cent of GDP by the year 2017 and then to decline to the year 2050. The implied growth of living standards is 1.20 per cent per year. Reduced immigration would reduce the rate of growth of living standards but reduced fertility would not. [ABSTRACT FROM AUTHOR]

The setting of monetary policy in Australia is guided by the inflation target-which is to keep the rate of inflation in the range of 2 to 3 per cent in the medium term. This article considers whether monetary policy can induce a permanent decrease in the rate of unemployment without violating the inflation target. The existence of customer markets will induce firms to allow their profit margins to fall and this will reduce the required fall in the real reference wage. Monetary policy should be exploratory in attempting "to find the bottom of the range of safe unemployment rates." The adoption of an explicit inflation target as an objective of monetary policy can enable monetary policy to yield better outcomes on unemployment. This is because the inflation target helps to anchor the expected rate of inflation. For wage and price setters the inflation target is a guide to the future rate of inflation. An exploratory policy may on average, over a sweep of years, cause the actual rate of inflation to exceed the expected rate of inflation. The price of low unemployment is eternal vigilance.

It is shown by numerical examples that, for the simple "two states of the world" version of Azariadis' original model of implicit labour contracts, enormous fluctuations in output price are required to generate layoffs. The paper then modifies the simple model, replacing the perfectly competitive product market specification with a sales constraint. This modification makes a significant difference; the combination of sales constraints and risk-shifting is shown to have the potential to explain layoffs. Since this sales constraint is unmotivated by micro analysis, its inclusion does not satisfy the original aim of the risk-shifting employment model to explain layoffs as based on micro foundations. A secondary aim of the paper is to make the workings of the risk-shifting employment model easier to understand by introducing a new diagrammatic analysis based on a contract curve. [ABSTRACT FROM AUTHOR]

It is shown that customer market analysis combined with trade union wage setting can yield a range of equilibrium levels of employment. Only when employment is forced outside this range can the disequilibrium acceleration or deceleration of prices be expected to operate. Numerical calculations with the customer market model suggest that this range is quite large, implying that the maximum level of unemployment consistent with non-decelerating inflation is way above the minimum level of unemployment consistent with non-accelerating inflation. This model with its range of equilibrium levels appears to be in closer agreement with empirical experience than natural rate of unemployment models.
This paper has shown how customer market analysis can yield a range of equilibrium employment levels. This range separates the zone of increasing inflation from the zone of decreasing inflation. In the analysis economic agents optimize subject to the constraints they face. Consequently the limits on price and wage flexibility that emerge result from maximizing behavior. Furthermore, in the model of this paper individuals are not mistaken about the true values of relative prices within the equilibrium range. Rather, the information problem that the customer market analysis addresses is a problem of ignorance of possible changes in other firm's prices. The model has been made as simple as possible to highlight the important implications that can be drawn from the costly flow of information outside a firm's clientele, the feature of customer markets. [ABSTRACT FROM AUTHOR]

The article presents a method of measuring trade union power and of investigating its determinants. It provides the definition of trade union power implied by the asymmetric Nash solution to the trade union/firm bargaining power. The article uses two alternative models of a trade union, an insider-dominated model and an open union model. The measure of union power was calculated, using Australian data for the period 1966 to 1989. The study used regression analysis to show that union power is inversely related to the aggregate level of unemployment.

This paper examines the implications for trade union wage demands of a shift away from income tax towards a commodity tax such as Value Added Tax (VAT). This subject warrants detailed analysis in view of the shift towards indirect taxation by most of the major industrialized countries and the widely held view that unions are concerned with real after-tax earnings rather than gross wages. A basic analysis of a union's objective in the presence of taxes is described. A specification of revenue neutrality is then given. The effect of different types of change in the tax structure on the wage demands of monopolistic unions which set the wage rate and allow the level of unemployment to be determined by the demand for labor are then examined followed by the examination of the implications of tax changes for efficient bargains in which the agreed wage is given by the Nash solution. The definition of aggregate revenue neutrality used here holds revenue constant at the original level and distribution of wages in the economy.

In this paper, the following four models of wage determination by trade unions, namely simple monopoly, wage-bargaining (or `right to manage'), efficient bargains and insider-dominated, are placed within a single framework. It is shown that the pattern of wage behaviour is the same in each of the four models. It is also shown that when taxation is introduced the impact on wages of changes in marginal and average rates of tax is similar across the models. [ABSTRACT FROM AUTHOR]

This paper extends the theory of the determination of retail prices in a customer market to a shop selling many types of goods. For a multi-good shop, a discontinuous marginal revenue function for each good sold is derived Under reasonable assumptions the size of this discontinuity depends only on the customer dynamics and is independent of own-price elasticities and cross-price elasticities. A discussion of the determination of producer prices shows how the theory can explain the relative stability of retail prices. [ABSTRACT FROM AUTHOR]

To reduce the level of tax evasion, a shift of taxation away from income tax and towards a consumption tax has been proposed tn Australia. This paper shows that for such a shift to maintain revenue but not induce trade unions to raise their wage demands, it is necessary that the income tax threshold be increased Numerical examples of desirable tax packages are given. [ABSTRACT FROM AUTHOR]

If prices are affected by both cost-push and demand-pull factors then a change in the policy mix towards fiscal ease can improve output, employment and the balance of trade without the price level rising. However the policy change may reduce investment and so affect the intertemporal allocation of resources. This paper derives conditions for tax cuts to ameliorate inflation and unemployment without a sacrifice of future output. Numerical examples suggest that one can have no presumption that the conditions are or are not likely to hold in general. The discussion is related to Corden's recent analysis of a 'free lunch'. As a cure, or part of a cure, for stagflation the policy of cutting taxes has its attractions.[1] A reduction in taxes may cut costs and prices and at the same time stimulate demand and thus employment. Thus the one measure would appear to attack both problems of inflation and unemployment. [ABSTRACT FROM AUTHOR]

Examines Australia's macroeconomic policy aimed at preventing long-term unemployment as of 1993. Number of unemployed for more than 12 months; Factors for long-term unemployment; Definition, rate and history of long-term unemployment; Lagged effect of the rate of aggregate unemployment.

Determines the social opportunity cost of consumption (SOCC) for Australia using overseas interest rates. Influence of SOCC in socially optimal levels of investment and current account surplus; Introduction to the development of the SOCC concept; Adjustment of the nominal interest rates for imperfect foresight; Mean value for the SOCC from 1960-61 to 1988-89.

This article sets out the basic ideas of macroeconomics and describes some trends in the Australian macroeconomy relevant for year 12 economics. [ABSTRACT FROM AUTHOR]

Argues that the major uncertainty about the Australian economy facing policymakers at the present time is the level to which unemployment can be reduced without creating a situation of excess demand with the associated tendency of the rate of inflation to increase. Size of the current account deficit; Increase in private investment in the country; Overview of fiscal policy in Australia in 1989.

The fringe benefits tax (FBT) has been criticised for being levied on employers. This criticism is based on a confusion between who has the liability to pay the tax and who bears the burden of the tax. We show that the burden of a fringe benefit tax is independent of who pays it. Furthermore our analysis suggests that the burden of the FBT will fall mainly on upper income groups. We also discuss how the imposition of the FBT will change the optimal mix of fringe benefits supplied by employers, with some benefits being ‘cashed out’. [ABSTRACT FROM AUTHOR]

This article reviews macroeconomic policy in Australia since the 1960s. It is argued that economic thinking by Australian governments progressed from a Keynesian approach to a classical approach in 1975 and then to a Keynesian-classical synthesis in 1983. To the usual major indicators of macroeconomic performance, unemployment and inflation, the article adds a third indicator, called thrift. Thrift is a measure of how society is allocating its resources between current and future consumption. The record of thrift for Australia since the 1960s is described and evaluated. [ABSTRACT FROM AUTHOR]

This paper examines the effect on unions' wage demands of two types of policy. The first changes tax revenue while keeping progressivity constant; the second policy changes the degree of progressivity of the tax structure while keeping total revenue constant. Progressivity is measured in terms of the relative dispersion of the distribution of post-tax wages. These types of policy were examined by Hersoug (1984), using a two-parameter tax function first suggested by Edgeworth (1925, ii, p.249). However, a linear function with a threshold level of income and a constant marginal rate is more realistic and has parameters which are more readily interpreted. This paper uses both types of tax function, the Edgeworth tax function in Section II and the progressive linear tax function in Section III. [ABSTRACT FROM AUTHOR]

The paper focuses on the derivation of a range of macroeconomic equilibria. To sharpen this focus the model is made as simple as possible. It is assumed that all workers throughout the economy are unionised and that all firms face the threat of foreign competition. Of course, a more realistic model would allow for some sections of the labour force to be non-unionised. In some of those sections the competitive model would determine wages, in other of those sections the efficiency wage theory would play a role. Furthermore, realism suggests a variety of price-setting mechanisms, not just the limit pricing of this paper. Competition, monopoly, imperfect competition and customer-market analysis all no doubt have their niches in an industrialised economy. However, the aim here is not to develop a macroeconomic model which captures all these sectional details. The aim here is to show how the combination of a selfish trade union with limit-pricing can generate a range of macroeconomic equilibria. The simplest way to do that and to get some idea of the potential of this idea is to construct the simple model of this paper. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to explore how gradual price adjustment affects the role and quantitative importance of anticipated and actual monetary policy in Australia. In section II, the key theoretical channels whereby anticipated and actual monetary policy influence cyclical output are analysed using a model derived from Buiter (1980). These channels are the rational expectations mechanism generating expected prices and the existence of gradual price adjustment. Both channels explain only the short-run deviations in output from its long-run or "natural" rate. The role of long-run systematic influences via the channel of unemployment benefits is also examined. In section III, the theoretical model is estimated using quarterly data for Australia, 1968.3-1980.4. The model is specified such that rejection of the hypothesis that prices adjust to clear markets can also be interpreted as a rejection of the policy ineffectiveness proposition. Finally, in section IV, the main conclusions of the paper are drawn together and discussed. [ABSTRACT FROM AUTHOR]

At the current time, the measurement of well-being is the subject of controversy and debate. This introduction briefly summarises the four contributions to this debate published in this Policy Forum. All the articles are critical of using gross domestic product per capita as a measure of well-being and offer various suggestions for an improved measure. [ABSTRACT FROM AUTHOR]

The article discusses various reports published within the issue, including one on the effect of inflation on unemployment, one on the inflation barrier, and one on the effect of the mining boom on national wealth.

This article presents an overview of several research on the policy implications of behavioral economics. Christina Fong, Samuel Bowles and Herbert Gintis argue that the support for redistribution to poor people depends on the perceived disposition of the recipients. They call this strong reciprocity. Meanwhile, Yew-Kwang Ng argues that private consumption expenditures have a negative externality, due to a keep up with the Jones effect, and that this is an inefficiency of private consumption. On the other hand, David Blanchflower and Andrew Oswald presented a survey on the correlation between individuals' subjective assessments of the level of their happiness and other measures across individuals that can be argued to indicate their level of happiness.

Gives an overview of the fiscal policy in Australia and Southeast Asia. Tightening of the fiscal policy in the Howard Government; Implications for the intergenerational distribution of resources; Impact of the tighter fiscal policy in Southeast Asia.

The article comments on the article "Infrastructure Spending and Unemployment: Government Responsibility for Growth and Jobs," by Peter Kenyon. The current rate of unemployment in Australia is excessively high. The Australian population would benefit greatly from government economic policies that reduce the rate of unemployment. Peter Kenyon argues in his paper for an increase in publicly funded infrastructure projects. Such a policy would be, in his view, the quickest and surest policy to deal with unemployment. In arguing for this policy, Kenyon observes that studies have shown that public sector infrastructure creates positive externalities for the private sector. Furthermore, Kenyon argues that, in Australia, productive infrastructure projects are there for the investing. This he infers from his view that the decline in Australia in public investment from 8 per cent of GDP in the 1960s to about 4.5 per cent of GDP now was caused by `the short-term policy of government budget deficit reduction' and not by fewer projects passing the test of cost-benefit analysis. Kenyon points out that this decline in public investment has not been accompanied by an offsetting increase in private sector investment. These arguments suggest that an increase in public investment would be productive.

An introduction to the journal is presented which discusses various papers published within the issue, including one on political influence as a major cause of wealth inequality in Australia, one on corporate influence in political decision-making and another on income inequality trends in Australia.

This paper applies a two good, multi-region Ramsey-Solow model of the world economy to determine the impact that alternative world fertility rates would have on international capital markets and living standards. Notable features of the model include: relative consumption demands and relative employment efficiencies that vary by age, traded and non-traded goods, vintage technology, outward-looking reference consumption, a proportion of non-optimising rule-of-thumb consumers and imperfect capital mobility due to asymmetric information. The model suggests that projected demographic change will imply a flow of international capital from the ageing regions to the younger regions; and that the world interest rate will fall. The lower world interest rate will cause a loss in living standards for ageing regions, the lenders, and a gain for the younger regions, who are borrowers. [ABSTRACT FROM AUTHOR]