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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Labour costs  

Labour costs include the actual wages or salaries paid to employees as well as any other costs associated with their employment (e.g. superannuation, workcover costs, etc).  

If there is a reduction in 'real' labour costs (which are nominal costs less the inflationary component), it means that the costs of employing labour fall, which tends to reduce production costs and create more favourable supply conditions.  This places downward pressure on aggregate prices (inflation) making it easier to achieve low inflation.  The lower inflation levels work to stimulate AD, via higher Consumption, Investment and net exports (X-M), thereby boosting the growth rate in real GDP and assisting in the achievement of economic growth.

With higher AD and economic growth, there is a greater demand for labour causing an increase in employment growth and a lower unemployment rate, assisting with the achievement of full employment.  With lower unemployment, or more employment, there is likely to be a reduced reliance on welfare, leading to a more equitable distribution of income. With respect to the impact on the achievement of external stability, the lower costs of production (or lower inflation) will have a positive effect on international competitiveness and net exports, increasing any surplus on Balance on Goods and Services, reducing both the CAD and Australia’s reliance on NFLs (NFD or NFE).

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