Question

During the mining boom, it was suggested that Australia has a two speed economy - that is, some sectors that are doing really and some sectors that aren't

(a) If we have perfectly flexible labour markets, what would you expect to happen to wages in the two sectors? Explain.

(b) What government policies would you recommend to overcome the two speed economy?

Answer 1

a)

Two speed economy occurs when one sector performs exceptionally well compared to another. Thus, income and wealth rise in sector that experiences incredible rise in income.

But since here labor market is perfectly flexible, thus negative distributive impacts might not be so pronounced in this case. Rise in demand for labor in mining sector would cause flow of labor from low performing sectors to mining sector. Hence, wage rate might not rise substantially in mining sector. Further, outflow of labor from less performing sector will hold on potential fall in wage rate.

Though the flexible wage market will moderate negative impacts of two speed economy, but still there will be wage differentials in these two sectors. Skills levels differ in both sector, so it will hinder the free flow.

b)

Two speed economy might cause rise in income and wealth inequalities. Moving on, it also affects the economy positively. Growth of mining sector contributes to well being of economy, its benefits might trickle down to other sectors as well. Thus, government must appropriately study the potential impacts of two speed economy. If trickle down effects are well documented, then there is no need of government actions to tax the mining sector.

Thus, government must wait and watch,