The Mackenzie Basin Boom
The Mackenzie Basin has experienced a construction and tourism boom. Over two years, regional GDP rose 7.2% while the regional population rose 5.6%. Employment grew 6.0%, and the unemployment rate fell from 5.8% to 4.1% - below the national average of 4.6%. Average weekly earnings rose 6.1%, but labour productivity (output per hour) rose only 0.3%. The regional CPI increased 6.4%, with accommodation costs up 14% and hospitality wages up 9%. Firms report 780 unfilled vacancies, and 62% say they cannot find suitable staff. The local electricity network is at 94% of capacity, and the main road carries 21,000 vehicles a day against a design capacity of 18,000. The central bank has raised the OCR by 250 basis points over the same period, and national house prices have fallen 9%.
1. Using an AD/AS model, explain the type or types of inflation the Mackenzie Basin is experiencing. Distinguish between demand-pull and cost-push elements.
Read the worked answer
Demand-pull: regional GDP growth of 7.2% and employment growth of 6.0% indicate strong aggregate demand, probably from construction and tourism. With unemployment at 4.1% and 780 vacancies, the economy is beyond full employment, so an AD shift to the right raises prices much more than output - the AD curve is operating against a steep AS curve.
Cost-push: wages rose 6.1% while productivity rose 0.3%, so unit labour costs rose by roughly 5.8%. Accommodation costs rose 14%, reflecting both demand and supply constraints. The electricity network at 94% of capacity and the road carrying 21,000 vehicles against an 18,000 design capacity are supply bottlenecks: congestion and infrastructure costs shift SRAS left.
So inflation is a mix: initially demand-pull, becoming cost-push as wage and capacity pressures feed through. The distinction matters for policy. Monetary policy can dampen demand-pull inflation, but it is poor at fixing supply-side bottlenecks; those need infrastructure investment, consenting reform and productivity policy. A regional CPI of 6.4% against a 1–3% target also shows the region is importing national monetary tightening it cannot control.
2. Explain how the fall in unemployment from 5.8% to 4.1% might overstate the improvement in the region's labour market. Refer to full employment, participation and labour force concepts.
Read the worked answer
The unemployment rate counts only people actively seeking work. If discouraged workers stop searching - for example, locals who cannot afford accommodation and leave the region, or partners who withdraw from the labour force - the participation rate falls and unemployment falls without more people being employed. The 5.6% population growth means the labour force is expanding; employment growth of 6.0% may largely be absorbing migrants rather than reducing joblessness among incumbents.
Underemployment matters too: hospitality workers on short or irregular hours count as employed but may want more hours. Skills mismatch is visible in 62% of firms unable to find suitable staff and 780 vacancies coexisting with 4.1% unemployment - that is structural rather than cyclical unemployment.
Full employment is not zero unemployment; it is the level consistent with stable inflation. If the region is below that level, wage growth of 6.1% signals overheating. The headline fall therefore overstates the improvement in labour market slack; vacancies, hours worked and wage pressure are better indicators of true tightening.
3. Evaluate whether the region's growth is sustainable. Consider GDP per capita, productivity and capacity constraints in your answer.
Read the worked answer
Sustainable growth means growth in real GDP per capita that can continue without depleting resources or generating imbalances.
- GDP grew 7.2% while population grew 5.6%, so GDP per capita grew only about 1.5%. The headline figure overstates the improvement in living standards.
- Productivity growth of 0.3% is the binding constraint: output per hour is barely rising while wages rise 6.1%, so unit labour costs are rising fast. This is not productivity-led growth; it is resource mobilisation plus a demand shock.
- Capacity constraints - 94% electricity utilisation, road volumes 17% above design - mean extra demand produces congestion and inflation rather than output.
- The construction boom is likely temporary. If it ends, employment and house prices may fall sharply.
Judgement: growth is currently unsustainable in its composition, even though the level of activity is high. Policy should shift towards productivity-enhancing investment - skills, infrastructure, technology - and diversification of the export base, plus managing the transition rather than stimulating demand further.