Crucial chance to lift all Australians up

My article on full employment in the Sydney Morning Herald, 1 March 2022

Peter Davidson
Adjunct senior lecturer at the Social Policy Research Centre, UNSW
Sydney Morning Herald, March 1, 2022

The econocrats at Treasury and the Reserve Bank threw everything they could at the deepest recession in living memory when COVID arrived. Higher unemployment payments, wage subsidies, infrastructure investment, interest rate cuts and government bond-buying were all deployed to save jobs and incomes.

Now that they expect unemployment will fall this year to its lowest level in 50 years, they now want to keep it there as long as possible.

A similar thing happened after World War II, when unemployment fell in the war economy and governments decided to use the same economic tools to maintain “full employment” in peacetime. They managed their budgets and interest rates to sustain demand for goods and services so the workforce was fully employed.

It worked: for almost 30 years there was no major downturn and prosperity was widely shared as incomes grew and unemployment remained below 3 per cent.

We turned our backs on full employment in the 1970s, forsaking people to the unemployment queues. High unemployment was rationalised as the unavoidable side effect of the fight against inflation and budget deficits.

We have an opportunity to again put people affected by unemployment and inadequate incomes at the heart of economic policy. Will we commit to full employment, or have we lost our ability to imagine a society where practically everyone seeking employment can have a decent job?

Australia’s unemployment rate has fallen from seven per cent to 4.2 per cent, with 90,000 new workers finding jobs during November last year as our economy bounced back faster than expected.

The pull of “return to normal” is strong. We hear dark warnings from bank economists about an upsurge in inflation, employers about labour shortages, and deficit hawks about ballooning public debt.

So let’s take a moment to imagine full employment.

Most importantly, it would lift a million people on unemployment payments out of poverty. Being excluded from paid work is a tragic human experience. For too long, millions have been held hostage to economic policies that deliberately kept unemployment above 5-6 per cent for fear of a breakout in inflation.

For this sacrifice to the nation, they receive the $45-a-day JobSeeker Payment and live in destitution. We’re so conditioned to high unemployment that people affected are routinely blamed for not trying hard enough. The JobSeeker regime is brutal: life-sustaining payments are automatically suspended for minor infractions like missing a job centre appointment.

It won’t be easy to reduce unemployment further because those still on unemployment payments belong to groups that are regularly screened out of job interviews. Four out of five have been on income support over a year, one in three has a disability and four in 10 are over 45 years old. Each is a person, often losing hope, repeatedly rejected. Yet if there are enough vacancies, and we invest in decent employment services, training and wage subsidies, employers will consider people overlooked in the past.

In a modern economy where a third of workers, mainly women, are employed part-time and a quarter are in casual jobs, full employment means adequate and secure working hours as much as having a job.

Many people in retail, hospitality, caring and labouring jobs struggle to survive on a few days of paid work a week. Many don’t know how much they’ll earn next week or whether they’ll still have a job. Low unemployment alone won’t fix this, but it’s heartening to see underemployment decline as unemployment falls.

Australia used to pride itself as a place without rigid class distinctions, where everyone could make a decent living and be equally valued and respected. Now it’s claimed that people refuse some entry-level jobs because “Australians won’t do them”.

That’s become the excuse for widespread abuse of temporary migrant workers in jobs where minimum wages are honoured in the breach. Full employment can help fix this, provided we don’t rush to fill those jobs again with temporary migrants without robust protections against exploitation.

Along with workplace relations reforms, sustained full employment would help restore decent pay increases for most workers. The last time wages grew at a decent clip (over 4 per cent) was in the boom years before the global financial crisis when unemployment hovered around 4-5 per cent.

Full employment and higher incomes, not budget cuts and high interest rates, are the best solutions to the “cost-of-living” problem.

Lower unemployment, adequate working hours, higher pay, decent income support and more reliable demand for the goods and services our businesses sell – what’s not to like?

There are hurdles to overcome. We need a comprehensive system of workforce planning to ensure vacancies don’t go unfilled and employers have the skilled workers they need.

Governments would have to work with employers and unions to avert any future wage-price spiral without recourse to high interest rates. We’ll have to dampen speculation in assets like housing and shares. We’ll need productivity-enhancing public and private investment.

The first, vital step is to reject harsh austerity policies. The budget deficit is declining as unemployment falls and spending cuts would jeopardise this. Public debt is sustainable as long as output, incomes and jobs grow faster than the interest payments, as they did in the post-war period.

The real budget challenge for future governments is to raise the revenue we need to close yawning gaps in essential services like health and aged care and income support safety nets.

In the pandemic, millions of us felt the fear of losing our job. For years before that, our incomes barely kept up with inflation. We owe it to ourselves to seize this opportunity to restore full employment.

Dr Peter Davidson is adjunct senior lecturer at the Social Policy Research Centre, UNSW, and principal adviser at the Australian Council of Social Service.

Social policy for the ‘good society’

Social policy for the ‘good society’

[comments presented at the Australian Social Policy Conference, Sydney 30 September 2015]

The ‘golden triangle’ of a good welfare state consists of:

  1. A labour market that minimises inequality and maximises mobility;
  2.  A social security system that minimises poverty and maximises economic participation;
  3.  Community services that strengthen solidarity and target disadvantage.

To achieve the ‘good society’ we still need to strengthen each of these three foundations and integrate them in response to individual and community needs.

It helps to give an example: I’ve been researching ‘activation’ or employment participation policies for people of working age on income support.

Over the last 25 years, Governments have re-written the welfare contract:

In return for income support, people are now expected to take steps to secure paid work where they can, and Government in turn is expected to invest in supports that improve their capacity to do so.

This brings to the fore three factors that have always shaped well-being for people in a vulnerable position in labour market: adequate income support, access to jobs (keeping in mind that labour market participation was always a benefit requirement), and the services required by people disadvantaged in the labour market (which in the past were rarely offered).

Every country does activation differently: it’s a site for the inevitable political contests over work and welfare. Every country has its policy strengths and weak links.

In Australia, wage inequality is too high but labour mobility is relatively good. We have an unusual combination of high minimum wages, greater reliance on part time employment (so that employers can use low skilled labour more productively) and in-work benefits (people receive income support and family payments when in low paid part-time jobs). This set-up is far from perfect, but it works better than labour markets that underpay people or exclude them completely. For example, a full time worker in the United States receiving the minimum wage has to work five days to earn as much as a minimum wage earner in Australia receives in three.

The weak links in our labour market for low skilled workers are high levels of casual work, decline of union presence in workplaces, and lack of protection for the large number of temporary workers from overseas (backpackers and students), which undercuts minimum wages.

The weakest link in the social security system is the low level of Newstart Allowance for those out of paid work: at $37 a day, which is towards the bottom of unemployment benefits in OECD countries.

In employment services it’s the lack of investment in the 70% of recipients have been on Newstart for more than 12 months. The main public investment here is Work for the Dole (a traditional ‘workfare’ program), which is more about pushing people away from income support than drawing them towards secure employment.

The solution to these problems is not just a matter of more benefits and more investment – the system has to be restructured so that the benefit system, labour market, and employment services are mutually reinforcing.

At least three changes are needed:

  1. We assume unemployed people should come to the labour market, not the other way round.There is much talk of incentives for unemployed people when its employers who need to be incentivized. A tighter labour market, better regulation of pay for low skilled work, wage subsidies for economically excluded workers would do much more to reduce unemployment than adjustments to benefits to improve work incentives. Employment service providers should have better resources and incentives to work more intensively with employers.
  2. We divide social security for people of working age into pensions for those supposedly ‘unable to work’ and the much lower Newstart Allowance for those ‘able to work’. Newstart is over $260 a week less than the pension for a single adult. By implication, those able to work are less ‘deserving’ of income support, even where their financial needs are the same.‘Unable to work’ a very antiquated notion. We should move away from these old distinctions and base rates of payment on need rather than distance from employment.

    This idea owes much to the principles of ‘basic income’ (and Australia comes closer to that ideal that most countries), but I prefer Tony Atkinson’s version in which payments are still linked to workforce participation. If income support is not closely connected with the labour market, then economic exclusion may be entrenched.

    If we move away from outdated notion that some people are ‘unable to work’ participation requirements can be better adjusted to individual circumstances, especially caring roles. This does not imply that the social security system should regulate family care. Rather, caring roles should be taken into account when deciding economic participation requirements.

  3. Governments guarantee people basic income support but not the employment assistance they need.In the name of cost-efficiency and flexibility, employment services in Australia are purchased from non-government providers based on employment outcomes. This sounds like a good idea – given the poor historical performance of public employment services in assisting people with labour market disadvantage. But over time employment services have been reduced to the lowest common denominator: the minimum of job search assistance required to get those who are ‘easiest to place’ over the line, while the rest languish for years on unemployment benefits.

    The present employment services system is all about process rather than content. We’ve lost sight of what it is that employment services should provide: the regular work experience, training and other services that many people need to improve their job prospects. No one is taking clear responsibility to provide them.

    We need to ensure the Government does not repeat that mistake as it experiments with the ‘investment approach’ to social disadvantage which is now under consideration.

These three issues are all connected: we won’t have adequate income support without labour market participation, and participation won’t be effective without a substantial investment in employment supports, and a change in the way the labour market treats low-skilled workers.

Just desserts? Social security and ‘deservingness’

Who ‘deserves’ income  support and why? An important new study on the social legitimacy of benefits sheds light on why some groups and some benefits are more favoured than others. This helps explain why the Newstart Allowance is $160pw less than the pension, why there are periodic ‘moral panics’ over the so-called ‘rorting’ of the DSP, and why people are concerned when millionaires receive Age Pensions. It also helps inform the design of social security payments.

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Does Work for the Dole work?

Work for the Dole was the flagship employment program of the Abbott Government (Abbott reprised his role as the program’s founder as a Minister in the Howard Government). From July 2015, working for benefits for at least 15 hours a week became the ‘default activity’ for 6 months of every year for unemployed people. One fifth of employment services spending is devoted to the program – almost $300 million a year. Aboriginal and Torres Strait Islander peoples in remote communities face continuous Work for the Dole for 25 hours a week.

The Turnbull Government seems less enthusiastic: it has cut the program back: instead of Work for the Dole after 6 month’s unemployment, from April 2017 unemployed young people will be enrolled in the ‘Youth Jobs Path’ program which combines work-readiness training with private sector internships.

Work for the Dole has always been controversial, but does it work? This blog looks at recent evidence of the impact of ‘work for benefits’ schemes on transitions to paid employment in the UK and a 2014 evaluation of Work for the Dole in Australia. Continue reading

Deduct the losses, capitalise the gains: how negative gearing works

Negative gearing arouses passions on both sides: about a third think people are making legitimate deductions, a third think it’s a rort, and a third don’t know. This blog explains how negative gearing works, to help resolve these issues. A more complete analysis of negative gearing can be found in a recent ACOSS report, “Fuel on the fire”.

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Hidden gems in the Tax Discussion Paper (2): we don’t rely a lot more on income tax than other countries.

Reading the press you’d think a key message from the Govt’s Tax Discussion Paper is that Australia relies a lot more on income tax than other wealthy countries. Not so! Read the fine print and we find that 63% of public revenue in Oz comes from income and income-like taxes compared with 61% across the OECD.

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Hidden gems in the Tax Discussion Paper: Shocking news from Treasury – personal income tax as efficient as GST!

Business, Government, and “every pet shop galah” have been saying that we should rely less on personal income taxes and more on the GST because this would be good for the economy. In my blog ‘Who’s the fairest and most efficient of them all?” earlier this year, I challenged this view.

Treasury modelling of the economic impact of different taxes tucked away on p32 of the Government’s Tax Discussion Paper confirms my doubts. It should change the debate.

Now, Treasury has released the details of that modelling.

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How the Budget was mugged (Treasury publishes the photo)

New Treasury Secretary John Fraser’s first speech includes a picture showing how the Federal Budget was mugged during the mining boom:

“The start of the structural deterioration in the Commonwealth’s budget position began
before the global financial crisis.”

The following chart, included in his slides, shows how the windfall revenue gains from the boom between 2002 to 2008 (grey bars, circled by me) were spent (green, blue and red bars).

budget slippage-page0001

Bulging with company tax and capital gains tax revenues, the Federal Budget was mugged on its way to the bank and the proceeds spent equally on eight successive tax cuts (green bars) and spending programs (blue bars) that were often of dubious value  – including the Seniors Supplement and easing of pension asset tests for wealthy older people in 2007, and the Education Tax Refund in 2009.

“The green and blue bars below the line show that these positive revenue surprises were largely handed back through personal income tax cuts or spent.”

By 2009 it was all over. The then Government tried valiantly (and succeeded) to avoid a recession through stimulus spending which was later wound back (the blue bar outside the circle).

Fraser didn’t put much emphasis on the fiscal damage caused by those tax cuts (he’s from Treasury), except to point to another well known story – the waste of revenues in poorly targeted tax breaks for superannuation:

“Generous income testing arrangements for Family Tax Benefits in the early 2000s and access to million dollar contributions to tax-preferred superannuation through 2006-07 were notable examples of middle or higher income welfare that contributed to the problem.”

As the ACOSS submission to the Audit Commission argued, these Budget decisions had huge opportunity costs. Instead of well targeted spending to deal with pressing problems –  poverty, unaffordable housing, and the gaps in community services for people with disabilities and mental illness; people who had no need of more public support were offered  ‘bonus’ payments and fresh opportunities to avoid income tax in old age.

Future generations will pay for all this if the most wasteful and profligate Budget decisions aren’t reversed. We’ll also pay a high economic and social cost if the harshest savings measures in last year’s Budget  aren’t abandoned, starting with the denial of income support for unemployed young people. That Budget did include sensible measures, such as the removal of the Seniors Supplement, which should go ahead.

The bottom line though, is that Australian Government spending is for the most part well targeted (the graph below shows that our cash social security spending is third lowest in the OECD) a major reason Oz Governments spend less than most other wealthy countries. A Budget repair job which is confined to the spending side (as in 2014) will either fail (as in 2014) or cause social harm.

spending on benefits oecd10-page0001

If we are to provide the health and community services needed by an ageing population, Australian (and State) Governments will have to raise more revenue, and learn to do this in a more economically efficient way. [No, I’m not ‘jumping to the GST conclusion’. Let’s open our minds a bit. Take a look, for example, at the reforms being discussed in South Australia].

Not as simple as it sounds: The Welfare Review in pictures

The Welfare Review Report has finally been released. It advocates a  “new flexible social support system that is simpler, sustainable, coherent and outcomes focused”.

tangled web-page0001

The Review proposes to replace the present tangled mess of 20 income support payments paid at various levels (see figure)

welfare review payment structure-page0001

with ‘five main payments’ (see figure):

  • Tiered Working Age Payment
  • Supported Living Pension
  • Child and Youth Payment
  • Carer Payment
  • Age Pension.

Sounds good, and a welcome change of tone from last year’s Budget. But unscrambling this egg is not as simple as it sounds, and nor is the recommended payment structure.

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Long term unemployment: ‘achilles heel’ of the Job Services Australia model

The following is a paper I presented at the long-term unemployment conference in 2014. It argues that the fact that two thirds of people on Newstart Allowances have received it for over a year and half for over two years signals policy failure. Governments have failed to invest in the regular work experience, training and capacity-building, and connections with employers needed by most people who have been out of paid work a long time.

JSA (and before that Job Network) rewards providers for low-level job search assistance. Average caseloads are over 100. This might work when people are close to employment already, but it’s not good enough for those with low skills, weak (or no) employment experience, or a disability. In theory, paying providers according to job outcomes is a good idea, but as in other countries where this has been tried, it hasn’t worked out as the policy makers planned. To begin with, Governments only get the quality of employment services they are prepared to pay for. In Australia they have not been prepared to pay for it.

The previous Government built a program based on short-term low quality training (average spend $300 per course, % employed after course 30%). The present Government is building a new one based on Work for the Dole (average spend $2,000, % employed after program 23%). Neither approach was successful (except in the sense that it kept unemployed people busy).

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