Employment participation policies and the ‘good society’: my comments in the final plenary of the Australian Social Policy Conference 17/9/15

Peter Davidson, Final plenary panel, Australian Social Policy Conference

Sydney, 17 September 2015

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

  • A labour market that minimises inequality and maximises mobility.
  • A social security system that minimises poverty and maximises economic participation.
  • Community services that strengthen solidarity and combat exclusion.

Today, as in the past, the task of labour market and welfare reform is to strengthen each of these three foundations and integrate them in response to individual and community needs.

These are huge issues: It helps to focus on an example: I’ve been researching employment participation or ‘activation’  policies for people of working age on income support in four countries, including Australia.

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 improving their capacity to do so.

Employment participation policies shine a light on three factors that have always influenced well-being for people in a vulnerable position in labour market: adequate income support, access to jobs, and the services required by people who are disadvantaged in the labour market. Income support has always been linked to paid work requirements, but in the past many were exempted because they are were deemed ‘unable to work’ and Governments were not prepared to invest in the intensive labour market supports they required.

Every country does ‘activation’ differently. It’s not all about ‘workfare’ or one-sided obligations. Activation is a site for the inevitable political contests over work and welfare. Every country has its policy strengths, weak links and blind spots.

In Australia, wage inequality is too high but labour mobility is relatively good. We have an unusual combination of higher minimum wages, greater reliance on part time employment (so that employers can use low skilled labour more productively) and in-work benefits for part time employment (because people receive income support and family payments when in those jobs). This set-up is far from perfect, but it works better than labour markets that underpay large numbers of people (like the United States) or exclude them completely (like Spain and Italy).

The weak links in the labour market for low skilled workers are high levels of casual and contingent (as distinct from part time) work, and the under-cutting of minimum wages due to the steady decline of union presence in workplaces, together with rapid growth in an alternative source of low paid labour in the form of people with temporary visas (backpackers and students) whose immigration status leaves them vulnerable to exploitation. This was brought to public attention by excellent journalism at the ABS’s 4 Corners and the Sydney Morning Herald, which revealed widespread underpayment of workers at 7-11 stores and in agriculture and food processing. This is the ‘dark side’ of the labour market in which low-skilled unemployed people must now compete.

The weakest link in the social security system is the low level of Newstart Allowance for those out of paid work. At around $300 per week, it is one of the lowest unemployment benefits in the OECD.

The weak link in employment services is the lack of investment in the 70% of Newstart recipients who have received income support for over 12 months. Most of the resources invested in this group are now devoted to ‘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 answer to these challenges is not simply more benefits and more investment – the system has to be restructured in a better way that draws together benefits, the labour market, and services. Nor is there a single solution, whether it be tighter labour market regulation or a ‘Basic Income’ scheme to reduce the stigma and marginalisation experienced by low paid workers and unemployed people.

At least three changes are needed:

  1. First, most ‘welfare reform’ policies aim to bring unemployed people to the labour market (as ‘job ready’ workers). Much less attention has been paid to bringing the labour market to unemployed people.

There is much policy talk of improving incentives for unemployed people (who would typically double their disposable income moving from Newstart Allowance to a full time job at the minimum wage) when it is largely employers who need to be ‘incentivised’. People unemployed long term, and others excluded from jobs such as people with disabilities, do not fare well unless the labour market is ‘tight’ (i.e. there are labour shortages, including in low skilled jobs). This is in prospect as the population ages: employers may need to adjust to a world where their labour supply comes from places they might not have looked before – older workers, women returning to paid work, and people receiving income support.

If we do not expect unemployed people to accept jobs that pay below minimum wages, then we also need to ensure that minimum wages ‘stick’. One possible solution to the problem of widespread underpayment of low-skilled workers (including people with temporary visas) is one that’s used in consumer campaigns against child labour internationally: bind those at the top of major ‘supply chains’ (such as 7-11 franchisors and the major retailers of agricultural produce) to ensure that employment rights and requirements are respected further down the chain.

Even if minimum wages are binding and the labour market is ‘tight’, many people unemployed long-term would need a ‘leg up’ to move from benefits to a secure job. Wage subsidies, training linked to work experience, and employment services that work in close partnership with employers as well as unemployed people, can all make a difference here.

If the labour market does not provide opportunities for people with limited skills and social barriers to work, then at some stage in future we face the prospect of unsustainable growth in reliance on income support. Australia is far from that position today. In fact the share of people of working age reliant on income support has fallen sharply over the last 20 years due to solid employment growth and employment participation policies. Yet if we allow employment growth and labour standards to lapse, and fail to invest in employment assistance for those left behind, we could go backwards.

2. We have an antiquated social security payment structure that attempts to divide people into ‘pensions’ for those supposedly ‘unable to work’ and the much lower ‘Newstart Allowance’ for those ‘able to work’ ($200 per week less 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 outdated notion. We no longer assume that people with caring responsibilities or people with disabilities are ‘unable to work’. We should move away from the old distinctions and base rates of payment on financial need rather than distance from employment.

A common base rate of payment well above Newstart Allowance would ease the worst poverty and make transitions to paid work, or combinations of benefits and paid work, smoother than they are under the ‘pension-allowance’ system.

This idea is similar in many ways to a ‘basic income’ (and in some ways Australia comes closer to that ‘ideal’ than most countries), but with two main differences. First, income support would not be ‘universal’ (one weakness of basic income schemes is that they are typically paid below subsistence level in order to extend them to all, free of income tests). Second, income support would still be connected as far as practicable with workforce participation. The idea of a common ‘base rate’ of payment set at a level that’s adequate to live decently comes closer to Tony Atkinson’s idea of a ‘Participation Income’ than its precursor of an unconditional ‘basic income’ for all.

We should strengthen connections between income support and the labour market so that people of working age are not left in the financially vulnerable and politically weak position of having to rely on Government indefinitely to meet their basic living costs. This is not what the vast majority of people receiving income support want. If we move away from outdated notion that some people are ‘able’ and others ‘unable’ to work then participation requirements can be better adjusted to people’s circumstances, including caring roles.

Care should be taken to ensure the State does not intrude into the management of care relationships any more than necessary (e.g. where children are demonstrably at risk). The risk of over-reach is well demonstrated by the steady expansion of ‘Income Management’  and other ‘behavioural welfare’ policies that regulate people’s lives well beyond the economic sphere, merely  on the basis that they receive certain payments and live in ‘targeted’ communities. It is difficult enough to connect income support to the labour market, let alone using it as a lever to ‘solve’ complex social problems. The evidence so far (including much that was presented at this conference) suggests that these paternalistic policies do not work.
3. While governments still guarantee people basic income support when they are out of paid work, no such guarantee applies to the employment assistance they need.

These days in Australia, in the name of cost efficiency and flexibility, employment services are purchased from non-government providers based largely on employment outcomes. This sounds like a good idea, given the past performance of the former Commonwealth Employment Service and large scale labour market ‘programs’ in helping people overcome disadvantage in the labour market. But over time services have been reduced to the lowest common denominator: the minimum of job search assistance required to get those considered ‘easier to place’ over the line, while the rest languish for years on Newstart Allowance.

The present employment services system (whether called Job Network, Job Services Australia or Job Active) is more about process rather than content. And the process (tenders, contracts and payment-by-results) is not working to because governments (both here and overseas) have yet to find a way to send the right signals and incentives to providers on the ground. We’ve lost sight of what it is that employment services should provide: the work experience, training and other supports that people with major barriers to employment need, and no one is taking responsibility to provide them.

The latest idea is the ‘investment approach’ to reducing social disadvantage and long term reliance on income support, which we’re borrowing to some extent from New Zealand. We must take care to ensure that the mistakes of the Job Network (including a loss of transparency and accountability for basic services within the ever more complex machinery of contracts and performance incentives) are not repeated here.

These three challenges are inter-connected: we won’t have adequate income support without labour market participation, and participation won’t be effective without substantial, well designed investment in employment supports, and a change in the way the labour market interacts with low skilled workers.

Scarcity: The use and abuse of psychology to reduce unemployment

The idea that psychology (rather than shortages of jobs or skills) plays a role in unemployment is controversial. Yet employment service providers report that motivation makes a difference. A decade ago, an Australian Government study argued that the attitudes of unemployed people influenced their job prospects. But it left many questions unanswered: what lay behind those attitudes? Where they permanent or a fleeting response to current circumstances? A new book by American economist and psychologist team Mullainathan and Shafir gives us new insights into how people respond to poverty. It reveals how ‘scarcity’ shapes people’s lives and behaviour. This has implications for the way governments treat unemployed people.

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Did the Australian ‘welfare to work’ policy improve the job prospects of people with disabilities?

Whenever the media turn their attention to the Disability Support Pension (DSP), the unspoken assumption is that many of the recipients could have a job instead – if only the personal or political will was there. Recently-published research from the Melbourne Institute shows how challenging the labour market is for people with disability. It raises serious questions about the last decade of ‘welfare to work’ policies which have shifted people with disabilities from higher to lower payments while doing little to improve their job prospects.

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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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Racing against time: indexation of social security payments

Indexation of social security payments is a dry subject. Does it really matter if they’re indexed to MTAWE or CPI? You bet! The Government’s budget proposals to index pensions only to the CPI and not to wages would reduce them by $80pw in a decade compared with present indexation, and save a motza. The Rudd Government’s decision in 2009 to index family payments to CPI instead if wages has saved over $1B and has already cost a low income family with 2 children under 13 years $19pw. If Newstart Allowance had been indexed to wages as well as the CPI over the last 20 years, it would now be $115pw higher ($52 instead of $36 a day).

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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].