Parts 1 and 2 outlined six alternative ways of dealing with a socially disruptive economic reform. They all assumed that the postulated reform would proceed but dealt in different ways with the social consequences. In this final segment of the paper, I consider a seventh oft-overlooked approach i.e. substantially modifying the reform in a way which achieves the same economic benefits at less social cost. I also discuss the value judgments involved in choosing between the seven options and offer some advice to my fellow economists.

Option 6: Explore alternative reform paths

Many economists believe that options 1 to 4 (none of which involve actual redistribution) are questionable even on economic welfare criteria. Yet they are not attracted to the idea of compensating losers, even in the preferred form of active adjustment assistance, because of the complexities it causes and the scope for politicisation and arbitrariness. Instead they prefer to look for ways of appreciably modifying the reform package itself so as to achieve the desired economic goals with more “benign” distribution effects and lower adjustment costs.

Viable alternatives are not always available. But in employment policy, despite the many false prophets in our profession who go around asserting that ‘there is only one right way and no other way will do’, there are often good alternatives which can do the job just as well without the unwelcome social consequences.

At the start of 2006, there was bipartisan political agreement and widespread consensus in the economics profession that, after 15 years of strong and sustained economic growth, levels of joblessness in Australia were too high – around 10% if one if one included under-employment and discouraged workers (Argy 2005). The Howard Government decided to fix the problem through its Work Choice and welfare-to-work measures. The aim of these measures is to curb collective bargain and trade union entry rights, facilitate downward wage flexibility, diminish unfair dismissal protection, remove the ‘no disadvantage test’ and strengthen the welfare compliance penalties. The Howard reforms have few associated “carrots” – apart from a sprinkling of active labour market programs like training, counselling and relocation assistance and some increase in low pay tax offsets. Basically the reforms are an application of option 1 the “potential Pareto” approach favoured by neo-liberals.

Will this neo-liberal workplace-welfare strategy work in economic terms? While it will have little or no impact on productivity , it will almost certainly increase employment opportunities for low-skilled ‘marginal’ workers (who are hard to place in jobs). However, in my view, a different policy mix could achieve the same or better employment outcomes with a much smaller increase in wage and earnings inequality.

Hard neo-liberal economists are too inclined to blame joblessness on a lack of work ethic (a welfare culture) and wage rigidities. These are undoubtedly significant barriers to employment which can be reduced by welfare sanctions and wage flexibility (within the bounds allowed by community values). But there are three other causes of structural joblessness in Australia (a) a lack of sufficient financial incentive to work; this applies principally to the inactive jobless (those not subject to work or activity tests) such as many single parents and disability recipients, (b) a mismatch (occupational and spatial) between job vacancies and job seekers and (c) unfavourable personal characteristics, including physical and mental handicaps , which make some job-seekers unattractive to employers.

These last three barriers to employment are more important for the core jobless population than the other two; yet they do not always respond well to pure neo-liberal solutions. There are alternative policies which can achieve the same or even better employment results over time. Continue reading →

In Part I outlined four policy strategies to deal with a reform which offered good GDP outcomes but had socially disruptive and regressive effects. All four did not require redistribution. I now look at the compensation option.

Option 5: Compensate the losers

The four options discussed above all give efficiency a high policy weight and do not involve any specific actual redistribution (other than through the normal safety net). By contrast, option 5 requires the Government to proceed with the reform but offer special compensation to losers (over and above the basic welfare benefits) where these are considered ‘poor’ or otherwise ‘unfairly treated’.

Under this option, unlike option 1, the Government is not content with hypothetical redistribution: it gets into actual redistribution. The rationale is the same as with option 2. That is, in the circumstances postulated, the losers from the proposed reform are very unlikely to have the same welfare function as the winners and can be reasonably expected to have a higher marginal utility. But, unlike option 2, the Government is not content to just set a higher hurdle it wants to redistribute some of the gains from winners to losers. The expectation is that it would achieve an even higher level of utility or wellbeing: while the proposed reform would increase aggregate utility even without compensation, but it is only through actual redistribution that it could maximize utility.

Apart from this utilitarian argument, the main justification for compensation is that, as structural reform produces benefits for most Australians, it would be “unfair” to let the burden of adjustment fall solely on a few. Proponents of the ‘fairness’ argument deny that the benefits automatically available to displaced workers, such as NewStart, are sufficient compensation in themselves. It is true that our tax/transfer system is well targeted at the needy; but the benefits are meaner than is available in a majority of developed countries (Argy 2006 p.18). Proponents of option 5 also deny that the benefits of reform tend to eventually “trickle down to everyone”. They point to evidence – notably the US experience over the last few decades showing that the benefits of reform may not impact on the poor for decades.

So to ask such pe Continue reading →

Draft

Economists are very good at advising on the best means of achieving given policy objectives – so long as the social objectives are clearly and fully laid out for them by the politicians. But most of the time the social goals are not specifically defined and so economists inject their own value judgments into the public policy debate.

This draft paper spells out some of the often-hidden trade-offs involved and the policy options for resolving them. It is designed to elicit discussion. Continue reading →