I don’t have a problem with the general idea that low wage earners should have their incomes protected to some extent if the value of their wages were to be allowed to fall. This could be done just by continuing to target tax cuts to the lower end – as it seems likely that governments will continue to do this via the Low Income Tax Offset, rather than a general increase in the tax threshold, it could be said that you already have your low wage-earner tax credit in place.

If you want to go further than that and have some kind of refundable tax credit (like the EITC in the US), to me this is not a whole lot different to using general income support payments to top up people’s wages. Unless you want to make people wait until the end of the year to get their ‘tax credit’ (which seems a bit harsh if it is a sizeable amount), then you end up having to deliver it on a more regular basis and it begins to look and smell much more like an income support payment anyway.

You could of course always just repackage some proportion of current income support payments into something that sounds less like welfare – for example, you could divide Newstart Allowance into one component for basic income support and another that you call Participation Income Supplement or something, but in the end that is just packaging, not changing the basic nature of the thing.

On the wage subsidy argument, I suspect that there are some populations where the deadweight effect might not be so bad – I seem to recall that in the old days when DEWR did its own not-so-bad evaluations they found that wage subsidies actually worked quite well for older (55+) unemployed men, for example.

BG, thanks for your many useful contibutions on welfare issues. On the two points you raise here, I need to clarify my position.

I am not advocating now or in the near future a new offset to compensate low income workers. As you say they have been fairly treated of late. I included it on my list simply because, under my regime of “structural wage flexibility”, minimum wage earners could gradually fall behind and could even become worse off in absolute terms. In these circumstances wage compensation will be appropriate; it is more dignified than welfare and has useful by-product work incentive effects where it counts most. But that’s for the future.

I agree that wage subsidies need to be very carefully targeted. I suggested in my OLO piece that the main beneficiaries should be “low-skilled, low ability workers in disadvantaged areas” (who are mostly long term jobless) and the subsidies should have a time limit.

I’ve just one quibble (perhaps two) – I really don’t think that we need any new

tax offsets or credits to compensate low income workers;

Our income support and family assistance systems here already do a fine job of topping up low wages – the only argument against continuing with this approach is that some people might perceive it as ‘welfare’. In addition, after a long period of neglecting the lowest income taxpayers, Australian governments have finally started to direct their tax cuts to the bottom of the income distribution, so as long as they keep that up that will make a contribution as well.

On the issue of wage subsidies, I’m a bit agnostic. I think the OECD is only in favour of them if they can be fairly tightly targeted to people who would otherwise have a low chance of getting a job – but the problem is that generally employers don’t want such people even with a sizeable subsidy attached. Otherwise employers just use them to hire the person (or kind of person) that they would have been happy to hire anyway, which leaves you with a rather large deadweight cost.

This may be of interest if you haven’t seen it

http://economistsview.typepad.com/economistsview/2008/03/the-natural-rat.html#comments