Australia doesnt really do social insurance. For many years income protection policy has focussed on poverty alleviation rather than protection against negative income shocks. The forthcoming recession might be a time when we begin to regret this model. As the graph below shows, Australian average income workers losing their jobs face a larger drop in income than in most other OECD countries.
Unemployment benefit replacement rates, 2005
The graph shows the net family income that people on average wages and eligible for unemployment benefits will receive if they become unemployed, relative to the income that they had when employed. The top panel shows the situation of single workers (the average wage used was around $51,000 in Australia in 2005). Australia is the last runner among the 29 OECD countries, with single unemployed having replacement rates of around 33% compared to the median OECD rate of 58%. The bottom panel shows the situation of a married average wage worker who loses their job while their spouse continues to work (on 2/3 average wage). In Australia, the income test means that such a family would not be entitled to any Newstart Allowance though their family payments would increase.
In most other OECD countries, the typical average wage worker losing their job would be entitled to a relatively high rate of unemployment insurance for some months (eg 6 or 12). Those without sufficient prior employment, or those who experience long-term unemployment, only receive social assistance payments. The Australian system of income protection is reasonably successful in preventing poverty among these groups with long-term disadvantage. However, it provides only weak insurance against shocks like the one we are facing now.
At the macroeconomic level, this suggests that the automatic stabilisers will be weaker in Australia than in most other rich countries. At the household level, it will mean greater short-term income shocks than experienced elsewhere. This will play out in terms of mortgage arrears, increased debt and household stress, and perhaps most importantly, political discontent.
What can be done? We cannot build an unemployment social insurance model overnight and maybe we shouldnt. But we cannot expect that an income support system based on poverty alleviation will be a suitable response to an economic shock of the size of the one we are about to experience. In the absence of automatic stabilisers manual action is required. Small actions could include further relaxation of liquid assets tests (beyond those won by the Greens) and reductions in Newstart waiting periods. Temporary increases in the payments to Newstart recipients who have been conspicuous in their absence from government handouts to date – are the most obvious response.