Is Australian social protection ready for the great recession?

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

bradbury

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.

8 thoughts on “Is Australian social protection ready for the great recession?

  1. Hi Bruce. I’m one of the (much) less informed commenters here, so apologies in advance if the following questions are stupid:

    a) isn’t the effect you describe at least in part deliberate? Because it encourages people to actually go and get a job?

    b) doesn’t the effect you describe suggest, consequently, that we should recover more quickly and ‘cheaply’ (in cost to the government) than countries whose social insurance encourages laid-off pickle-barrel sealers to hang around and wait for pickle-barrel sealing to take off again rather than to simply think: shit, I need some cash, what can I do’? Or do you think that the recession will be so serious that there just won’t be any jobs to go to?

    That said, your (final) suggested solution sounds fairly sensible and a certainly more so than a lot of the expenditures currently enacted to a similar end.

  2. Thanks but no thanks.
    your suggestion causes rigidity in the labour market ( check out the NAIRU’s for countries that have this and that countries that do not.
    Moreover countries with these policies face enormous costs as the population ages.

  3. Bruce, you have surely met the standard objections to an increase in Newstart payments by specifying that the increase might be “temporary”.

    I have often argued for a temporary increase in Newstart, and then reverse it after the economy recovers. That deals with the macro-problem – yet it will not affect rigidity in the labour market or discourage people from getting a job or aggravate the population as it ages. The labour market will be less rigid when manpower is in greater demand in the recovery phase.

  4. Patrick and BBB. As Fred points out, a temporary increase in benefits should not have a significant impact on labour supply – because labour supply only matters once the economy starts to improve again.

    More generally, the trade-off between equity and labour supply considerations will vary over the economic cycle. I think we need an income support system that is more responsive to these variations. Support for the unemployed generally should be increased when jobs are few. Also, there is a case for insurance-like policies to cushion the impact of job loss.

    It is not so much that “the recession will be so serious that there will be _no_ jobs to go to”, but rather that there will be many fewer jobs available – and so it won’t matter so much if a few people decide to not search too hard for work.

  5. I think that’s simple commonsense, Bruce. I’ve always held that what are good income support policies and labour market programs in one labour market can be quite disastrous in another – and labour markets vary with the business cycle.

    In my experience the requisite change in policy approaches does eventually happen because the political focus changes – the unemployed, for example, tend to be treated much more sympathetically if there are significant numbers of articulate middle class voters among them. But this only occurs with a long lag and so is often pro-cyclical.

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