Does high employment require high social inequality? Fred Argy

The following opinion piece first appeared in New Matilda. Comments welcome.

Many economists are fond of saying that a country can have relatively high employment or relatively low inequality – but not both. The argument runs like this. Good employment outcomes can only be achieved through free, competitive markets, with low levels of social regulation, a high degree of wage flexibility, curbs on trade unions and tough welfare to work policies. Such policies are bound to widen earnings inequalities – but any attempt to counter this effect through tax/transfer redistribution measures would simply nullify the economic and employment benefits of the market liberalisation measures. Higher inequality is therefore a pre-condition for higher employment.

Economic theory alone cannot prove or disprove this kind of argument. Subject to the usual qualifications, economists start with a strong presumption in favour of free and competitive market economies – but once a high level of market freedom is attained, as is now the case in all Western societies, the profession is far from unanimous about the incremental effects of further market liberalisation on economic performance.

So we need to turn to the empirical literature for guidance. Many economists like to compare “Anglo” countries (the US, UK, NZ and Australia) with those in continental and southern European countries (which I will call “Continentals”). This comparison does lend support to the ‘trade-off’ theory: Anglo countries have generally performed better on employment criteria than the Continentals but worse on income inequality.

The Nordic experience

However the trade-off hypothesis is undermined by the experience of the Scandinavians (Denmark, Norway, Sweden, Iceland and Finland) and countries like Ireland, Netherlands and Austria. These Northern Europeans, which I will call “Nordics’ for short, have generally been able to deliver low levels of inequality as well as strong employment outcomes.

Some critics refuse to accept this assessment. In particular they challenge the employment statistics put out by Nordic countries. They argue, for example, that while the official Swedish unemployment rate is well under 5%, the “true” jobless rate is closer to 15% because official figures fail to include discouraged workers who have stopped looking for work, young mothers who choose not to work, people on sick leave or on training and employment schemes, and so on.

Economists have always known that official unemployment figures tend to under-state the degree of under-utilisation of the work force and that there is considerable ‘hidden unemployment’. But this is not something unique to the Nordics. Exactly the same can be said of other countries. For example, in the USA and Australia, if one adds on the number of discouraged and under-employed workers to the official rate, the true jobless rate is very much higher than the official rate. The estimates range from 10 to 20% depending on what you include.

The OECD has rightly chosen not to get into these messy complications. It publishes members’ official unemployment figures on a comparable and widely accepted measurement basis. And it tries to give some indication of cross-country differences in the incidence of ‘hidden unemployment’ by publishing figures on the ratio of employment to working age population and labour participation rates. On all these indicators, the Nordic employment performance is quite comparable to that of the Anglos.

So how do we explain the Nordic success? In a forthcoming paper I hope to examine the issues in detail. In this short opinion piece I will, at the risk of over-simplification and over-generalisation, sum up my tentative views on four specific questions.

Q. 1. Why are the Nordics able to deliver social outcomes that are at least as good as the Continentals’ – yet out-perform them on employment?

I believe the answer lies with the methods of redistribution employed which differ from the Continentals in three respects. First, Nordic countries rely less on employment protection legislation. In particular, they allow more flexibility on hiring and firing.

Secondly, the Nordics provide generous benefits for the jobless but the benefits are more tightly linked to work. That is, they reward well those who enter education or training or are actively searching for work but reduce their benefits if they reject these options. Thirdly, the Nordics rely relatively heavily on “social investment” as an instrument of redistribution and, as argued below, this approach is employment-friendly.

Q.2. Why are the Nordics able to deliver lower social inequality than the Anglos yet match them on employment?

Although Nordics allow more labour market flexibility than the Continentals, they have retained higher levels of employment protection, stronger legal safeguards for trade unions and generally higher minimum wages than the Anglos. This network of worker protection regulation, combined with more generous welfare benefits and more progressive taxes, helps explain why they have lower levels of inequality.

But doesn’t economic theory suggest that higher social regulation damages employment performance? Why hasn’t this happened in the Nordic countries? My explanation is twofold.

First, as many economists have long suspected, it appears that in moderation worker protection regulation is not too damaging for employment. Indeed an argument can be made that the deregulation process works best in the initial stages and then runs into diminishing returns and may even become counter-productive for productivity and employment if taken too far.

Secondly, and more importantly, the Nordics have used non-regulatory instruments of redistribution to promote employment. Three types of “social investment” seem to have contributed most to the Nordic success.

  • specific targeting of early child and youth disadvantages;
  • policies which explicitly seek to reduce socio-economic inequalities of access to health care, pre-schooling, public education, public housing and public transport; and
  • “active labour market programs” targeted specifically at disadvantaged job seekers and people of working age (disabled persons and lone parents). These programs include diligent, well-funded job search and placement services; in-work bonuses; government training and job-readiness schemes; family-friendly policies such as paid parental leave and good quality and affordable child care assistance; remedial programs for youth who drop out from high school; financial incentives for employers to employ and train the long term low-skilled jobless; and subsidies to jobless persons who are capable of setting up and managing their own business.
  • There are credible studies showing high national economic returns in the long term from many of these social investment programs. The returns come in the form of higher employment (participation) rates; a more productive workforce and citizenry; greater geographic and occupational mobility of labour; less waste of potentially successful entrepreneurs; diminished health costs; lower imprisonment rates; less spending on juvenile delinquency; and savings in commuting time. There are also ‘external’ economic spin-offs from increased community trust and harmony and greater community acceptance of structural reform.

    In short, a major reason why Nordics have been able to reconcile high employment with low inequality is that they have invested heavily in their people and this has tended, over time, to offset any negative employment, efficiency and disincentive effects from social regulation and relatively high taxation.

    3. Is the Nordic achievement sustainable in the long term?

    It is often argued that Nordic tax levels are unsustainable in the long term. This argument has two stands. One is that voters will eventually rebel. And to an extent they have but not sufficiently to fundamentally alter their social model. The other argument is that, in an integrated, highly competitive world economy, governments will in time be forced to cut taxes in order to avoid a brain drain and compete with low tax countries. That argument too is questionable. While high taxes do have negative effects per se, it appears from the Nordic experience that the economic returns from social investment have over time tended to outweigh the tax efficiency costs and there is no reason why the economic balance sheet should change markedly in the future.

    4. Is the Nordic model exportable to Australia?

    Until quite recently, Australia could boast that it had achieved a reasonable balance between employment and equality. Sure, we substantially deregulated the labour market but we also invested heavily in human capital and maintained a strong social safety net. However the Howard Government’s recent workplace and welfare measures have put us firmly in the American camp.

    Does the Nordic social model offer Australians an alternative policy route to high employment? Many believe not. They argue that Nordic tax and redistribution policies cannot be exported to countries with a very different set of social values and priorities. There is more than a core of truth in that view. Nordic redistribution policies rest on three pillars: deep-rooted egalitarian values (which stand out clearly in all international surveys); an electoral system which ensures that these values are fully reflected in the Parliament; and a population which is ethnically homogeneous and geographically concentrated. These features are lacking in most other countries. For example, in the USA and Australia, the poor tend to be predominantly from minority groups and are often geographically and socially segregated from the better off people, producing a “them” and “us” mentality.

    But Australians still have a strong and passionate belief in equality of opportunity – the notion that everyone should have an equal chance to achieve their full potential, irrespective of their social background. It is the essence of what we all mean by a “fair go”. Since the Nordic ‘social investment’ model is all about equalising opportunities, parts of it should appeal to Australian values. Of course, we can never go a long way down the Nordic path. But the confident assertion of Howard Ministers that the only way to improve our employment performance is through measures which produce greater inequality is a half-truth masquerading as economic science.

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    Seneca
    15 years ago

    An interesting essay on a topic that has intrigued me. Great work from Prof Argy.

    A question to start the ball rolling and a comment: how different is the “Nordic” labour law from the law from the Australian? For example, how far does their ‘flexibility in hiring and
    firing go” – just
    more liberal than the Western European model, which presumably doesn’t say much? For
    example how do their dismisall laws compare with ours?
    The comment picks up on Prof Argy’s third pillar of the Nordic situation – how much
    is this changing in light of the changing demographic pattersn – eg if Denmark counts as
    a Nordic country we recently saw a dramatic collapse in shared values via the Mohammed
    cartoons = and so how robust is the Nordic model with respect to changes that make it
    more like the Angos in terms of social heterogeneity?

    Corin
    15 years ago

    These were my comments on NM – brave on NM:

    “Fred, I always enjoy your writing – breezy and excellent research.

    Can you comment on one thing from the paper:

    Minimum Wages, Labor Market Institutions, And Youth Employment: A Cross-National Analysis (http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1058&context=ilrreview)

    Australia’s minimum wage to median wage ratio in 2000 is .58

    Finalnd is .7 less at .51

    Sweden is .6 less at .52

    Doesn’t this indicate somewhat that you are comparing apples and pears in terms of determining participation? I mean in Australia with a .58 minimum wage – the disemployment effects will be greater.

    I mean how much more particpication would there be in Australia with say .51 offset by active investment and income tax credits. Well a great deal if the five-economists are to be believed.

    Also the Nordics are noted for income support as well as active investment – so from another stand point – perhaps they are best seen as being on the wage-tax-trade-off left, and not the industrial Left. Perhaps they are more “new” Left than “old” Left.

    I think the Nordics have a lot to show us – but may be people are looking at them from different angles?

    Cheers again,
    Corin

    Second post – 5 minutes later after I read my obvious error:

    Fred – clearly Finland is 0.07 not.7 less and Sweden 0.06 not .6 less – my idiocy with numbers! But the point of the above post remains. Australia has higher minimum wage ratio to median wages than the Nordic countries, significantly so by the look. Should we be aiming for .51 as a ratio or is .58 what we should maintain?

    Tricky Question hey! Where’s Tristan Ewins and his normal – hey the Nordics are so much more Left wing than us commentary when you need it! This would make a fab debate. I think a lower figure would probably would be better (.51 may be a bit low??) but with EITC’s and active social investment offsets.

    Try convincing G. Combet that a .58 ratio is in fact a potential constraint on getting unemployed people out of poverty!!”

    Andrew Norton
    Andrew Norton
    15 years ago

    “For example, in the USA and Australia, the poor tend to be predominantly from minority groups..”

    Fred, I would be interested in seeing your data on this. Certainly, there are some minority groups that have above average levels of low income. But one way Australia differs from the US is that we have an overwhelming majority group, the Anglo-Celts, who are probably at least 10 times as numerous as the next largest group (though it is hard to tell precisely, because so many give ‘Australian’ as their ancestry.) Mathematically it would follow that most poor people would be from the dominant ethnic group. And the only group that has (or will soon) break the 10% group, ‘Asians’, is highly industrious and so not a source of likely resentment for welfare dependence.

    Given the special situation of African Americans I think race may partly explain the small US welfare state. But I think its explanatory value in the Australian context is nil or near nil.

    Fred Argy
    Fred Argy
    15 years ago

    Thanks for the comments received so far. My responses follow.

    Corin you are correct. Australia’s minimum wage is close to the highest in the developed world relative to median earnings. This is why I have often argued for government-sponsored wage-tax trade-offs in Australia

    Andrew Norton
    Andrew Norton
    15 years ago

    Fred – I think this has things the wrong way around – people don’t like Aborigines and Middle Eastern migrants partly because they do not conform adequately to norms surrounding work. All the polling evidence I have seen suggests that there has always been social disapproval attached to able-bodied people becoming welfare-dependent. This includes single mothers, one of the few areas of social problems where Middle Eastern migrants are I believe under-represented.

    Interestingly, the arrival of large numbers of migrants of Chinese descent seems to have gone very smoothly – as I suggest above, I think this is partly because they are seen to work hard and contribute to the community.

    Fred Argy
    Fred Argy
    15 years ago

    Andrew, either way, the result is the same. Whether the lesser support in Australia for equal opportunity programs (targeted at the disadvantaged of working age) is because indigenous people and middle east migrants are perceived as ‘undeserving” poor (usually unfairly in my opinion) or because they are “different” and “remote”, their presence in relatively large numbers produces less enthusiasm for active redistribution programs in Australia than in Sweden etc.. This is despite polling which shows we support the principle of equality of opportunity almost as strongly as the Nordics. The homogeneity and concentration of the population in Nordic countries is important as a contributing explanation. Things are changing of course even in these countries.

    Andrew Norton
    Andrew Norton
    15 years ago

    Fred – I realise we are at risk of going in circles here, but this I think goes to the heart of some of the left-right differences on welfare. Many on the right – and this I think reflects the ‘common sense’ view of the general population – believe that it is wrong to encourage people not to work and to rely on handouts. If you read their early objections to the welfare state – decades before migration from the Middle East and before anyone dreamed of Aborigines getting special extra payments – they were against it because they thought it would undermine self-reliance. If all the Arab welfare rorters were deported tomorrow it would make no difference to these attitudes.

    Unfortunately, the institutions of the Australian welfare state have generally not matched public opinion. Only means-testing slowed its growth, with relatively few active measures to get people back into work. As you point out, the Nordic states were better on this, and we are now catching up – in the face of opposition from the welfare lobby.

    Because the left refuses to take this moral complaint against welfare seriously, they rush around looking for other explanations, such as racism, heartlessness etc. And in doing so, they both fail to engage with the real problem and further alienate people who do not appreciate this unjustified criticism.

    Patrick
    Patrick
    15 years ago

    Hey, the left in a nutshell!

    Seneca
    15 years ago

    On this latest thread, I am inclined to Andrew Norton’s arguments. As I see it, support for equality of opportunity is not necessarily the same thing as support for extensive publicly funded welfare programs. AN is spot on in saying this goes to the heart of the left/right argument.

    Another interesting commment from AN is that the Nordics were better at getting people back to work, and that steps here in that direction are being resisted by the welfare lobby – it’s tempting to try to take a cheap shot at the “Nordic model supporters” (NB I am not counting Fred Argy in this group) by speculating that maybe the left is selective in its promotion of the model. We haven’t heard much recently from the ACTU about the Swedish model which used to be all the go in the eighties – maybe there have been changes there.

    Of course one major difference between us and the Nordics appears to be in level of trade union membership – perhaps that points to a fundamental difference that should be explored…

    Nicholas Gruen
    Admin
    Nicholas Gruen(@nicholas-gruen)
    15 years ago

    Thanks for the excellent piece Fred. AN, The points you make against the left are OK by me, but they’re essentially spoiling ones. As I think Fred is arguing, there is broadly a choice between two options to get higher growth and lower unemployment. One – the US one – heads in directions which increase inequality whereas the Nordic model seems to promise greater equality, growth, lower unemployment and poverty. That’s a pretty nice package. Do you like the idea and if not why not?

    Andrew Norton
    Andrew Norton
    15 years ago

    Nick – Though I am not sure that Fred is fully arguing that *we* have two choices, given the historical and cultural differences between Anglo-based multicultural and Nordic monocultural society.

    I picked on a smaller issue because I am reluctant to go charging into an area I don’t know enough about. But I am not normatively much concerned with income inequality and I have little confidence in the competence of the Australian state (especially in education-related matters, which I know most about) so my intuitions are going to be against much expansion of government.

    Fred Argy
    Fred Argy
    15 years ago

    Andrew, I seem to have hit a nerve with my comment that it was “mostly unfair”

    Andrew Norton
    Andrew Norton
    15 years ago

    “2. These deserving poor can be helped into jobs by freeing up the wage market. Let the market decide. This might just work. But what sort of society do we end up with? ”

    It may not be Sweden, but it would be a better kind of society than we have now. Particularly for men, having a job, any job, is better than having no role at all.

    I never thought you would not be proud to be a lefty! (You may have noticed my theories about how lefties take politics to be an issue of character.)

    Seneca
    15 years ago

    I acknowledge that a bit of casual googling is not research and so I am looking forward to Fred Argy’s promised more detailed paper. But… I became increasingly curious about how well the Nordics were doing and got the following from aforesaid casual googling for Sweden:

    As of June 2005 the unemployment rate was 7.1%. “

    Fred Argy
    Fred Argy
    15 years ago

    Seneca, I have seen many statistics on Sweden thrown around. My source is OECD July 2006. It shows (on a “commonly used definitions”

    Scott Wickstein
    Scott Wickstein(@scott-wickstein)
    15 years ago

    Can I ask the economists here whether or not the general makeup of Australia’s economy makes a difference- in that most of our wealth seems to derive from resources and service industries. Sweden and Finland for sure have more of an industrial makeup to their economy… what impact does that have?

    I myself do not WANT to have an ‘egalitarian’ economy because I want to see a society that rewards and encourages risk-taking and talent; we need more billionares, not less.

    Fred Argy
    Fred Argy
    15 years ago

    Andrew, ouch! I have never claimed to be a superior human being because of my left-wing views. I like to think however that my leftish views are based on reason at least as much as on values. I respect your views for exactly the same reason, Andrew.

    Scott, my brand of egalitarianism is really all about equality of opportunity not equal outcomes (you should read my discussion paper on the subject).So our values are not that different. But I do not accept that free markets ALONE do a terrific job of rewarding talent. I believe they are a necessary but not sufficient condition for equality of opportunity. Free markets must be supplemented by a lot of social investment (as defined in my paper) and that is why I see a bigger role for government than you or Andrew.

    Don Arthur
    Don Arthur
    15 years ago

    Andrew Norton says that “Many on the right – and this I think reflects the ‘common sense’ view of the general population – believe that it is wrong to encourage people not to work and to rely on handouts.”

    Andrew thinks that this gets to the heart of left/right differences and that the public agree with the right on welfare. It’s not so.

    Australians, like people in most countries, don’t like the idea of handing out money to people who refuse to help themselves or won’t do anything in return. And as Fred says, few people complain about payments to the aged and genuinely disabled.

    Throughout history vicious right wingers like Franklin D Roosevelt have condemned passive welfare as a ‘narcotic’ and insisted that able bodied people ought to work for a living.

    But at the same time, bleeding heart left wingers like… Franklin D Roosevelt have asked taxpayers to help create jobs to make it easier for unemployed people to work for living instead of rotting in poverty or collecting the dole.

    This seems to be the combination that the public supports. In Australia, the public’s support for job creation has often taken the form of industry protection. It can also take the form of government job creation schemes — particularly during recessions.

    Twenty years ago — when America’s right wingers were pretending to be public opinion’s best friend — Mickey Kaus put this theory to the test in an essay titled ‘The Work Ethic State’. Kaus suggested abolishing welfare and replacing with low wage government-created jobs.

    It was just what many of the public had been asking for and naturally the right didn’t any part of it. They even started backing away from workfare. Policies like that mean increasing the size and cost of government. Their preferred solution was to argue that if illegal immigrants from El Salvador could find work then this was proof welfare recipients were out of work by choice.

    Nobody in government wants to give the public the policies it says it wants. This is because they’re convinced that the public don’t understand economics and can’t figure out the effect of their favourite policies on tax rates and deficits. Voters, they say, might like the policy but they wouldn’t like the results.

    Occasionally a politician WILL promise to give the public exactly what it wants. This is known as ‘third way’ politics and generally ends once the candidate wins office. That’s because nobody in government…

    Andrew Norton
    Andrew Norton
    15 years ago

    Don – Alas, FDR is not part of the contemporary Australian left, who have fought every attempt to push able-bodied welfare recipients into paid activity: the unemployed, single parents, and the ‘disabled’.

    Don Arthur
    Don Arthur
    15 years ago

    Andrew – The trouble with arguing about this is that you seem to use this issue to define leftism.

    As Fred says, the Swedish system has always been strong on work. Unemployment insurance has been time limited and continued support dependent of participation in government schemes. Classical liberals always objected to the cost of these schemes and argued that they concealed the true level of unemployment. Were the Swedish labour market policies of the 1960s and 70s right wing?

    A large section of the Australian union movement has looked towards countries like Sweden, Norway and Austria for policy ideas. Australia Reconstructed isn’t exactly a conservative or libertarian document. Its authors regarded the dole as the least acceptable response to unemployment. Is ‘active labour market policy’ (complete with big government) really a right wing idea?

    In the mid 1980s Bob Hawke had to be talked out of creating a work for the dole scheme. His government ended up making the income support system tougher than it had been under Fraser by introducing the concept of ‘reciprocal obligation’ and policies like Newstart. The British Labour Party were so impressed by Hawke’s policy ideas that they adopted many of them themselves.

    In the 1990s the Keating government adopted an ’18 months and then you have to work’approach under the Job Compact — the centrepiece of Working Nation. The policy relied heavily on job creation/training schemes like New Work Opportunties (too heavily because they overestimated the effectiveness of wage subsidies). Blair and his colleagues liked this kind of approach and ended up introducing it for young people as the New Deal. Was Working Nation a right wing policy?

    Of course there have always been activists/academics like John Tomlinson who thought that Hawke and Keating were part of a neoliberal conspiracy. But then, some American socialists thought that FDR was conspiring to rescue capitalism from its inevitable collapse.

    You don’t need to support a Basic Income or Guaranteed Minimum Income scheme to be on the left. If you did you’d exclude old-fashioned Bellamy socialists, most communists, a large chunk of the union movemen. And, of course, many libertarians support a Negative Income Tax with no behavioural requirements at all.

    Yobbo
    Yobbo
    15 years ago

    “And, of course, many libertarians support a Negative Income Tax with no behavioural requirements at all.”

    On the condition that the negative income tax would be combined with the abolition of the minimum wage and most industrial relations laws, and that the NIT would do away with the ridiculously high effective marginal tax rates on part-time work.

    We believe that the primary reason most income support reciepients don’t want to work is that it’s a waste of time with the current EMTR. You can work zero hours per week and take home $190, or you can work 20 hours per weeks and take home $250. Why would anyone do that?

    You wouldn’t need behavioural requirements with a NIT because the incentives are already present. Currently there is no incentive at all for someone on the dole to take a low-paying job, because they won’t be any better off if they do. The only incentive present is to do just enough to not get your dole payments cut off.

    Don Arthur
    Don Arthur
    15 years ago

    Yobbo – It’s easy to see why libertarians support a Negative Income Tax. But it’s interesting that in doing so they also fail to take Andrew’s “moral complaint against welfare” seriously. So the moral issue isn’t so much a left versus right issue but a conservative vs everyone else issue.

    Daniel Moynihan tells the history of Friedman’s NIT proposal during the 60s and 70s. He says that Johnson was hostile to the idea. The president didn’t want to hand out money to people who weren’t working. “What I am seeking” he said “is the abolition of relief altogether. I cannot say so out loud yet, but I hope to be able to substitute work for relief.” And he wasn’t talking about freeing up the economy.

    According to Moynihan, during the 1960s “the left adopted almost wholesale the arguments of the right.” Part of this transformation was that the left adopted some of the libertarian ideas of the right. When it came to welfare, the old left sounded a lot like Lawrence Mead. They wanted the government to tell the lumpen proletariat how to live their lives. But by the 1970s these kinds of ideas had become ‘neoconservative.’

    Unlike the old right, the neocons didn’t want to abolish the welfare state. What they wanted to do was reshape it so that it reflected the moral values of the American republican tradition. Neocons care more about reinforcing the Protestant Ethic through administrative reform than they do about EMTRs and economic efficiency.

    It’s not so much that they believe there’s a real difference between right and wrong. It’s more the idea that society will collapse if ordinary people start thinking like economists.

    Andrew Norton
    Andrew Norton
    15 years ago

    Don – OK, some on the centre-left have adopted pro-work policies. But apart from Latham and Noel Pearson, I can’t think of any major left-of-centre figures in recent times who have been serious on this issue- and not coincidentally they are both from backgrounds that have brought them much closer to the welfare culture than most lefties get.

    As I think we have discussed before, the general tendency of the left is to blame structural causes for social problems, and suggestions that people could help themselves are dismissed as ‘blaming the victim’.

    Don Arthur
    Don Arthur
    15 years ago

    Andrew – I agree that the left tends to look for structural causes to problems like unemployment. For thinkers who are part of what you call “the moderate left” (and I’d call the mainstream or non-radical left) it’s not blaming the victim to insist that people take advantage of assistance. It’s only blaming the victim to insist that they help themselves when government does nothing about the underlying structural causes.

    The real change on the left is the recognition that the structural causes of problems like unemployment might include government interference in the economy.

    This brings the mainstream left and right much closer on this issue. For example, when David Kemp introduced Work for the Dole he said, “The government recognises that the particular disadvantages young people face in getting jobs are structural”.

    Fred Argy
    Fred Argy
    15 years ago

    Yobbo, you say that “most income support recipients don’t want work”. This is the big myth of the Right. My analysis has shown that less than 15% of the “jobless” (including the inactive unemployed) are voluntary. These people need better incentives such as tax credits or tougher welfare sanctions.

    But what of the other 85%? They are the victims of a structural imbalance in the labour market (partly due to wage rigidities but caused more by unavoidable occupational and geographical immobility and personal characteristics that have nothing to do with immorality). These people do have a strong work ethic but cannot fit easily into the jobs available. If the Left is too inclined to “blame the victim” (and it is a fair criticism Andrew makes) you people on the Right are much too inclined to blame it all on moral irresponsibility and a welfare culture.

    Fred Argy
    Fred Argy
    15 years ago

    Oops a slip of the pen. In the last sentence, I meant to say if the Left is too inclined to blame the system.

    backroom girl
    backroom girl
    15 years ago

    Fred – I think that both you and Yobbo are right. Very few people recognised as unemployed (either active or inactive) are voluntarily unemployed – they can’t really be because to be in this category, you have to want to work at least at some level. However, very many of the people on income support are ‘not in the labour force’, and this category includes people for whom this status is voluntary as well as those for whom it is not. Even most mothers with young children are in the end making a conscious decision either to work or not to work – it is not in most cases something that is entirely beyond their control.

    Patrick
    Patrick
    15 years ago

    I think Fred and Yobbo are both right as well, except that I really suspect that Fred is wrong. In fact it is well and good to say that people want work, and certainly a reasonable proportion of welfare recipients do genuinely want work. But a considerable number don’t want anything like the rigidity, discipline and, er, well, work that goes with work. I don’t presume to have even approximate proportions – but I would urge Fred not to underestimate laziness. After all it is one of the most powerful evolutionary impulses, and why shouldn’t it have a role to play in shaping government?

    NB Sven Steinmo has the best treatment of this topic I know, from a taxation perspective.

    Fred Argy
    Fred Argy
    15 years ago

    I need to further clarify my statement that people on the Right are too inclined to blame joblessness on immorality and a welfare culture.

    The assumption underlying many of the views expressed – and indeed government employment policy – is that most of the joblessness is due to either (a) a lack of work ethic (a welfare culture) or (b) wage rigidities. These are significant barriers and I do nt under-estimate them and they can be reduced by welfare sanctions and wage flexibility (within the bounds allowed by community values).

    But there are three other causes of joblessness (c) a lack of sufficient financial incentive; this applies principally to the inactive jobless (those not subject to work or activity tests) such as many single parents and disability recipients, (d) a structural mismatch (occupational and spatial) between job vacancies and job seekers and (e) the lack of job readiness of many jobless persons due to physical and mental handicaps (mental health in particular is a major factor identified by the Department of Families and Community Services). I have argued (in an article in Economic Papers March 2005) that these last three factors do not lend themselves to facile neo-liberal solutions. Yet they are more important than the first two.

    Andrew Norton
    Andrew Norton
    15 years ago

    Fred – I think three parts of the Right’s agenda are linked to reducing joblessness: 1) improvement of the education system, as people with low literacy and numeracy level have poor employment outcomes; 2) directly economic factors such as the minimum wage and the rate of economic growth; and 3) removal of perverse incentives to stay on welfare, especially ‘passive’ welfare. In terms of space devoted (1) and (2) get more attention than (3) I think.

    I think many on the right would say that (c) and (d) lead to (a), but once established (a) can be hard to break, particularly when so many members of a community are out of the productive population that social norms in favour of work over welfare break down.

    Don Arthur
    Don Arthur
    15 years ago

    I agree with Fred’s about joblessness and mental health. For example, the research I’ve seen suggests that a high proportion of welfare reliant sole parents suffer from depression and anxiety disorders.

    Depression can look a lot like (a). A person who’s depressed can often feel worthless — “what employer would want to hire someone like me?” And if you believe that you’re so useless that nobody would want you, why would you bother trying to find work?

    It’s easy to look at someone in that state and accuse them of having no motivation — of not wanting to work. But I’m not aware of any research that shows that depriving mothers of income is the most effective treatment for the problem.

    This issue has received some attention in the US:

    http://www.financeproject.org/Publications/engagingandservingdepressionRN.htm

    Andrew Norton
    Andrew Norton
    15 years ago

    Don – To the contrary, forcing them out of the house could be useful therapy. A vital part of dealing with depression is getting people active and involved again – and stopping them from sitting at home dwelling on their problems.

    Fred Argy
    Fred Argy
    15 years ago

    Andrew, the issue is not WHETHER you move these hard-to-place people from welfare to work

    Don Arthur
    Don Arthur
    15 years ago

    I’d agree with Fred. The argument isn’t about whether there ought to be a work a requirement. So for reciepients who are suffering from depression it’s about how we go about “getting people active and involved again”.

    I’m sure that if Andrew Leigh was here he’d say that welfare to work policy ought to be guided by the evaluation evidence. So if anyone knows of well designed study that shows that simply cutting off income support is more effective than the kind of approaches Fred is suggesting (which I’m assuming include sanctions), then maybe it is the best option. But if all you’ve got is time series data on US TANF caseloads then I don’t think the argument is settled yet.

    Fred – I’m a bit confused about your idea that values only kick in after the argument about effectiveness is over. It seems to me that it’s impossible to come up with a definition of ‘effectiveness’ without invoking values.

    Andrew Leigh
    15 years ago

    >> I’m sure that if Andrew Leigh was here he’d say that welfare to work policy ought to be guided by the evaluation evidence.

    Word is that he’s lurking by the fringes, silently concurring with Don.

    Fred Argy
    Fred Argy
    15 years ago

    Good point Don. You are right to be confused about what I said about effectiveness and values. Let me try again.

    If one is predominantly concerned about inequality, then it is impossible to define effectiveness without invoking values. But if a policy is effective in raising employment but it also increases inequality, there is a trade-off which needs to be recognised. After all higher employment is as much a social good as an economic good. The trade-off I might opt for would differ from Andrew’s. Again, if one can achieve roughly the same employment results through two different policy routes (one involving higher taxes than the other), I would opt for the one which delivered the lowest level of inequality because that is where my values lie. But perhaps someone like Andrew Norton might choose the other option because it involves lower taxation and more ‘economic freedom’. I don’t think one can objectively decide between the two sets of values.

    Is that any better or am I getting deeper into confusion?

    Casper
    15 years ago

    Hi Fred Argy,

    Jsut a quick point, perhaps we should also need to take into account public sector / private sector jobs ratio when unemployment is discussed. Nordic countries have very large public sector, runs large deficit budget (whihc of course is not sustainable).

    Also, the potential economic growth that has to be sacrified also needs to be taken into account. 100% employment with $1 per person per day earning gives perfect equality, 100% employment but no one will be happy.

    USSR has no problem achieving 100% unemployment and near equality either.. A GINI of close to 0.

    I think comparing equality against a set living standard is better than comparing it relative to other countryman/women.