The welfare to work debate

In an earlier piece on economic freedom I raised inter alia the issue of Australias welfare to work measures under Howard. This attracted some debate and it seems appropriate to reiterate my views on the topic.

Australias welfare to work measures have involved a tightening of eligibility requirements, an increase in penalties for non-compliance, a relentless psychological war mounted by politicians against welfare recipients and above all, a steady and relentless decline in Newstart allowances (which are indexed to the CPI) relative to average incomes (which are growing at nearly twice the CPI). Newstart recipients only have to earn $1600 a year to start losing some of their benefits.

I asked if such a tough policy reform was achieving its main objective to reduce Australias levels of joblessness (unemployment, under-employment and numbers of discouraged workers). The literature is unambiguous on the subject. Even the OECD Employment Outlook which is sceptical of other labour market deregulation initiatives, finds fairly robust evidence that the level and duration of unemployment benefits can have a detrimental impact on unemployment.

While I have not seen clear evidence that Australias own welfare to work policies directly contributed to the improvement in our employment rate in recent years, it is a reasonable presumption that they did (although other factors such as the global economy and our resources boom have been far more important).

I am not therefore suggesting we turn back the clock (indeed Howard deserves some credit in this area). But I would like to see Newstart more generously indexed in the future – for two reasons.

First, I personally feel very uncomfortable with a situation where nearly everyone is enjoying unbelievable prosperity and yet our most disadvantaged Australians are falling further and further behind. Even the Prime Minister is reported to have said that that a farmer cannot earn a decent living on current Newstart benefits, which is why he has offered them much more. Good luck to the farmers, but why do we expect other welfare recipients to survive on such benefits?

Secondly, studies have shown that generous unemployment benefits are not a deterrent to work if associated with active labour market programs and job mobility and flexibility. If Newstart were indexed to something more than the CP it need not have much impact on employment. The adverse effects on workforce participation could be neutralised through a mix of strong incentives for the unemployed to find work (such as reforms in the tax-benefit system to reduce high marginal effective tax rates), well targeted public spending on active labour market programmes such as training and wage subsidies and more family-friendly workplaces. Longer term, workforce participation could be boosted by social investment in early and public secondary education, lifelong learning, health access, low-cost housing and public transport.

Of course this alternative strategy would put a slight extra burden on taxpayers and would be unacceptable to libertarians and perhaps even to the electorate. But it would appeal to the normative values of many Australians.

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Andrew Bartlett
14 years ago

Very good point. I’m still not convinced that cutting the incomes of some of thepoorest people in the country is the key contributor to helping them into paid work, but I’m always prepared to keep looking at the evidence.

However, as you say, the basic fact remains that there is a key group who is falling further behind and – particularly when combined with factors like the housing affordability crisis – are doing it very tough indeed. Your mention of farmers is also noteworthy, as the disparity between what farmers can earn before their income is cut and what others on Newstate can earn is also drawing a lot of attention.

By definition, people on welfare will always be doing it tough to some degree, but we have a system in place now where some are falling further and further down. There is a big push at present to give another boost to Age Pensions because of the difficulty in coping with rising living costs – whatever the merits of this, the value of Newstart is much less and continuing to get worse. Of course, pensioners are a more politically acceptable (and realtively consistent) constituency, but the plight of the long-term unemployed does deserve more attention.

Backroom Girl
Backroom Girl(@backroom-girl)
14 years ago

Fred and Andrew

I agree with you that it is inequitable that people on allowance-type payments such as Newstart get a less ‘generous’ indexation regime than people on pensions. In fact, I think the growing discrepancies between pensions and allowances create quite problematic financial incentives in a number of areas (for example, for people to qualify for DSP if they can and against low-income single parents repartnering). However, while their payments are indexed only to CPI, those payments are worth more in real terms today than they were when the Howard government came to power, particularly for people with children but also for people without. It’s just that pensions have grown even faster in real terms.

The difficult thing with unemployment benefits is always how to design them to ensure that there are adequate financial incentives for people to take low-paid work. In the past when most jobs were full-time, we did this through having relatively low rates of benefit and a very stringent income test (dollar for dollar withdrawal over most of the income range where benefits were payable). But these days when so many jobs that unemployed people might get are part-time and/or casual, we try to provide a financial incentive for people to take those jobs as well. So we have moved from a situation where we used to apply a 100% withdrawal to one where the highest withdrawal rate is now 60% (compared with 40% under the pension income test). What this means, in turn, is that the income at which allowances cuts out is now very close to the minimum wage. Indeed, for a small number of people, it is higher than the minimum wage.

So we are now in the situation where we are potentially or actually using Newstart Allowance to top up the income of people in low-paid full-time work. If you want to make the system more generous in terms of either rates or income test, the overlap between the income support system and full-time work will inevitably become greater. Now I don’t have a particular problem with that, but I suspect a lot of people might.

On the activity requirements side, I do support people facing fairly strong expectations to find work. What I don’t like about the current regime is that it is far too ‘one size fits all’ and black-letter law, whereas I think you would get better results by allowing people a bit more latitude in figuring our their own best pathway to financial independence.

stephen bartos
stephen bartos
14 years ago

fred, a typically thoughtful post. I wonder if there’s value in making a clearer distinction between short term and long term unemployment. The majority of people in the unemployment statistics are there for only relatively short periods: in transition from education to work, from one location to another, from one occupation to another. For these people, there’s something to be said for assistance to be provided more or less in the form of social insurance, even income maintenance along scandinavian lines; or at the least, more generous indexation of Newstart as you suggest, which would make it a better ‘transition allowance’.

But then there is the group of long term unemployed; people without the necessary skills or experience to be in the workforce. For this group, the longer the detachment from work the worse the problem gets – the most accurate predictor of future unemployment being the length of past unemployment. (obvious reasons: loss of skills, motivation, work habits, attitude, etc.). for this group, very different interventions are needed because the problems are much deeper. Gets even worse when it turns into inherited detachment from the workforce – ie two or more generations in families with no employment history, low literacy and numeracy, low social skills.

I suspect that the level of Newstart allowance actually hasn’t much to do with this set of problems. Not only early education, health, housing and transport (that you mention) but also the interaction with other parts of the social welfare system – eg parenting and disability payments – and the decline of low skill manufacturing jobs are parts of the puzzle.

At present, we have enough fiscal capacity to be able both to figure out how to address this problem in a more systematic way and then put in place measures to do so. there has been some attention paid to the issue already by the present government (e.g. although there’s plenty of negative things people have to say about the jobs network, at least in its design it did try to deal differently with longer term intractable unemployed people). but the issues cross government boundaries (housing, public transport, pre schools: all States; provision of sewerage, footpaths, etc. – local – makes a difference too). This makes it that much harder to tackle the problem, and my prove an insurmountable barrier.

Backroom Girl
Backroom Girl(@backroom-girl)
14 years ago

Stephen

With respect, I think Australia has got along quite well without going down the social insurance route and I would have thought it’s much too late to catch that boat now, even if we wanted to.

I think you and Fred and I all agree that more needs to be done in terms of improving the life chances of people (kids perhaps moreso than adults) from disadvantaged backgrounds. But I do think it is quite difficult to do that in a cost-effective way without pairing it with a fair amount of prescription and what many on both the left and the libertarian right would see as unwarranted government intervention in people’s lives.

Finally, whatever people think of the merits of the detail of Welfare to Work, it did send the important message that parenting is not a lifetime excuse for staying out of the labour market. Hopefully, that may do a little towards addressing the problem of multi-generational income support reliance.

stephen bartos
stephen bartos
14 years ago

BG – I agree with you on social insurance: not something institutionally right for Australia given our system has evolved differently (the “I wouldn’t start from here” Irish joke comes to mind). I’d still suggest it’s worth bearing in mind but only as an analogy rather than a design feature of any future policy.

On the long term unemployed question, it may require a high degree of intervention, not a laissez faire approach, if the problem is to be tackled effectively; but so do a variety of other welfare programs – disability support comes immediately to mind. And the interesting thing is that for some groups (older low skilled males especially) you could argue that DSP becoming by default, and in a haphazard way, a substitute for Newstart.

Is there a case for a sort of triage: eg some LT unemployed people are worth encouraging back into the workforce immediately via the incentives already in the system, some are going to require a massive amount of intervention and support if they are to make the leap (so a more detailed consideration of whether or not this is needed has to be done on a case by case basis) and for some, we have a different form of welfare assistance?

Coupled with this, a recognition that the multigenerational problem is a real one that justifies much greater early childhood interventions. Even devoteees of individual liberties and advocates of people being left to make their own decisions can often be convinced of the merits of government helping children too young to make reasoned decisions for themselves.

You are also right re welfare to work incentives. do you find the polarisation of commentary in this area annoying? there are some positives in recent social welfare reforms, as well as negatives, but it seems you have to be in either the “everthing is wonderful” or “everything is a disaster” camp.

Backroom Girl
Backroom Girl(@backroom-girl)
14 years ago

Stephen

I was perhaps a little too hasty in completely dismissing short-term income maintenance as an objective for the benefit system. One way that you could do this, in a limited way that was still in keeping with our needs-based approach would be to allow partnered people who had left work because of unemployment, illness or birth/adoption of a child to qualify for income support in their own right (ie without regard to their partner’s income) for a period, say three or four months, after which the normal partner income test regime would kick in. At present, people with employed partners are the only group that misses out on any form of income support when they become unemployed and for them you would think the income shock must be pretty substantial. (Funnily enough, we did have just such an arrangement for sickness benefits for many years, but I think that was abolished by the Hawke/Keating government.)

Andrew – this kind of arrangement might be a compromise that could be considered in the context of the maternity leave debate. Given the historical evolution of our income support system, it would be quite anomalous to have publicly-funded maternity leave that completely replaces people’s previous earnings, since we don’t do that in the case of unemployment or sickness.

And yes, I do get so annoyed by the fact that all public debates have to be in terms of black and white. But not here on Troppo of course :-)

Anthony
Anthony
14 years ago

“I agree with you on social insurance … Id still suggest its worth bearing in mind but only as an analogy rather than a design feature of any future policy.”

BG, I like your suggestion regarding the partnered unemployed/sick. But I wouldn’t be too dismissive about the social insurance analogy.

First, if you’re lucky enough to have worked in a job where you’ve accrued annual leave, perhaps some long service leave, and particularly severance and redundancy entitlements, on losing the job you have got some short term income maintenance. You’re in a better position relative to someone who hasn’t been able to accrue such entitlements: in particular, workers who may also have worked at a job for a fair while but on a casual basis. So it is possible, a la social insurance, for people to have some protection against short term loss of income accrued through the employment relationship; the problem is that such protection isn’t generalised and that low income people often do not have the attachment to standard employment relationships that has allowed them to accrue rights to paid leave. So maybe an issue is how to extend such income protections, rather than say they have no place in the Australian system.

Second, it is easy to overstate the differences betweensocial insurance’ models of welfare and Australiassocial assistancemodel. Traditional social insurance schemes preoccupied Australian policy makers for much of the interwar period, but the Joint Parliamentary Committee on Social Security in the early 1940s finally garnered bipartisan support for general revenue financing by arguing that, in effect, there was no material difference between contributions and progressive income taxes, with claimants havingearnedtheir benefits through the taxes they paid. This in fact meant extending income taxes down the income scale so that those likely to receive the new social security benefits were being asked, for the first time, to pay for them, and to pay for them via a tax based largely on participation in the employment relationship. It also explains why around 40 per cent of the redistribution effected by the Australian system is redistribution of income across individualslifetimes. Similarly, many OECD countries place importance on the alleviation of poverty regardless of income smoothing over the life course, which means that although classic insurance models favour lifetime redistribution over interpersonal redistribution, they by no means eliminate it.

Finally, we do have an actually existing social insurance system operational in the form of State workers comp schemes. Some (Louise Thornthwaite and John Buchanan, I think) have suggested this might actually provide a good model for a paid mat leave scheme, rather than Pru Goward’s preferred model of flat rate payments out of consolidated revenue set at the level of the minimum wage.

melaleuca
14 years ago

I would support a one off increase in the unemployment benefit but leaving future increases tied to the CPI. Mutual obligation and intensive assistance to help people find work may be “intrusive” but they are essential to ensuring we don’t end up with a large unemployable and dysfunctional underclass (in addition to the unemployable indigenous underclass we already have).

Backroom Girl
Backroom Girl(@backroom-girl)
14 years ago

Anthony – It is true that for some people access to accrued leave can provide short-term income replacement in the initial period following loss of employment. (For many people, of course, that is all they get for the reason I pointed out initially that they are precluded from income support by their partner’s income.)

And while it is true that people without an ongoing employment relationship don’t accrue leave, don’t forget that in most cases they receive a casual loading on their hourly rate of pay to compensate them for that. In those cases, they are actually advantaged because they get immediate access to income support, rather than having to wait until after the period that it notionally covered by the accrued leave payments.

But in the ‘wage earner’s welfare state’ that is Australia, the income support system has always been envisaged as the safety net that exists to support people who aren’t well-covered by wage earners’ traditional entitlements. That’s also why, as a general rule, people who have access to paid leave or to workers’ compensation have their access to income support restricted.

So when it comes to maternity leave, I would argue that you need to provide for that in a way that is consistent with the system that has grown up here. It doesn’t seem sensible to legislate to make employers responsible for paying it in the same way as annual or sick leave, since that would clearly create a disincentive to employing women of child-bearing age. You could do it through some kind of social insurance scheme, as suggested by Buchanan and Thornthwaite, which could either replace or supplement paid maternity leave already provided by some employers. Presumably that would be funded by a payroll-tax type of levy, rather than one based on risk? Or you could take the approach I have suggested, which would leave the provision of paid leave up to employers on a voluntary basis, but provide a publicly funded safety net to provide a minimum level of assistance to people who don’t have access to paid maternity leave.

Backroom Girl
Backroom Girl(@backroom-girl)
14 years ago

Melaleuca – politically it is sensible I think to rely on CPI indexation as the legislated form of indexation, supplemented as appropriate by the occasional ad hoc increase in rates. This provides maximum flexibility for Government, especially in hard times (which will presumably come again) as well as much greater political kudos when the ad hoc increases are handed out.

The problem the government has faced since it took the decision (perhaps in retrospect not the wisest decision) to link age, disability and single parent pensions to Male Average Weekly Earnings is that there is now a significant above inflation increase built into income support expenditure that the government has no control over and which probably limits its capacity or at least its willingness to provide ad hoc increases in other areas.