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.