My 20/20 submission and my little imbroglio with The Australian

I did not apply to participate in the 20/20 summit but I did submit a 500 word piece on employment policy. Although Club Troppo readers would have heard my views before, the submission is set out below.

I also had an interesting disagreement with The Australian editorial writers on the appropriate fiscal policy, which I have reproduced below.

MY 20/20 SUBMISSION

The Rudd Government has inherited a healthy employment situation. However, Australias labour force participation rates are still below the best in international terms and, after allowing for under-employed and discouraged workers, the actual under-utilization rate is closer to 7% of the workforce than the official rate of 4%. So there is room for further improvements in the future.

Unfortunately, there is a real risk that employment prospects might deteriorate over the next few years because of inflation concerns and a world economic slow-down. To counter this risk, what is needed is a both a structural and cyclical response.

There is undoubtedly a structural imbalance in the labour market, reflecting market failure on three fronts: constraints on labour mobility (occupational and regional), wage rigidities and inequalities of employment opportunity. All of these adversely affect the unemployment/inflation relationship. A response is needed on three fronts.

First, the Government must ensure there is reasonable room for structural wage flexibility and use tax offsets to compensate low paid workers. Second it must persist with effective but humane welfare to work measures. Thirdly, active measures are needed to enhance the productivity and employability of the low-skill, low-ability workers and to prevent the perpetuation of chronic inter-generational joblessness. Such measures have been successfully applied in Nordic and European countries, including:

  • wage subsidies to employers who employ low-skilled, low-ability workers in disadvantaged areas;
  • more effective relocation incentives to encourage people to move to booming parts of the employment market;
  • incentives to firms to introduce more family-friendly workplaces such as parental leave and good quality and affordable child care assistance;
  • measures to correct early childhood disadvantages stemming from low parental income and education, poor parental attitudes, dysfunctional home environment etc;
  • carefully targeted adult education and training opportunities;
  • remedial programs for older school children and youth (age 14-19) who are under-performing and at risk of dropping out early from high school;
  • and action to improve access to key employment-enhancing public services like health, housing and public transport in low-income areas.

Such a strategy would be largely self-funding in the long term because it would increase the productive base of the economy and thus generate additional revenue.

The Government also needs to be prepared for the strong possibility of an economic slow down over the next five year period requiring a quick and effective cyclical response. It should have a few short-gestation infrastructure projects ready to implement as needed and put any 2007/8 and subsequent budget surpluses into an investment fund to draw on at short notice. Furthermore, as a slow-down is likely to impact very unevenly, the design of fiscal policy in the next few years should be sensitive to the geographic and regional imbalances in employment opportunities.

MY EXCHANGE WITH THE AUSTRALIAN ON A RELATED TOPIC

My letter published on April 7:

I usually find myself agreeing with George Megalogenis but I cannot accept his view that (a) the Rudd government might need to curb its spending even more to make up for the prospective drop in revenue from the prospective economic slow-down; and (b) future budget surpluses should be put into workers superannuation accounts (Weekend Australian 5 April – “Budget surplus at risk” and drooling with temptation at the cookie jar).

One could argue the exact opposite. First, when the economy is slowing, fiscal restraint needs to be lighter not tougher. Secondly, most economists accept the need for Australia to step up its investment in economic and social infrastructure (where appropriate in partnership with the private sector) as soon as economic circumstances make it feasible. If the fiscal surpluses were put into a new government investment fund, the funds would be quickly available for future investment in physical infrastructure in the event of a recession threat. If the surpluses were put into private superannuation funds, the money would have to be borrowed back by the Government at full market rates, with high transaction costs, to pay for new infrastructure when needed. This would slow down the potential fiscal contra-cyclical response as well as bloating further the future cost of the pro-rich tax superannuation concessions, which already amount to 2.5% of GDP. Where is the logic in that?

Today’s editorial in The Australian responds critically.

I intend to respond to the editorial along the following lines:

You might be surprised to learn that I heartily agree with most of your editorial (spending must be cut in good times and bad 8/4/08). There is a burning need to review the structure of government spending and in particular to move away from middle-class welfare and passive hand-outs to the unemployed.

But, with the prospect of a significant economic slowdown, I would not like to see all the spare money used to cut taxes or run bigger surpluses. Instead, I would prefer to see a sizeable portion of the budget savings redeployed to public investment in well-targeted education, adult training, remedial and early childhood programs, relocation incentives, preventative community health, low-cost housing and public transport in low-income areas. Such programs would help everyone fulfil their full potential irrespective of the circumstances of their birth and upbringing. It would be win/win for social equity and for the productivity and employment-capacity of the economy. And it would help prevent an unwelcome rise in unemployment in the short term.

To the Editor: I have a doctorate in economics but I am not a Professor.

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11 Responses to My 20/20 submission and my little imbroglio with The Australian

  1. stephen bartos says:

    always look forward to your posts Fred. I agree with most of your points; but reservations on wage subsidies, because of the difficulty of designing them so as to encourage new employment (as opposed to subsidising a job that would have been created anyway) and their openness to fraud and manipulation.

    On “more effective relocation incentives…”, could not agree more: I have argued for some time that a large barrier to mobility is housing; makes the labour market much stickier when so much of a person’s wealth is tied up in their home, effectively anchors many of our workforce in place. Greater proportion of rental housing, lower transactions costs in house purchase and sale (costs that are mainly a function of house prices), would all make a difference. But to get there, someone needs to bite the bullet on reducing the incentives for over-investment in owner occupied housing in Australia, and be prepared to deal with a possible decline in real housing values over time: politically unlikely.

    remedying early childhood disadvantage, education and training opportunities, better services in low income areas etc. all desirable and efficacy supported by the evidence. not so sure about the remedial measures for 14-19 year olds dropping out of school: isn’t there a case for developing school alternatives that lead to employment and develop work skills (such as better structured pathways to apprenticeships or trade training, or other areas that emphasise manual skills) rather than putting all the eggs in the school basket?

  2. Kevin Cox says:

    I would agree with Stephen that wage subsidies do seem problematic for the reasons he outlines.

    The problem may be overcome if we allowed individuals to optin to a different tax and benefits scheme along the following lines.

    If a person optsin to the scheme then they get a flat income no matter whether they are employed or not. They also give up their rights to some social security payments such as unemployment benefits (or whatever it is currently called). They also agree that all other income they earn is paid into a single bank account and that the income is taxed at a flat rate and is paid immediately to the tax department.

    If they “cheat” the system then they go back to the existing system.

    This may be used by many people as a way of getting out of “poverty traps”.

  3. Fred Argy says:

    Thanks Stephen and Ken. I included wage subsidies in my list of suggestions because recent OECD papers have pointed to the success of temporary wage subsidies for stubborn unemployed in countries like Denmark, Netherlands, Belgium, Ireland, Spain, France and Austria (the mechanism commonly used being reductions in employers social security contributions for low-paid workers). Such measures need to be backed by effective welfare to work policies and training opportunities. I also note that John Quiggin (whose views I greatly respect) proposed wage subsidies in one of his recent postings, although he has not (to my knowledge) elaborated on the idea.

    In principle, wage subsidies offer a more socially acceptable approach to the kind of wage deregulation advocated by right wing critics (which the electorate has rejected). If deregulation works, so should wage subsidies – provided the revenue cost is small and does not generate undue efficiency costs.

    That said, I accept that there are administrative complexities which might not make it cost-effective in Australia. Nothing is easy in this game. Kevin might be on the right track. I also concur with Stephen’s “alternative” to remdial programs.

  4. Fred Argy says:

    One further thought about wage subsidies: I understand Job Network agencies can access the job seeker account to subsidise the wages of long term unemployed people.

    One comment I have heard is that (from Peter Saunders of CIS) is that “once the subsidy finishes the job placement often disappears”. But what is “often”? And what happens to the job experience of these people over the medium term?

    Has this existing scheme been fully evaluated?

  5. Backroom Girl says:

    Hi Fred

    The traditional approach to wage subsidies in Australia has been to pay them directly to the employer (who then passes them on to the less-than-fully-productive employee by paying the same wage that the person would attract if they were fully productive. But I wonder if this might not be a bit counterproductive in that some employers may still view this employee as costing the same as any other, but more particularly the employee to think that their labour is worth as much as any other. REsearch in the US has also found that if you target subsidies tightly to people who really would be unemployable or only marginally employable without them, then employers interpret the availability of a subsidy as a message not to employ the person, rather than the other way around

    Perhaps a more transparent way of going about this would be to allow wages to adjust downward to accommodate low-ability and/or low-skill (for example, by allowing employers to pay a lower ‘training’ wage for some initial period) and subsidise some workers directly through the income support system. We do already do this for people who have low productivity because of disability or who are part of a formal apprenticeship or traineeship – why not for people with low productivity for other reasons like just having been out of work for a long time?

  6. Rodney Henderson says:

    Fred Argy talks the usual rubbish.

    As owner of a small blue collar business, I used to employ anybody who turned up including ex-cons, druggies and long term unemployed.
    Unfair dismissal laws gave me pause.When the NSW government added to corrupt and expensive worker’s comp regime, the concept of absolute employer liability for accidents regarless of the cause, I changed policy. Inexperienced workers with problematic backgrounds are much more accident prone. The fines and (of course) legal costs are very high.
    I now only employ experienced workers.

    People like Argy are so locked in anti-employer attitudes that they can never be constructive.

    As to his detail proposals, they all very rortable and bureaucratic. Employers are expected to do massive paper work for small handouts. Only the crooks can be bothered.
    The whole public sector teacher/coucilor/social worker class is completely opposed to assessment or real accountability. Try to get public schools to teach basic literacy and numeracy to underpriveledged kids before you try anything more complex.

  7. Fred,

    what interests me about your proposals is your skepticism in the market’s ability to provide the same incentives.

    wage subsidies to employers and incentives to firms to introduce more family-friendly workplaces when most of them are already screaming out for workers? Isn’t that just a tad superfluous?

    more effective relocation incentives when people are already flocking in droves to QLD and WA?

    Sometimes, you have to let the market do its thing. It usually works quite well on its own.

  8. Fred Argy says:

    Reading the last two comments on my 20/20 submission, I should have made it clearer that the aim of my structural (longer term) proposals is to increase the effective supply of workers at any given wage rate and so ease the risk of accelerating wage and inflationary pressures and thereby reduce the need for high interest rates. How is that anti-employer?

    I also explained why labour markets do not work efficiently and pointed to three market failures which required government intervention (assuming it works and does not create efficiency costs of its own).

  9. trevor burke says:

    Hi Fred,
    How does the general population get to send their ideas to the summit
    Thanks
    Trevor

  10. david tiley says:

    Trevor – go to the Australia 2020 site. There is a space for ideas from the rest of us. A lot of pet peeves and nuttiness – my favourite is about daylight saving in Queensland – but some good, cogent notions in there too.

  11. Fred Argy says:

    Trevor, my understanding is that formal 500 word submissions to 20/20 Summit could have been made between 11 February and 9 April and in that time some 8700 submissions were made by some 3500 individuals or groups. No formal submissions can be made now but there are other channels available for people who want to put some views to the Government. David says there is a 20/20 discussion forum but you can write direct to the Prime Minister http://www.pm.gov.au/contact/index.cfm.
    Sorry but that’s all I know. Good luck.

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