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.