New welfare model, old welfare results
Justin Campbell argues, Christian Porter’s new welfare investment model won’t create jobs or growth.
Recently, Social Services minister Christian Porter announced that the government intends to introduce a New Zealand style welfare investment model. The model involves the government investing more initially in problem cases early on, with the view that it will reduce the government’s long-term liability. New Zealand much like Australia has had a problem with people moving from normal unemployment benefits to the higher paying disability payments. The investment model would provide more resources for these hard cases; helping them move into employment. However, is this just another big government solution to a micro level problem?
Presently, Australia’s welfare system already provides more resources to the long-term unemployed via Job Services Australia (JSA) or the Disability Employment program (DES). I have previously worked in the Disability Employment Program and the Work for the Dole Program. Nothing I saw working on either of those programs makes me think that another government program will make any significant difference to the level of unemployment.
Unemployment has five causes, frictional unemployment, voluntary unemployment, structural unemployment, real wage unemployment and cyclical unemployment. Frictional unemployment occurs when people move between jobs; these people never have anything to do with Job Services Australia. Programs such as JSA and DES attempt to address structural unemployment by assisting with job searching and reskilling. The success of such programs are dubious at best. Such approaches fail to address the fact that the unemployed are kept out of employment because they are priced out the labour market (real wage unemployment) or there’s simply not enough jobs available due to cyclical declines in the economy.
Structural issues causing unemployment are best addressed at micro level within the communities jobseekers live. Family, friends and community groups are best able to help people overcome whatever disadvantages they face. Programs delivered or funded by the Commonwealth focus their energies on meeting KPIs set by the department and are too far removed from the individual or the local economy. When I worked in DES, we were paid by the department on 13 and 26 week outcomes. Many of those people were soon unemployed again after those periods. The people who were successful in finding long term employment usually found it via their own networks and through their own hard work. Sometimes, we were able to assist, but was this a good use of public funds? In my opinion, no. The Federal government would better focusing its energies on the two causes of unemployment that it can affect: real wage and cyclical unemployment.
Real wage unemployment is caused by the gap between the demand for labour and the artificial shortage of supply created by the minimum wage, the award system and effective marginal tax rates (created by the interaction between the welfare system and the tax system). The Federal government could do a lot to help the unemployed by abolishing the award system; too many jobseekers are priced out the labour market by the government setting the price of labour too high. This is especially true where structural issues also exist. Many unemployed people are unemployed because they have the wrong skills and would require significant re-training by an employer before the price set by the award system can be justified by the employer. Instead of doing this this the Department of Employment regularly raids shopping centre food courts to ensure workers aren’t being ‘exploited’.
In the DES program we were able to apply for a supported wage agreement which allowed the employer to pay the workers a percentage of the award rate based on review by an independent assessor. This made it possible for an employer to pay someone to clean tables or wash dishes and often create a job that didn’t previously exist. If in the first place the government didn’t set the wage rate artificially high, this process wouldn’t be necessary and more of these entry-level roles would be created. Because the wage rate was lower, the worker could also continue to receive part of their unemployment benefit while gaining valuable skills. If the government were to fix the relationship between welfare and the tax system by implementing a negative income tax as a replacement for the current welfare program this would happen naturally.
The government can also help reduce cyclical unemployment by assisting the Australian economy to grow at a high rate. Fortunately, recent economic news has been good with the Australian economy growing at 3.3% p.a. The government can help continue this success by focusing on abolishing unnecessary red-tape as recently outlined by the Institute of Public Affairs, ensure Australia has a competitive tax system and remove long term threats to the economy by balancing the budget.
While the proposed welfare reform maybe an improvement on existing practice, the Federal government needs to focus on the two causes of unemployment it can control if it hopes to return Australia to the low unemployment we experienced in the mid 2000s. And that requires a real focus on jobs and growth.
Justin Campbell is on the executive committee of LibertyWorks.