Easing the transition from welfare to employment requires tough decisions

The current focus on foreign and defence policy does not mean the suspension of domestic policy development. It's impossible to be a force for good in the wider world without a strong and secure domestic base. International crises cast domestic issues into different perspective but don't make them go away. Although issues of war and peace inevitably distract people from bread-and-butter concerns, they can also suspend safety-first politics and give national leaders renewed determination to amend what's within their power to fix.

As a counterpoint to the problems of the wider world, providing a fair go for struggling Australian families is more urgent than ever. In particular, how do we give Australian families the best possible chance to make a better life for themselves and tackle the sense that many people are still running faster without advancing on an economic treadmill?

ACOSS wants the Government to create more jobs. ACCI wants the Government to create new regulatory structures that will allow business to create more jobs. The welfare reform roadmap just released and the commitment to new policies on work and family are marks of a government which has always looked for fresh ways to tackle the most intractable social and economic problem of the past quarter century. Unlike its predecessors, this Government has not ignored the impact of the social security system on unemployment and is determined to ensure that paid work is consistently more attractive than the alternative.

"Perhaps it is a weakness of democracies," wrote the Adelaide University historian, Sir Keith Hancock, "that, having willed an end, they try to shuffle out of willing the means." "Australians," he continued, "certainly, constantly confuse end and means and they do this because their easy-going good nature and intellectual laziness make them reluctant to refuse favours, to count the cost, to discipline the policies they have launched. These policies, therefore, yield diminishing returns until, at last, they may become a positive danger to the national purpose which has called them into existence".

Hancock was writing about "protection all round" and analysing the foreseeable but unplanned outcomes of policy based on wishful thinking. Policies to boost employment are especially prone to the magic pudding syndrome or to the counterproductive influence of unintended consequences and easily degenerate into attempts to buck markets rather than address the structural factors which drive them. The former Labor government's Accord, for instance, had worthy objectives: to boost employment and to provide a better life for people doing it tough. Unfortunately, lower wages and higher welfare payments created more potential jobs but fewer workers prepared to fill them. The orthodox "cure" for unemployment became ineffective because of new work patterns and a welfare system which undermined the appeal of entry-level jobs.

Comprehensive social security is part and parcel of modern civil society but has a range of harmful side-effects. Failure to acknowledge the way universal, more-or-less unconditional welfare changes people's behaviour has seriously compromised Australian governments' efforts to deal with unemployment.

Unemployment is a much more complex social and human phenomenon than is apparent from the average press release. Unemployment happens to people, not economies. Behind the statistics are hundreds of thousands of quite different human situations. People's finding, losing or failing to find work is a function of personal factors such as the motivation of job seekers and the goodwill of employers as well as "impersonal" ones such as the state of the economy and condition of particular industries. Even so, some systemic issues can make a big difference to how people organise their lives. If, for instance, people can receive almost as much money through the welfare system as through paid employment they can hardly be blamed for concluding that work does not pay.

It is generally believed that a 48.5 per cent top marginal tax rate (with Medicare levy included) cutting in at just $60,000 a year constitutes a significant disincentive to earn and achieve and places Australia at competitive disadvantage in seeking to hold and attract the best talent. Unfortunately, the interaction of the tax system and the welfare system means that people moving from unemployment to work generally face effective marginal tax rates of nearly 70 per cent and sometimes over 100 per cent. Adults on Newstart who earn an additional dollar pay 17 cents income tax. On top of the 17 cents lost through tax, they lose an additional 50 cents through benefit clawback once they've earned $31 a week producing a 67 per cent effective marginal tax rate for part-time work in excess of about three hours a week. If 48.5 per cent tax discourages people with responsible jobs, what about the impact of 67 per cent on unemployed people? What is thought to be a significant disincentive to well-qualified people doing interesting jobs can hardly fail to discourage less well-motivated people working for about $10 an hour.

Progressive income tax is supposed to mean higher tax rates at higher incomes but that's not how it works in practice for people who are also receiving social security benefits. Financial incentives are certainly not the only determinant of labour market behaviour but they are an important one.

High effective marginal tax rates mean that moving from welfare to work can make depressingly little difference to people's disposable income. For instance, a single person on Newstart renting privately whose earned income increases from $75 to $375 a week, after tax and social security clawback, is just $53 a week better off.

The interaction of a needs-based, highly targeted welfare system with a progressive tax system becomes even more complex for low to middle-income families receiving multiple benefits (with cumulative and often different thresholds and withdrawal rates). For families, the worst poverty traps can occur when moving from low to middle levels of earned income. For instance, a couple renting privately with three teenage children whose earned income increases from $610 to $860 a week is actually $28 a week worse off after paying tax and losing part or all of their rent assistance, family payments and Austudy. The social consequence of 850,000 children living in 435,000 jobless families is not so much a dramatic increase in poverty (thanks to a tightly targeted welfare system) but a significantly greater incidence of early school leaving, unemployment and teenage parenting in the next generation.

Under these circumstances, the wonder is not that Australia has a persistent sub-culture of unemployment but that more people do not opt out of participation in the workforce. The fact that so many people persevere in modestly paid jobs testifies to the resilience of the work ethic and people's appreciation that there's much more to work than pay alone. Most people, most of the time, work for the satisfaction and companionship of a job well done as much as for money but incentives do matter and sooner or later perverse incentives start to warp people's best instincts.