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Time to look beyond the unemployment statistics

By Andrew Leigh - posted Tuesday, 27 September 2005


What might the ACT government do about this? With its latest package of welfare reforms, the federal government has opted to address welfare dependency mainly through punitive policies. Under the new regime, parenting payment recipients with school-aged children must search for at least part-time work. Unemployed workers aged 50-64 face more stringent job search requirements. And qualifying for disability benefits has become harder.

By contrast, welfare reforms implemented in the United States under Bill Clinton used a combination of sticks and carrots to bring about a large rise in workforce participation. Most importantly, the US provides poor families with a wage subsidy worth up to A$5,300 a year. And these wage subsidies worked. Careful studies (pdf file 202.45KB)afterwards concluded that more of the rise in US employment over the 1990s was due to carrots (the wage subsidy) than sticks (such as time limits on welfare receipt). This provides a clear policy lesson for other countries seeking to move more people off welfare: if you want to be successful, wage subsidies should be part of the solution.

The US is not the only country to have this kind of wage subsidy program. Britain provides a wage subsidy of up to $7,000 annually to induce low-income parents into the workforce. Belgium, Finland, Ireland and the Netherlands also use wage subsidies to boost workforce participation.

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Yet Australia has largely eschewed wage subsidies. While the so-called “five Economists” proposal in 1998 received broad support in the academic community, the federal government took little notice. Federal wage subsidy programs tend to be targeted at particular groups (such as apprentices, older workers, disabled and Indigenous people), or operate only for a very short time. Although there is money in the federal coffers to create a wage subsidy program that would raise employment rates among poor families, the federal government instead plans to spend it on tax cuts that will deliver a larger share in 2006-07 to the richest 5 percent of households than to the poorest 50 percent. Carrots for the rich, sticks for the poor (pdf file 173KB).

But there is an alternative. With a healthy budget, the ACT government should instead devote money to providing work subsidies for the low-paid. Rather than attempting to create jobs by offering payroll tax breaks to new firms, the ACT should instead focus resources on providing employment to low-skilled workers, whose labour force participation rates have been steadily falling. We should do this for the sake of those workers who are currently denied the dignity of a full-time job. And we should do it for the sake of the next generation of Canberra’s children, who are more likely to themselves find jobs if they grow up in a household where work is the norm. Work subsidies are not the only solution to joblessness and entrenched inequality, but the international research shows that they should be on the policy menu of forward-thinking politicians.

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First published in The Canberra Times on September 9, 2005.



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About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

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