To lower unemployment, employers need incentives to re-engage the jobless

In the aftermath of the election and the federal Coalition and Opposition reshuffles, on Friday and Sunday respectively, attention will now turn to the policy agenda.

We hope the new coalition government will identify the key issues that need to be addressed for the short and long-term benefit of Australia. At the same time, Labor under Simon Crean is under pressure to find a new and convincing policy agenda that will make it a credible alternative government.

Two of the main issues are jobs and education. We need to be able to produce a more efficient and equitable short, medium and long-term plan for the employment and development of Australian human capital.

On the other hand, we want a strategy that will "back Australia’s ability" and allow our children to realise their potential , and for Australia to be a "clever country" or a "knowledge nation". This is a medium to long-term policy agenda to help achieve sustained economic growth and afford greater opportunity to a larger number of Australians to develop their skills and be paid higher wages than would otherwise be possible.

To do this will require a combination of more public investment in education, especially (but not exclusively) in pre-school and primary school education, and more private investment in human capital, especially at the post-secondary level.

It will also require greater diversity in education provision to meet varying needs, and a more highly-paid and ambitious, productive and accountable teaching profession.

A more deregulated higher education sector appears to be needed, with a greater variety of fees that are payable for a greater variety of courses, alongside a subsidy and loan system (building on the current HECS arrangements) which helps to ensure that a more efficient and dynamic system, and encouragement of excellence can be coupled with more equitable outcomes.

On the other hand, as well as developing such aspirational policies aimed at ensuring high and growing wages for our younger generation, we have to recognise that we have a problem with the high level of joblessness, which is unduly concentrated in jobless households.

About one in six households with at least one jobless person of working age possess no jobs. Almost one in six children lives in such a household. While the medium to long-run education agenda outlined here can provide some help to some of these families - for example, in enhanced early childhood education in disadvantaged areas - there is an urgent need to get jobs into jobless households.

We have to be realistic that for many of these households we cannot be too ambitious about that will be required in such jobs. Jobless households are generally not in a position to land highly-skilled jobs or to command high wages.

Indeed, in getting jobs into jobless households, many jobs will have to have low-wage costs attached to them for employers to have incentive to hire the jobless.

We will need to provide supplements to low wages through the tax and social security systems to make a big dent in the number of jobless households, while improving their living standards. A carefully designed mixture of welfare and labor market reform is needed, to improve the incentive for employers to hire jobless people, and reward the jobless for securing employment. We also need helpful employment services addressing individuals’ needs and associated administrative requirements for those we seek to help.

Soon after the 1998 election, I was one of the so-called "five economists" who recommended this sort of approach to unemployment and joblessness. We argued that without reform of that kind, it would be hard to get unemployment much below seven per cent. This argument remains quite compelling.

While there are signs that some elements of our plan are being adopted in the welfare reform process, a more comprehensive approach is needed. In particular, while the employed are pleased that their real wages have risen significantly, rising real costs of hiring low-skilled workers is making it harder for many of the jobless to break in.

We want full employment and high wages for as many as possible. In the long run, our education system will be a significant factor in helping create such conditions. This requires the development of a compelling education policy agenda. At the same time, we do not want to leave behind our unemployed people and jobless families. Not only will the jobless suffer; so will their children. Combining such "soft-hearted" aspirations with a hard-headed policy agenda will require the combination of an economically efficient approach and a socially inclusive one.