Investing in people is the path to full employment

One of the many objectives that guide government policy is the attainment of full employment. Progressive and conservative governments all around the world tend to pursue this objective, knowing that having as many people in employment as possible benefits the individual as well as society.

While most are in agreement on having such an objective, there is debate about how to achieve it. Some, notably those on the conservative side of politics, believe that the most effective way is through labour market reform that supposedly provides more “flexibility” and therefore encourages employers to hire more employees. The Australian Government’s WorkChoices laws are the latest example of such reform. The reality is that such reform only provides more flexibility for employers, resulting in a transferral of power in the workplace away from employees, to further concentrate it with employers at the expense of fairness in the workplace.

Despite supporters pointing out that WorkChoices has encouraged more employment, the fact is that one of the main explanations for Australia’s current low unemployment rate is the resources boom. In any event, the only way that WorkChoices could be seen to encourage employment is because it allows employers to offer inferior terms and conditions of employment to prospective employees, in particular lower wages. In effect, this is encouraging more employment by devaluing the economic worth of the unemployed, by forcing them to accept inferior terms and conditions of employment if they want a job.

But there is another way to encourage more employment, based on investment in the unemployed. If we look to Scandinavia, and Denmark in particular, we can see this alternative approach in action, and it delivers even lower unemployment while maintaining fairness in the workplace.

Denmark is different to Australia in a number of ways. It is a welfare state with government provision of universal health care and education for its population, in addition to other public services. It has a relatively regulated labour market, with high rates of union membership and employment under collective labour market instruments, which translates into a more balanced relationship between employees and employers and therefore increased fairness in the workplace. Notably, Denmark has invested significantly in the unemployed through the implementation of active labour market policies.

Active labour market policies describe a variety of different programs and initiatives that attempt to move the people without jobs into work. They can involve government support for job searching to assist with the process of seeking work; government funding for training and education for the unemployed to provide them with the skills to make them more attractive to potential employers; and incentives such as subsidies to encourage employers to hire people who may be long-term unemployed.

Providing all unemployed persons with one year of education or job training, or with a grant to start a small business is a practical example of one such active labour market policy in place in Denmark. As Table 1 shows, the level of public expenditure on active labour market policies as a percentage of GDP in Denmark far exceeds the level of public expenditure as a percentage of GDP in Australia.

Table 1: Public expenditure on active labour market policies as a percentage of GDP, Denmark and Australia

Australia’s public expenditure on active labour market policies as a percentage of GDP is so small, that even if it were doubled, it would still be smaller than that of Denmark. But there is a convincing case to increase public expenditure on active labour market policies in Australia.

First, in a practical sense, higher public expenditure has resulted in better labour market outcomes in Denmark when compared to Australia, with Denmark having both a considerably lower rate of unemployment and a higher participation rate (a country’s labour force as a percentage of its population) than Australia, as shown in Table 2. This demonstrates that if active labour market policies are properly designed, they deliver results.