With businesses complaining of a shortage of skilled workers, the Rudd government is putting increasing emphasis on education and training.
It has set up a new board, Skills Australia, which will spend over a billion dollars in the next four years providing half a million new vocational education training (VET) places. It is encouraging more young people to stay in school to year 12 or to take VET courses rather than going straight into jobs. And it wants Job Network agencies to improve the skills of long-term unemployed people rather than just placing them in short-term jobs.
All of this sounds splendid, but we should not get carried away with the euphoria of it all. Where people are capable of taking on more complex tasks, and are motivated to get themselves qualified, it makes sense to offer them training. But not everybody has the ability to perform the highly-skilled jobs that business wants filled, and not everybody has the motivation to put themselves through rigorous training courses.
The Organisation for Economic Cooperation and Development (OECD) warns that training schemes for unemployed people have a very mixed track record - not just in Australia, but elsewhere too. The worst results are for young school leavers, where training achieves almost nothing (this is hardly surprising - after ten years of compulsory schooling, the last thing most early leavers want to see is another classroom). Schemes aimed at unskilled, older men also often generate disappointing results.
Rates of completion of existing training courses are extremely low. Last week, the National Centre for Vocational Educational Research reported that only 10 per cent of Australian unqualified school leavers who sign up for VET courses complete their training and get qualified. The authors blamed “lack of motivation” as the main reason for this huge drop-out rate, but lack of ability is almost certainly a contributory factor. It’s difficult to be motivated in something you find too difficult.
It does not always make sense to encourage (or require) young people to stay in school longer, or go to college rather than find a job. Research by the Australian Council for Educational Research (ACER) finds that students who leave at year 10 to take up apprenticeships do better than those who sign on for two more years of schooling or vocational training and then try to find work. The ACER also reports that students with low numeracy and literacy scores who stay at school to year 12 are less employable, and earn lower incomes, than those who leave at year 10 and get jobs. Forcing more kids to stay at school can be counter-productive.
There are about 1½ million working-age people in this country living on welfare benefits. Many of them could and should be working. Some might benefit from more training, but many would benefit more from an increase in lower-skilled jobs for them to do. The key to increasing the supply of lower-skilled jobs is to reduce employers’ costs, for high wages deter employers from hiring marginally productive workers. This means allowing minimum wages to fall.
Brendan O’Connor, the Workforce Participation Minister, has ruled this out. As a former union official, it goes against his every instinct. But he should think again, for our high minimum wage is pricing the most disadvantaged Australians out of the labour market and leaving them beached on welfare.
OECD figures for 2005 show Australia has one of the highest minimum wage levels in the world. Expressed in terms of purchasing parity, our real hourly minimum wage in 2005 was US$7.58. In France it was $7.20; UK $6.34; New Zealand $5.51; Canada $5.14 and the USA $4.57. We could reduce our minimum wage by 20 per cent and still be comparable with countries like Britain and New Zealand. And a 20 per cent fall in the minimum wage could generate 100,000 new jobs, most of which would be suitable for people with few skills or qualifications.
Our high minimum wage is a blunt tool for raising the living standards of low-income workers. Many minimum wage earners are second earners living in relatively prosperous households, so they are not poor. And those who really are doing it tough would be better helped by a more generous tax and benefits system, rather than by propping up the headline hourly rate.
Ireland’s minimum wage in 2005 was US$6.06 per hour; Belgium’s was US$6.57; the Netherlands’ was $6.76. All of these are significantly lower than Australia’s US$7.58, yet in all three cases, their minimum wage earners took home more money than ours did. This is because these countries levy lower net taxes on low income earners than we do.
The lesson is that, instead of focusing his attention on the gross minimum wage, Mr. O’Connor should be thinking about protecting people’s net disposable incomes. With a bit of ingenuity, he could cut the minimum wage and increase the supply of low-skilled jobs without making existing low-income workers any worse off. And that really would be an achievement the new Rudd government could boast about.
Peter Saunders’ paper ‘Expanding low-skilled employment’ is published on February 14, 2008 by the Centre for Independent Studies. A shorter version of this was first published in the Australian Financial Review on February 18, 2008.
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