Joblessness and income inequality: has Australia taken the wrong turn?

Model 4 is favoured by the Scandinavian countries and some of the smaller Europeans (such as the Netherlands and Austria). It involves high taxes and redistribution on an even larger scale than group 3 - but the income support provided, while generous, is more work-conditional and employment protection laws are less strict than group 3 - although stricter than in groups 1 and 2 (or Australia).

Instead this model relies heavily on “active” social programs to enhance the productivity and mobility of low income people throughout their life cycle. For example, in addition to spending much more on education, governments in Denmark, Norway, Sweden and the Netherlands invest about four times more (relative to GDP) on active labour market programs - job placement, training, employment incentives, integration of disabled people, direct job creation and start-up incentives - than the English-speaking countries.

The policy works. Model 4 delivers low and stable levels of income inequality, high and rising levels of income mobility and very good productivity and employment outcomes. The Scandinavians also rank high in international competitiveness league tables.

The “best” mix of instruments?

The poor employment outcomes in much of continental Europe are partly due to rigid monetary policy but, one suspects, they are also due to excessive reliance on EPL. This suspicion is confirmed when one looks at Italy, Spain, Portugal, Turkey and Greece. These countries, which are not included in our tabular analysis, have very restrictive job-protection laws and deliver poor employment outcomes (as well, they are not generous with fiscal redistribution so they also produce poor distribution outcomes).

On the other hand, the success of model 4 suggests that high levels of redistribution are not per se incompatible with good economic and employment outcomes - provided the main redistribution method is fiscal rather than regulatory and the policy mix is liberally spiced with “active” government intervention to help people get jobs and improve mobility and work incentives.

Lessons for Australia

Australia’s policy mix of the last decade - liberal economic reform with moderate employment protection regulation and conditional income support for working age Australians - has been fairly close to that of model 2. And it has delivered similar employment and productivity outcomes but with somewhat less income inequality. With a record like this, Australia could have simply rested on its laurels. But reform is the name of the game. So we got the recent workplace and welfare reforms. These take us towards model 1 (indeed in terms of how we treat trade unions and how we reward welfare to work we now have harsher regimes than the Americans).

But the cross-country evidence above suggests that moving from model 2 to model 1 produces little economic benefit and considerable distributional pain. On the other hand, even a partial move from model 2 to model 4 offers more equality of opportunity without any national economic cost. Sweden, for example, has much less income inequality than Australia, as well as more generous sickness, parental and study leave arrangements, better education outcomes and, it appears, greater intra-generational social mobility. Yet over the last five years it has achieved much stronger productivity growth than Australia, as well as higher employment/population ratios (with fewer casual jobs), lower inflation and a substantial external account surplus (unlike our big deficits, despite booming commodity prices). Much the same can be said of the other Scandinavian countries.

Has Australia taken the wrong turn?