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The politics of 'empowerment'

By Corin McCarthy - posted Friday, 7 July 2006


Australians are committed to social mobility as a core value in economic life.

The obvious prescription is investment in people and skills, combined with incentives to work at all income levels. But as yet no leader (whether in public life, business or the union movement) has effectively outlined this position.

This position involves strong and deft political leadership. It requires an acceptance by the electorate that they may not be personally better off in the short term, but they will benefit by a combination of tax-incentives and education, with a strong economy delivering further opportunities. The following is a summary of policies that can deliver these medium-term benefits.

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In his paper Tax Cuts for Growth (pdf file 1.14MB) Nicholas Gruen provides clear evidence that the best tax policy is aimed at improving the work disincentives of those who face the highest effective marginal tax rates (EMTRs). These are not people on the top marginal rate of 46.5 per cent (after the recent budget) but those at the low-end of the income spectrum who pay tax at the same time as having their benefits withdrawn as they move from welfare to work.

A single incomes policy - considering minimum wages and the net tax burden on low incomes together - is desirable for addressing work incentives and distributional effects of labour-market-flexibility.

Mark Wooden (pdf file 135KB) argues: “Effective incomes policy requires decisions about minimum wages be made in conjunction with income support and tax policy”. (Also see this research by Andrew Leigh (pdf file 373KB)

The success of wage-tax-trade-off policies has been considered. The estimates on employment growth vary between 2.1 per cent and 7.2 per cent resulting in a further reduction in the unemployment rate between 0.3 per cent and 2.1 per cent (Borland 1999, Will Lowering Wages Reduce Unemployment).

A further study by Chris Richardson (Access Economics) in 1999 for the Business Council of Australia quantified the employment uplift as an extra 169,000 jobs over a period of ten years, with two-thirds being delivered in the first six years.

Peter Dawkins, aware of incorrect claims by some that these policies may reduce unemployment at the expense of after-tax wage equality outcomes, outlines as a response (see page 16 (pdf file 297KB)): “… even without the employment effects, the policy redistributes income away from the top three income deciles to deciles two to seven. If the effect on unemployment … were also included in the distributional analysis it would further reduce inequality.”

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Far from being expensive, policies delivering $3 billion in annual tax-credits produce an increase in economic activity delivering in excess of $3 billion in tax revenue, according to Dixon and Rimmer, in “A wage-tax policy to increase employment”. This affordability is confirmed in the Access Economics report.

Therefore tax credits create real employment incentives at minimal cost to the budget surplus. When aligned in an incomes policy they also produce significant employment benefits and long-term reductions in inequality.

These policies are so cost effective they leave substantial room for bracket uplift for the 30 per cent tax rate. This combination could well decide the next election.

The other beneficial effect of downward pressure on minimum wages is an expected move from award wages to more enterprise level arrangements, thereby ensuring individual workers can raise their before-tax take-home pay as well as receive beneficial tax credits.

In response, unions will be required to more actively engage with enterprise level arrangements and, with this in mind, unions will require access rights to workplaces on reasonable request.

Despite the “empowering” effect of tax transfers and labour-market flexibility, Australia also requires an investment program in skills to deliver the kind of productivity and social mobility that we expect.

Fred Argy argues (pdf file 60KB): “While we have invested heavily in our people in the past … we are not doing enough on three other policy fronts: work incentives, workplace choice for everyone and social investment”.

Active investment in skills can provide school-leavers with better outcomes as well as degrees, skills and trades for  unemployed and underemployed people.

Argy adds that reducing underlying structural inequalities is the key and not income inequality per se: advocating a policy move from passive welfare to active social investment in people.

Turning to the politics of “empowerment”: who is leading this overall centre-ground narrative, providing this option?

John Howard has promoted economic freedoms in the labour market. Yet he has not married it with incentives and tax relief for those on lower wages; nor better training programs for those most affected by his changes.

Howard has promoted tax-cuts up the scale at the expense of reducing EMTRs further down the scale. This should now be addressed by tax-transfer policies.

Howard’s industrial relations changes are also punitive to workplace representation. His policies are not inclined to improve employee productivity and long-term social mobility for unskilled and underemployed people. Howard has failed his economic test with this under-investment.

Kim Beazley has promoted union bargaining and a view that downward wage pressure on minimum wages is against the national interest. Beazley has also failed his economic test. The academic consensus is clear: high minimum wage levels and EMTRs have reduced workforce participation and this needs to be addressed in an incomes policy that aligns wages, tax and social benefits to deliver growth for all Australians and better outcomes for low income Australians in particular.

An “empowering” economic model must consider some or all of the following:

1. Bracket uplift for the 30 per cent tax-rate; and

2. Earned income tax credits (see discussion papers: Andrew Leigh on optimal design (pdf file 426KB), and Peter Dawkins on extending the wage-tax trade-off (pdf file 297KB); and/or

3. Extension of the Lower Income Tax Offset (LITO); combined with

4. Individual employment bargaining, with the following safeguards:

  • union access to workplaces on reasonable request;
  • minimum levels of information on individual employee performance and overall company profitability;
  • the right to elect representation in the bargaining process; and
  • collective bargaining available in medium and large firms for “like for like” employees if a majority of employees elect; combined with -

5. Fair Pay Commission considering minimum wage levels in conjunction with income support and tax policy; combined with

6. Changing the taper-rate of social-benefits; combined with

7. Wider educational investment for the less skilled and underemployed people, funded by HECS style schemes.

This set of policies would upset the “dominant narrative” staking a claim to economic prosperity and opportunity.

It would promote productivity among the least productive Australians, at least measured by income. It maintains a link with workplace performance, without this link negatively compromising after-tax wage results at the low-end. It also assists many to shift from their current workforce standing to better opportunities.

Which leader will grasp this “empowerment” mantle and run with it? That leader will be tapping into the Australian value of social mobility. That leader will have a long-term narrative for our nation. That leader will have a good chance at the next election.

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About the Author

Corin McCarthy was an adviser in opposition and government to Craig Emerson MP. He also advised Labor’s 2007 election campaign on small business issues. He has written widely on these issues in The Australian and On Line Opinion. He currently works as a lawyer in London advising on major infrastructure projects. These views are his own.

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