Howard’s workplace and welfare reforms and Australian values

So, even if winners outnumber losers, the Howard reforms will only be utility-enhancing overall if they have a large positive effect on per capita national income. Given the uncertain productivity effects of the reforms, this is unlikely even when one allows fully for the effects of the reforms on work participation. If, as I will now argue, the same job benefits can be obtained by other means without hurting the poor, the utilitarian case disintegrates completely.

An alternative social democratic (SD) route to higher workforce participation

Over recent decades, many social democrats (SD) gradually discarded the “old” model of workplace regulation and passive redistribution (still dominant in a few continental European countries) and replaced it with one which embraced many liberal elements and a greater emphasis on “active” forms of redistribution.

The new SD model is “liberal” in that it tries to ensure that (a) the regulatory framework is light enough to allow employers considerable flexibility in hiring and firing and in the structure of wages and (b) people of working age receive welfare benefits only subject to reciprocal work or training obligations.

However it departs from the Howard agenda in three key respects. First, it is more tolerant of social and workplace regulation, where such regulation is the only effective way to protect important values such as employees’ right to bargain collectively and to control their working hours and family time.

Second, it is more generous with compensation to workers who are forced by policy change into lower-paid jobs (for example, it may incorporate a system of wage insurance or temporary wage supplements for older retrenched workers).

Third, and most importantly, the SD agenda includes additional investment in “productive” social programs - those which enhance human capital and help correct labour market imperfections (such as geographical immobility). Such programs are varied and seek to:

• correct early childhood disadvantages (such as through conditional grants, improved pre-school and child care , parental counselling, regular health visits to ensure childhood nutrition, and so on);
• assist older school children and youth who are at risk of dropping out early from high school;
• improve access to key employment-enhancing public services like health, public education, housing and public transport in disadvantaged areas;
• facilitate adult training, retraining and life long learning;
• increase the work incentive structure for inactive low-skilled persons, such as through tax credits or more generous tax offsets;
• make work more family-friendly (for example, more working time flexibility for employees, paid or longer unpaid parental leave and good quality and affordable child care assistance in the workplace);
• create new job opportunities for the low to semi skilled in under-resourced community and public sector services;
• improve the competitiveness of economically viable regions suffering temporarily from low job opportunities; and
• make it easier for people to relocate from non-viable (for example, remote) areas.

Effects of SD on employment, productivity and distribution

There is no doubt that the social investment elements of the SD approach can deliver broadly the same aggregate employment outcomes as the Howard approach. Indeed, they have one big advantage. The Howard policy framework offers a “quick fix” to the “hidden unemployment” problem but it does nothing to overcome the underlying barriers to employment resulting from early childhood and teenage environment, poor education, inadequate training, geographical immobility and low work incentives. It attacks the symptoms of joblessness after they have occurred. By contrast, SD goes back to the root causes and tries to break down the barriers to upward income mobility.

What about its effect on productivity? I noted earlier that the Howard reforms had little to offer on this front. SD should perform no better or worse in net terms. On the one hand, it will require higher taxes and, per se, this may well impact adversely on risk-taking and work effort. On the other hand, SD spending programs should generate productivity benefits. Studies have found that social spending which is specifically targeted at improving the income earning potential of the low-skilled and disadvantaged is positive for productivity growth and pays for itself over time.

The SD model, with its mix of market-friendly policies, compensation and social investment, has been applied for a long time by Scandinavian and many smaller European governments.

Historically they have delivered productivity and employment outcomes broadly similar to the USA, UK and Australia - but with lower levels of inequality and higher levels of income mobility.

The experience of the UK over the last decade is also interesting. The Blair Government retained a good deal of the Thatcher liberal regime but it also did two other things. It partially re-regulated (for example, it increased the minimum wage substantially, albeit from a low starting point); it improved work incentives for the low-paid (through earned income tax credits); and it considerably increased social investment in child development, education, health and housing, principally targeted at the disadvantaged. The result was a strong economic and employment performance but with a halving of poverty rates between 1997 and 2006.