Job markets and the economy

To be effective, the strategy must allow reasonable room for structural wage flexibility, for example, through radical award simplification. And it must incorporate most of the present tough welfare to work measures. These “neo-liberal” measures are unpalatable to many but necessary to ensure markets work in conjunction with governments - not against them - and that the demands on taxpayers are not excessive.

But neo-liberal policies should also be backed by measures designed to protect the incomes and enhance the productivity, employability, work readiness and incentives of the low-skill, low-ability workers and to prevent the perpetuation of chronic inter-generational joblessness. The types of measures needed could be drawn from the following illustrative list of options - most of them successfully applied in Nordic and European countries:

• tax offsets or credits to compensate low income workers;
• wage subsidies to employers to induce them to employ low-skilled, low-ability workers in disadvantaged areas;
• improved adult education and training opportunities;
• adequate relocation incentives to encourage people to move to booming parts of the employment market;
• more family-friendly policies (for example, more flexible working patterns, parental leave and good quality and affordable child care assistance);
• a redesign of fiscal policies to help address the geographic and regional imbalances in employment opportunities and the insensitivity of monetary policy to such imbalances;
• measures to correct early childhood disadvantages (in cognitive skills and non-cognitive aptitudes like social skills and motivation) stemming from low parental income and education, poor parental attitudes, dysfunctional home environment, neighbourhood factors or exposure to poor role models or pervasive irresponsibility;
• remedial programs for older school children and youth (age 14-19) who are under-performing and at risk of dropping out early from high school;
• lifelong learning incentives targeted at vulnerable groups, putting some of the onus on business too; and
• improved access to key employment-enhancing public services like health, housing and public transport in low-income areas.

This “liberal-interventionist” strategy would allow Australia to sustain low rates of unemployment (3 to 4 per cent) with low and stable underlying inflation. It would be largely self-funding in the long term because it would increase the productive base of the economy and thus generate additional revenue. But in the short term there would be a net demand on revenue.

To minimise by-product economic efficiency costs, the revenue gap could be funded by broadening the tax base (such as clawing back some of the tax advantages of superannuation and capital gains and other middle-class welfare) and by increasing taxes on activities with negative externalities (such as those which generate greenhouse gases and traffic congestion). To pay for longer term capital projects, some temporary government borrowing would also be justified.

Ultimately, the strategy would have lots of winners but very few outright losers. The low paid worker would, at worst, be unaffected in net terms; the unemployed would be better off; taxpayers generally would pay more tax in the short term but they would have more than offsetting gains from lower inflation, lower mortgage costs and a stronger economy with good job opportunities.

As well as making sure that the labour market of the future is able to deliver adequate structural wage flexibility and occupational and geographical mobility, the authorities need to look critically at the adequacy of the present RBA measure of “underlying inflation” as a trigger for interest rate increases: does it truly reflect excess demand pressures in the economy and does it discount fully for “cost-push” factors? And they should ask themselves why a temporary non-accelerating inflation rate of, say, 3.5 to 4 per cent poses greater economic and social risks than an unemployment rate of 5 to 6 per cent. The 2020 summit will hopefully face up to these critical issues.