Turning down the economic turbo boost

The second crucial reform was to minimum wage setting that forced the Fair Pay Commission to consider an optimal minimum wage rise for generating work.

This is under threat in Rudd Labor's new low-paid bargaining stream and the revised wage setting powers given to Fair Work Australia. This greatly undermines the flexibility of wages at the low-end and will lead to more unemployment than would otherwise be the case.

History tells us it is better to keep people employed through falling real wages in a downturn than for marginal workers to lose work and social skills on the dole.

Nobel laureate, economist James Heckman wrote in 1993: “A major lesson of the last 20 years is that the strongest empirical effects of wages and non-labour income on labour supply are to be found at … the margin of entry and exit.”

Heckman’s advice should ring in the ears of wage setting bodies as they consider setting minimum and award wage floors.

For these reasons we should applaud loudly the decision of the Fair Pay Commission to freeze minimum and award wages for 2009-10.

While the stimulus packages were welcome to generate more demand in a depressed economy, this decision by the Fair Pay Commission is also crucial for keeping the dole queue lower than it would have been otherwise.

The third crucial reform was increasing incentives for people to re-enter the workforce, both through mutual obligation “sticks” and tax reform “carrots”. This is also under threat as Rudd Labor has relaxed activity tests and there is talk that single-parent pension rules may be relaxed.

So, when Rudd talks of labour participation and productivity growth, and dealing with capacity constraints, he is probably trying to cover up that his labour market policies are neither promoting work nor productivity.

Ceasing such over-regulation should be Rudd's capacity constraint for dealing with unemployment.

For, while it has been possible for ministers Tanner and Emerson to partially offset the Commonwealth's regulation burden through COAG regulatory reforms, the total effect of Rudd's policies through more regulation and picking industry winners will reduce Australia's growth prospects.

The Productivity Commission has already found that for every job saved in the auto industry it costs the community some $300,000 and the Green Car Innovation Fund would be unlikely to yield significant innovation and greenhouse benefits.