Reforms and initiatives to reduce Australia’s NAIRU
There are various microeconomic and welfare reforms that may help to reduce our NAIRU. Several suggested reforms and initiatives will be discussed.
Firstly the market for unskilled workers is over-regulated and the process of legislating for minimum wages is facilitating high unemployment (McConnell et al, 2003). If minimum wages slipped further behind, additional opportunities would be available for the unemployed and young or inexperienced individuals would be provided with an entry point to the labour market.
Secondly, the government should implement policies and systems that entice or enforce individuals to move to where there are job opportunities or to retain and gain the skills for available positions. This would address the mismatch between the skills required for vacant jobs and geographical mismatch, both causes of structural unemployment (McConnell, et al, 2003).
A third initiative that could reduce the NAIRU involves improving the effectiveness and efficiency of the education system in Australia through increased spending in schools, colleges and universities. Creating new jobs through faster growth is the beginning, but people have to be able to perform the jobs and therefore require education (Fraser, 1997). Unskilled workers are more likely to be unemployed that skilled workers and increased participation in education produces a more highly skilled and adaptable workforce (Donath, 1991).
A fourth initiative to improve the NAIRU entails increasing the rate of participation in further and higher education. A study by the Australian Bureau of Statistics examines the factors that influence an individual’s chances of becoming unemployed. While the study revealed that men born in the same year will have similar chances of unemployment, when men were divided up between those who did not complete high school (unskilled) and those who received a post school qualification (skilled), unemployment was much higher among unskilled men (Gittins, 2003).
Fifthly, programs must be implemented to break the cycle of hysteresis. Each time there is a recession, there are more people without work for longer periods. The reasons for hysteresis are that the Long-Term Unemployed (LTU) have a lowered probability of finding work. Such individuals lose their skills, making them less employable or employers use their unemployed status as a sign that they are unemployable. The rejections from employers reduce self-esteem and the individuals decrease their job searching effort (Junankar, 1999). In conjunction with improvements in general education, more effective training programs and state-subsidised jobs need to be implemented to address the skills gap and self-esteem issues of the long-term unemployed.
Further, employers and employees need to embrace the concept of ongoing learning to increase versatility and employability. In particular, employers must be educated regarding the benefits of training staff for increased adaptability and the rewards for doing so in terms of increased productivity.
Continuation of industrial relations reforms will also assist in improving the NAIRU. Reducing the regulations governing the employment relationship (such as unfair dismissal) is likely to encourage employers (particularly small businesses) to hire and therefore create additional jobs (Covick, 1997).
Implementation of policies to encourage mutual obligation may also assist in reducing the NAIRU. Although the McClure report outlines a rationale for removing the idea of obligation placed on individual recipients out of a central place in policy (Kinnear, 2002), it is important that the voluntarily unemployed receiving benefits participate in finding employment if we are succeed in reducing the NAIRU.
Finally, in conjunction with encouraging mutual obligation it is essential that disincentives to work be addressed. This includes reviewing our generous welfare system, examining the taxation system and marginal tax rates and particularly the way in which benefits and the tax system interact. The next section will examine disincentives to working and suggested reforms.
Addressing disincentives to working
There is evidence to suggest that there is a disincentive problem due to Australia’s generous welfare system and the interaction of benefits with the tax system. In particular, the Australian system has progressive taxation and means-tested benefits. Therefore more tax is taken from higher earners and limited welfare payments are available to those who need them. Inevitably the system penalises people as they improve their incomes (Saunders, 2003).
Research conducted by Guest, Wyatt and Schuwalow (1998) show that the unemployed face high marginal tax rates and other disincentives to working. The research investigates the implications of very high Effective Marginal Tax Rates (EMTRs) and the targeting of social security benefits. Empirical evidence cited from labour economics proposes that high EMTRs are a disincentive to work through the substitution effect. An increase in EMTRs lowers the cost of not working and therefore encourages the substitution of leisure for work. The marginal costs of accepting additional work can also act as disincentives and can include work related expenses such as transport, childcare or clothing.
The workplace relations minister, Tony Abbott also supports the disincentive argument, claiming that most unemployed people are accustomed to life on welfare and not motivated to find work (in Ruse, 2003).
The welfare and tax systems must be reviewed in order to address disincentives to work. A simple solution to the disincentive problem could be to raise the tax-free earnings threshold above the welfare minimum floor (Saunders, 2003). Workers could then retain more of what they earn and would require less welfare top up payments.
Other solutions could be to reduce welfare payments to the point where individuals have little choice but to work or to place a time limit on welfare benefits. It has been suggested that $2 billion could be saved if access to unemployment benefits were cut after six months (Editorial, Financial Review, 11 September 2003). It is recognised that neither of these suggestions are likely to be implemented, and both would be socially unacceptable.
The best solution would be to ensure that potential labour receives a higher benefit for working than the benefit offered under the welfare system and to ensure that the unemployed are re-trained and placed in appropriate programs that encourage and entice individuals into the labour market.
Conclusion
In conclusion, Australia maintains a stubbornly high rate of unemployment due to the existence of a natural rate of unemployment. Various reforms that may reduce our NAIRU have been presented. In particular, there is evidence showing that the unemployed in Australia face high marginal taxes and other disincentives to working. The tax and welfare systems must be reviewed to remedy this disincentive issue and assist in reducing our NAIRU.
References
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