Vital Signs: we’ll never cut unemployment to 0%, but less than 4% should be our goal



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Richard Holden, UNSW

One of the most concerning things that happens in any recession is the spike in unemployment. The COVID-19-induced recession in Australia and around the world is no exception – other than perhaps the magnitudes involved.

Being out of work is distressing, even in advanced economies with a social safety net (like Australia). Welfare payments rarely, if ever, replace the full loss of income from employment.

In many countries, such as the US, unemployment benefits expire after a certain period of time. This puts the unemployed at risk of being destitute. In Australia (and other countries) receiving unemployment benefits requires proving you are actively looking for work. These obligations can be quite onerous, even if well-intentioned.

Worse still, being unemployed can tilt the scales against an employer offering you a job.

As MIT and Harvard economists Robert Gibbons and Lawrence Katz noted in a landmark 1991 paper, if employers have some discretion over whom to lay off – as is often the case – the labour market will rationally infer that laid-off workers are less desirable employees.

High unemployment also leads to what economists call “labour-market scarring”. This means all those starting work in a bad labour market can suffer long-term economic effects. Either because they don’t get on the job ladder as early as they would have, or because they start off in a job that doesn’t build their skills as well as would have been the case in a strong economy.


Rarely has Australia’s unemployment rate fallen below 5%

Seasonally adjusted.
ABS Labour Force

These effects can be significant and are of particular concern during this pandemic, as University of Michigan economist Betsey Stevenson has pointed out in an excellent paper on how to mitigate those effects.

Finally, a job also has non-financial benefits. As US presidential candidate Joe Biden has rightly reminded us, a job is about more than a paycheque:

It’s about dignity. It’s about respect. It’s about being able to look your kid in the eye and say everything will be okay.

All of this points to why policy makers need to make low unemployment one of their core missions.

This involves central banks using monetary policy to reduce unemployment and smooth out the business cycle, and governments using fiscal policy to boost demand when it is flagging.

Searching for jobs

That said, there are two important imperfections in labour markets that make some amount of unemployment inevitable. The first is that employers and employees need to be matched together. This involves workers searching for the right job – a process that takes time.

As Peter Diamond, awarded the 2010 Nobel prize in economics for his pioneering work on “search theory”, has observed:

We have all visited several stores to check prices and/or to find the right item or the right size. Similarly, it can take time and effort for a worker to find a suitable job with suitable pay, and for employers to receive and evaluate applications for job openings.

Indeed, searching for better matches between employers and employees is an important contributor to labour market efficiency. As Diamond noted, in the US on average 2.6% of employed workers have a different employer a month later. Some people spending some time unemployed is part of a healthy labour market.

A second important friction was pointed out by another Nobel laureate, Joseph Stiglitz (joint winner of the economics prize in 2001 for his work on asymmetric information).

Efficiency wages

That is, employers might not want to pay their workers the bare minimum they can get away with. Paying above market – what is called an “efficiency wage” – can induce workers to work harder and more efficiently, because the prospect of losing their job is even more painful.

Another way to think about this was offered by George Akerlof (co-winner of the 2001 Nobel economics prize with Stiglitz and A. Michael Spence).

Akerlof brought insights from sociology into economics by viewing the contract between employers and employees as, at least in part, about “gift exchange”. As he put it:

According to this view, some firms willingly pay workers in excess of the market-clearing wage; in return they expect workers to supply more effort than they would if equivalent jobs could be readily obtained (as is the case if wages are just at market clearing).

What is ‘full employment’?

These frictions in the labour market mean full employment, practically speaking, is not zero. It’s almost surely not 1% or 2%, either. The level depends, in part, on how brutal we are willing to make being unemployed. It also depends on the level of the minimum wage.

I, for one, am glad Australia does not cut off unemployment benefits after 16 weeks
(as in the US state of Arkansas) and consign the jobless to abject poverty. I’m also glad Australia’s national minimum hourly wage is A$19.84 (about US$14) – double the US federal minimum of US$7.25.

Does that make unemployment higher here than in countries that take a harsher approach? It does. But it also makes us a more compassionate and empathetic society that takes human dignity seriously.

So when federal Treasurer Josh Frydenberg said a few weeks ago that once Australia’s unemployment rate is “comfortably below 6%” the task of “budget repair” should begin, I gasped.




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If “comfortably below” means something like 4%, then fine.

Because of the labour market frictions mentioned above, and our approach to unemployment benefits, it’s going to be hard to get unemployment much below that in Australia.

But the idea we should tolerate unemployment of, say, 5.5% in normal times is, frankly, intolerable. Monetary and fiscal authorities should use all the firepower at their disposal to avoid that outcome.The Conversation

Richard Holden, Professor of Economics, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Meet the Liveable Income Guarantee: a budget-ready proposal that would prevent unemployment benefits falling off a cliff



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John Quiggin, The University of Queensland; Elise Klein, Australian National University, and Troy Henderson, University of Sydney

The economic crises that have punctuated the 21st century, most notably the global financial crisis and the COVID-19 crisis, have led to a growing realisation that alternatives to our present system are possible and perhaps inevitable.

In particular, there has been an erosion of the belief that the economy is able to provide a decent income to everyone who wants to work.

A number of proposals have been put forward in the wake of this realisation, among them

  • universal basic income, which would unconditionally provide every resident (children and adults) with a regular subsistence wage

  • a job guarantee in which the government would provide real jobs, at the minimum wage, to all unemployed Australians

Many seem utopian, which isn’t necessarily a bad thing – it’s good to look beyond the day-to-day to consider how things could be done differently.

In a new Australian National University Policy Brief we propose something practical, which we are calling a Liveable Income Guarantee (LIG).

Take the age pension..

It starts with one of the most successful institutions we’ve got: the age pension.

Before the age pension was introduced in 1908, retired Australians were highly likely to be poor. But now, on some measures, retired Australians are less likely to be in poverty than Australians of less than pension age.

Our proposal is to replicate this success for the entire population.

We are proposing a payment equal to the pension, and subject to the same asset and income tests, that would be provided to everyone who is willing to make a contribution to society consistent with their ability to do so.

…extend it to others

“Contribution” would be defined broadly to maximise contributions. Examples would include full-time study, volunteering, caring for children, ecological care, and starting a small business.

The biggest shift relates to the treatment of unemployed workers and single parents.

JobSeeker is set to return to the unliveable rates of the former Newstart after the end of December.

We are suggesting that instead it be lifted to the rate of the age pension, which is about where it used to be before unemployment benefits were frozen in real terms in the 1990s.


Newstart versus the age pension

Dollars per fortnight, single.
Source: Ben Phillips ANU, DSS

Parenting Payments have also been notoriously low, especially for single parents, whose support has been cut consecutively by five prime ministers from Howard to Turnbull.

Unlike some proposals for a universal payment to all citizens, the increased expenditure required for the liveable income guarantee would be relatively modest, as little as A$20 billion a year.

Do it for the price of tax cuts…

This is roughly comparable to the budget cost of the income tax cuts, primarily directed to high earners, legislated to take effect in 2022 and 2024.

The real barriers to the adoption of the proposal are ideological. The central assumption underlying economic policy in Australia has been that in a market economy everyone who wants a decent job is capable getting one.

It has followed that the unemployed are seen as either unwilling to work or suffering from particular deficits that need to be remedied by training and job readiness programs case by case.




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Over the first two decades of this century, it has become evident this assumption is incorrect. The global financial crisis and the subsequent swing to austerity produced sustained high unemployment in much of the developed world.

While Australia avoided the worst consequences thanks to well-timed stimulus (here and in China) the unemployment rate has failed to fall below 5% as underemployment has climbed for more than a decade.

Any prospect of a rapid return to full employment have been dashed by the pandemic.




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Longer term it is clear that many existing jobs will disappear as a result of technological change, and it isn’t clear that our current institutions will be able to manage the process.

While governments should commit to a return to full employment, they are unlikely to be completely successful.

Ready us for the future

The implementation of a liveable income guarantee would allow us to be better prepared in case they are not and to be better prepared for future disruptions, be they pandemics or anything else.

On the brighter side, technological progress has increased our productive capacity to the point where we can afford to support a much wider range of non-market contributions to a market economy. The crisis has shown us how important many of those contributions are.

Looking beyond the crisis, it is possible (relatively simple) to create a society in which everyone has a decent standard of living, and no one is excluded.

Providing dignity to everyone who makes a contribution would benefit us all.The Conversation

John Quiggin, Professor, School of Economics, The University of Queensland; Elise Klein, Senior Lecturer, Australian National University, and Troy Henderson, Lecturer in Political Economy, University of Sydney, University of Sydney

This article is republished from The Conversation under a Creative Commons license. Read the original article.

‘If JobSeeker was cut, the unemployed would be picking fruit’? Why that’s not true



F Armstrong Photography/Shutterstock

Peter Davidson, UNSW

I’m not sure which does the most harm: the cut of A$150 per week in JobSeeker payments due this Friday or the sudden and coincidental volley of media reports about unemployed people refusing jobs, including fruit picking.

This narrative is jarring when there are 19 people unemployed or underemployed for every vacancy and only 3% of employers report that they are recruiting but can’t find enough applicants.

Are unemployment payments really that cosy since they almost doubled in April from $282.85 to $557.85 a week?

$557.85 a week for a single adult is around 80% of the full-time minimum after-tax wage of $669 per week, and a good less again as a proportion of what most entry level jobs pay, because most pay more than the minimum wage.

Five studies conducted in the United States where unemployment payments were lifted US$600 per week during the coronavirus crisis found no evidence they were discouraging people from finding jobs.

Some were making 70% more than they did while in jobs.

Unemployed workers would generally prefer to be in paid work, and in any event are usually required to search for it.

There are other reasons not to pick fruit…

Fruit pickers are often underpaid cash-in-hand.

Growers representatives have told a parliamentary inquiry that when JobSeeker payments were doubled, many workers collected their final cheques and went home.

But temporary migrants and young locals are often underpaid in such jobs.

Squeezed by powerful customers, employers with thin margins and a ready supply of labour have grown used to offering very low wages cash-in-hand.

In piece-work like picking where pay is tied to output, there’s no legal requirement to pay minimum wages.

A labour hire firm recently complained people weren’t taking up their offer of “at least $500 per week” to pick strawberries.

$500 is two-thirds of the minimum wage.

It’s not just the pay that discourages people from taking up crop picking: they need to be fit and able to travel for what’s often a short period of paid work.

This won’t work for many people on Jobseeker, including the quarter with disabilities, the third aged 45 or over, and the 10% caring for children.




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There are ways to reduce under-payment and high turnover in such jobs.

Reducing our reliance on temporary migrants would be a first step.

Otherwise, employers won’t compete fairly to attract workers, and local workers will remain wary.

More direct contact between the employers and unemployed people and less reliance on labour hire firms would help build trust.

…and other reasons not to work more days

Jobseeker tops up the wages of many part-time workers.

It is cut by 50c for every dollar earned above $53 per week, then 60c for every extra dollar earned up to $128 per week, before cutting out completely for a single adult on $544 per week.

Former social security official David Plunkett calculates that before COVID and the effective doubling of JobSeeker, a worker on it gained a net $100 to $200 for working one to three days a week at the minimum wage, climbing to $269 for the fourth day, after which Jobseeker expired.

Since the new arrangements and top up that effectively doubled JobSeeker, the net gains have fallen slightly $100 to $175 for the first three days, before dropping to just $5 on the fourth.




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The compromise that might just boost the JobSeeker unemployment benefit


The problem isn’t the effective doubling of JobSeeker, it’s the sudden-death cut off of the top-up as soon as the last dollar of Jobseeker expires.

That flaw could be fixed by tapering the supplement out gradually (rather than increasing the “income free area” to $150 per week as the government is proposing).

There’s no need to force people to choose between poverty and entry-level jobs.

Even if, for example, Jobseeker was increased permanently to the pension rate, it would still be under 70% of the minimum wage after tax.

Incentives for part-time work can be fixed by reforming income tests and tax. Beyond that, the answer to periodic labour shortages, exploitation and high turnover in entry-level jobs is better entry-level jobs.The Conversation

Peter Davidson, Adjunct Senior Lecturer, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Unemployment support will be slashed by $300 this week. This won’t help people find work



Stefan Postles/AAP

Bruce Bradbury, UNSW and Peter Whiteford, Crawford School of Public Policy, Australian National University

This week, support to unemployed Australians will be dramatically reduced.

In April, the new Coronavirus Supplement roughly doubled the level of benefits for unemployed people on the JobSeeker payment and a range of other working-age payments.

The supplement will drop from $550 to $250 a fortnight from Friday. This is before it is dropped entirely at the end of 2020.

While there has been increasing pressure from welfare groups to maintain a higher level of JobSeeker supplement, there have also been calls from within the government to remove extra supports, amid claims people are not looking for work.

Prime Minister Scott Morrison has warned about increased unemployment payments. As he said in June,

what we have to be worried about now is that we can’t allow the JobSeeker payment to become an impediment to people going out and doing work, getting extra shifts.

But will cutting support to unemployed Australians really help them get a job?

Our analysis shows there is considerable scope to increase JobSeeker payments before they might hinder people’s motivation to find paid work.

Lack of job searching is not the problem

Right now, there is little evidence a lack of job search effort is a significant problem for the economy.

Around 6.8% of the workforce is looking for work. But in July, Treasurer Josh Frydenberg acknowledged the real unemployment rate was closer to 13.3%, when “discouraged jobseekers” — not actively looking for work because their business is locked down or on hold — are included.

Treasurer Josh Frydenberg speaking at a press conference.
Treasurer Josh Frydenberg has noted the real unemployment rate is more than 13%.
Daniel Pockett/AAP

With about 1.6 million people on JobSeeker but only 130,000 job vacancies in May 2020, it matters little if some job seekers are more selective about the job offers they accept.

In fact, for the longer term health of the economy, it is important people find jobs that suit their skills. International evidence shows the provision of unemployment benefits slightly increase both the wages received when work is found and the stability (or duration) of the new job.

But would higher benefits be a problem as the economy recovers?

If benefits start to approach the level of minimum wages, some workers with low earning potential might decide the extra effort is not worth it — and so reduce their job search effort.

As the economy recovers, this will mean some potential jobs will go unfilled and government expenditure on JobSeeker will remain unnecessarily high.

Comparing JobSeeker to the minimum wage

However, our analysis shows Australia is in no danger of creating a disincentive for people to seek work because of higher JobSeeker payments.

We have compared Newstart and JobSeeker payments for single people with the minimum adult full-time wage (after tax) over the past three decades. This is a standard benchmark for assessing incentives to move from welfare benefits into work — assuming work is available.



Our analysis also looks at the payments provided to single pensioners. Pensioners received around 55% of the minimum wage up until 2009, when the pension was increased under the Rudd government. After that, net pension income was around 65% of the minimum wage. This is close to the commonly used poverty line, set at half the median household disposable income.

But for unemployed people on JobSeeker (or its predecessor, Newstart), the past two decades have seen a steady decline in their position relative to the minimum wage. It has fallen from around 50% in the 1990s to under 40% at the start of 2020 — well below the poverty line.

These calculations changed with the introduction of the Coronavirus Supplement in April, which almost doubled the payment for single unemployed people. Nonetheless, JobSeeker plus the supplement was still well below the adult minimum wage (76%, or 82% if we add shared accommodation rent assistance).




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On September 25, the Coronavirus Supplement will drop by $300 a fortnight. And the combined JobSeeker/supplement payment will fall back to 55% of the minimum wage until December 31.

Unless the federal government makes further changes, the supplement will be removed entirely at the end of the year. So those on JobSeeker will be back receiving less than 40% of the minimum wage.

The crisis isn’t over, why is support being wound back?

Neither the pandemic nor the economic crisis will be over by the end of 2020.

As the wage subsidy program JobKeeper is also wound back, next week and then again, next year, increasing numbers will become reliant upon JobSeeker.

Man wearing mask lines up outside Centrelink office.
The Australian economy could take years to recover from COVID-19.
Dan Peled/AAP

If the payment reductions continue as forecast, this will force many people well below the poverty line. A recent Australian National University analysis estimated an extra 740,000 people will be pushed into poverty.

This would not only be a disaster for the people directly affected, but also likely have large adverse economic effects. Deloitte Access Economics estimates withdrawing the Coronavirus Supplement support would be equal to a reduction in the size of the economy of $31.3 billion and an average loss of 145,000 full-time equivalent jobs.

The case to maintain much of the crisis-induced increase in payments is clear. In the short term, there will be no shortage of people looking for work. Maintaining payments at around the pension level — close to the poverty line — should be our policy objective.




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Even in the longer term, as labour demand increases, the large gap between welfare payments and minimum wages leaves plenty of room for permanent increases in income support, without creating a disincentive for people to look for work.

At a minimum, permanently increasing JobSeeker to 50% of the minimum wage — as was the case in the 1990s — should be an easily achievable target for Australia as it makes it way through the economic wreckage of COVID-19.The Conversation

Bruce Bradbury, Associate Professor, Social Policy Research Centre, UNSW and Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Budget deficit to hit $184.5B this financial year, unemployment to peak at 9.25% in December: economic statement



Lukas Coch/AAP

Michelle Grattan, University of Canberra

Treasurer Josh Frydenberg has announced massive budget deficits of $85.8 billion for the just-finished 2019-2020 financial year and $184.5 billion projected for 2020-2021.

Growth is set to be negative for last financial year and the current one. The government’s economic statement forecasts cuts of 0.25% in GDP in 2019-20 and a reduction of 2.5% in the current financial year.

Unemployment is expected to peak at about 9.25% in the December quarter.

Employment is forecast to fall by 4.4% in 2019-20, but recover by 1% in 2020-21.

The unemployment rate averaged 7% in the June quarter 2020, and is forecast to be 8.75% for the June 2021.

A table containing 'major economic parametres'

Treasury

The statement shows debt levels rising markedly in the wake of the pandemic, although the government emphasises Australia still has a low level of government debt-to-GDP compared to other countries.

Net debt is estimated to be $488.2 billion in June this year. This 24.6% of GDP.

Debt is then forecast to increase to $677.1 billion at June 30 next year, which would be a rise to 35.7% of GDP.

As the government looks to the recovery, Treasurer Josh Frydenberg said: “Our economy has taken a big hit. And there are many challenges we confront. We can see the mountain ahead and Australia begins the climb. We must remain strong. We must draw strength from our resilience as a nation and a people.”

Finance Minister Mathias Cormann said “We are in a better, stronger, more resilient position than most of other countries around the world.”

Defending the high debt level, Cormann asked “what was the alternative?”

The government admits the outlook is unpredictable, and revised numbers will come in the October budget.

“The economic and fiscal outlook remains highly uncertain,” the statement says.

One massive uncertainty is what happens in Victoria. The statement takes into account the present six weeks lockdown but this could be extended if the state does not soon get on top of the second wave of the virus.

The Victorian government on Thursday reported 403 new cases, and five deaths including a man in his 50s. There were 19 new cases in NSW.

The statement says GDP is forecast to have fallen by 7% in the June quarter, but will grow in the September quarter by 1.5%. In the calendar year of 2020, GDP is expected to fall 3.75%, but grow in calendar year 2021 by 2.5%.

Earlier this week, the government announced an extension of JobKeeper and the Coronavirus Supplement that goes with JobSeeker, although both will be scaled back after September.

Despite the government announcing these increases in support, the statement stressed the goverment’s economic response to the crisis was “temporary and targeted” with measures designed to support the economy without undermining the structural integrity of the budget.

a table containing 'budget aggregates

Treasury

Revenue is taking a major knock from the fallout of the pandemic.

Total receipts, including earnings of the Future Fund, have fallen by $33 billion in 2019-20 and $61.1 billion in 2020-21 since the budget update last December.

Since that update, tax receipts have been revised down by $31.7 billion for the just completed financial year, and $63.9 billion for the current financial year.




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“The outlook for tax receipts remains uncertain. This reflects both uncertainty around the economic outlook, and how this interacts with structural and administrative features of the tax system, such as the ability of taxpayers to carry forward losses to offset future income,” the statement says.

It says payments have increased by $187.5 billion over two years from the budget update.

They are expected to reach $550 billion for the 2019-20 year, which is 27.7% of GDP, and rise to $640 billion in the current financial year, representing 33.8% of GDP.

“This increase is as a result of the Government’s targeted responses to the COVID-19 pandemic to support Australia’s economy, as well as the impact of automatic stabilisers including the payment of unemployment benefits,” the statement says.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The compromise that might just boost the JobSeeker unemployment benefit


Michael O’Neil, University of Adelaide and Peter Gill, University of Adelaide

The government is about to make an historic decision.

The JobSeeker unemployment benefit (previously called Newstart) has scarcely increased in real terms since 1994.

In that time general living standards, as measured by real gross domestic product per capita, have almost doubled, climbing 83%.

Other benefits such as the age pension have broadly kept pace with living standards. They climb in line with wages rather than the slower-growing consumer price index.

In dollar terms the single rate is now just A$565.70 per fortnight, close to the poverty line and well below the $860.60 paid to single pensioners. Back in the early 1990s it was close to the pension.


Source: Ben Phillips ANU, DSS

The Organisation for Economic Co-operation and Development said in 2010 Newstart had fallen so low as to call into question its effectiveness in “enabling someone to look for a suitable job”.

In March, as the scale of the looming job losses from coronavirus and the responses to it became clear, the government effectively doubled JobSeeker, boosting the $565.70 single payment and other lower payments by a $550 per fortnight coronavirus supplement in an acknowledgement that unemployed people “need to meet the costs of their groceries and other bills”.

The increase took effect from April 27, but was temporary, for six months after it received royal assent, meaning it is due to expire in late September.




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The economic statement due on Thursday will provide an opportunity for the government to cushion the blow by either extending the life of supplement or permanently lifting JobSeeker.

It’ll also provide an opportunity for it to say no, allowing JobSeeker to collapse back to where it was.

An increase suggested to the recent Senate inquiry by the South Australian Centre for Economic Studies was $80 to $120 per week, enough to restore it to where it was relation to other benefits in the early 1990s.

Some Senators wedded to low JobSeeker

But the government will need to get over its seemingly ideological premise that the unemployed are in some way responsible for their own misfortune and are usually undeserving of the support needed to meet living costs.

This sentiment on display in the dissenting report by Coalition members of the Labor and Greens dominated inquiry which recommended JobSeeker be increased.

In explaining their position in April, after the the government had temporally doubled JobSeeker, Coalition Senators Wendy Askew and Hollie Hughes, argued that a permanent increase could carry with it “disincentive effects in respect of engagement with the workforce”.




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Put plainly, they were concerned that if JobSeeker was boosted to a reasonable level (as it has been, temporarily) people mightn’t want to work.

Yet the transcript of evidence given by treasury officials at the inquiry reveals the department has never been asked to examine that question.

Asked whether the treasury had ever done any modelling of an increase in the payment now known as JobSeeker, deputy secretary Jenny Wilkinson relied “no”. Asked again: “You’ve never done that?” she replied “no”.

Others have done the analysis.

The compromise that might just stick

Deloitte Access Economics believes an increase would boost the size of the economy and boost the number of people employed by 12,000.

A compromise that might be acceptable to members of the Coalition who oppose lifting JobSeeker but support “job-ready” training programs, might be an increase in the JobSeeker allowance of, say, $80 per week, split into two.

Half of the increase would be a cash increase without conditions, the other half would be provided for accredited training.

With conditions in place to ensure participation in bona fide training, the increase could drive the skills development both employers and the unemployed want.




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The training that would emerge would be market-driven, responding to the post-COVID-19 needs of employers and potential employees.

The Productivity Commission has implicitly endorsed such an approach, reporting in May that there was “a manifest capacity to better allocate the $6.1 billion in government spending on vocational education and training to improve outcomes”.

JobSeeker could help, both supporting Australians who are out of work and supporting them to get back into work.The Conversation

Michael O’Neil, Executive Director, SA Centre for Economic Studies, University of Adelaide and Peter Gill, Research Associate, SA Centre for Economic Studies, University of Adelaide

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Cutting unemployment will require an extra $70 to $90 billion in stimulus. Here’s why



Shutterstock

Brendan Coates, Grattan Institute; Matthew Cowgill, Grattan Institute, and Tony Chen, Grattan Institute

After managing the first stage of the COVID-19 crisis so effectively, the government now faces a bigger challenge: getting us back to work.

The official employment figures indicate the scale of what’s needed. In the past two months number of Australians with a job has fallen by 835,000. Millions more are in jobs kept on life support by JobKeeper.

Employed Australians, total

Includes Australians regarded as still employed because they are on JobKeeper.
ABS 6202.0

The Reserve Bank’s latest public forecast has the unemployment rate peaking at 10% and then falling to 6.5% (baseline scenario) or 5% (optimistic scenario) by mid-2022.

In Grattan Institute’s latest report, The Recovery Book, released this morning, we argue this isn’t ambitious enough.

The case for ambition

The bank and the government ought to aim for something better, closer to 4.5%.

This is the rate it has previously identified as “full employment”, the lowest Australia can sustainably achieve without stoking inflation.

It would mean bringing unemployment down 1.5 percentage points further than it might otherwise fall over the next two years – to somewhere between 4% and 5%.

Projected unemployment with and without extra fiscal stimulus

RBA forecasts linearly interpolated between 6-month intervals. ‘Full employment’ corresponds to the RBA’s pre-COVID estimate, plus and minus one standard error band.
Grattan calculations, RBA May 2020 Statement on Monetary Policy; Lucy Ellis, 2019 Freebairn Lecture in Public Policy

The bank has passed the baton

With the bank’s cash rate already cut to 0.25%, conventional monetary policy (cutting the cash rate) has run out of steam.

Unconventional policy will help.

The Reserve Bank is advancing cheap money to private banks for onlending to businesses, buying government bonds to keep the three year bond rate near 0.25%, and has pledged to keep the cash rate at 0.25% for the next three years.

The bank can and should do more, but the rest will have to be done by government spending and tax measures, so-called fiscal policy, of the kind that has already been proved effective in suppressing unemployment.

We’ll need $70 to $90 billion

We estimate that reducing unemployment by 1.5 percentage points by mid-2022 would require additional stimulus of A$70 billion to A$90 billion over the next two years, equivalent to between 3% and 4% of GDP.

This is on top of the more than $160 billion committed to JobKeeper and other coronavirus supports to date.

Here’s how we make the calculation.

First, to reduce unemployment by that much we estimate that real gross domestic product needs to grow by about 4 percentage points more than forecast over the next two years.

The estimate is based on previous work by economist Jeff Borland. Jeff kindly updated his calculation with us for this article, finding that each one percentage point increase in annual GDP growth reduces the unemployment rate by around 0.38 percentage points.




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Second, we assume each dollar of stimulus in a particular year increases GDP in that year by between 80 cents and one dollar (some of the rest is saved and some leaks overseas).

This estimate of “fiscal multiplier” is slightly higher than that used by treasury during the global financial crisis but is in line with recent academic work finding that stimulus measures are more effective when monetary policy is out of ammunition.

If the fiscal multiplier isn’t as high – or if the recovery is more sluggish than expected, more stimulus might be needed.

There’s little risk of overkill…

A few weeks ago Reserve Bank Governor Philip Lowe raised the possibility that the crisis had pushed the minimum sustainable rate of unemployment higher, from 4.5% to nearer 5%, on the face of it making a case for less ambition.

His concern was “scarring” – the risk that some of the people who lose their jobs will become so damaged they become unsuitable for future employment, meaning that employers looking for staff would rather bid up the wages of existing workers than employ them, fuelling inflation.

But, if anything, his concern is a powerful argument for spending more, and more quickly, in order to avoid scarring. There’s good evidence sustained high unemployment hurts the economy in the long term.




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The charts that show coronavirus pushing up to a quarter of the workforce out of work


And if the extra spending did fuel inflation, it mightn’t be such a bad thing.

Inflation has been below the bank’s target for years. If it gets above it and becomes a problem, the bank can dampen it by raising rates.

…and little time to lose

The extra stimulus will need to be announced soon: on or well before the federal budget scheduled for October. Fiscal measures take time to have their biggest effect.

We are facing a “fiscal cliff” when measures including JobKeeper and the enhanced JobSeeker payment are withdrawn at the end of September. To escape it, they will need to be wound down more gradually, as the international Monetary Fund warned last week.

There are plenty of ways to maintain support including further cash payments to households, along the lines of those in the global financial crisis showed were effective in boosting spending, as well as spending on things such as social housing, roads and school maintenance.

Fear of debt needn’t hold us back

Extra stimulus will mean extra government debt. But the Australian government can now borrow for 10 years at a fixed interest rate below 1%. Adjusted for inflation, that’s a negative real interest rate, making debt more affordable than it has been in living memory.

There will naturally be concerns that further debt will place a burden on younger generations. But they are the generations that will be lumbered with the costs of worse than necessary unemployment, some of it very long term unemployment, unless we act.

In the worst case, they’ll ask why we didn’t do more.




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The Conversation


Brendan Coates, Program Director, Household Finances, Grattan Institute; Matthew Cowgill, Senior Associate, Grattan Institute, and Tony Chen, Researcher, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

When the Coronavirus Supplement stops, JobSeeker needs to increase by $185 a week



James Gourley/AAP

Peter Whiteford, Crawford School of Public Policy, Australian National University

The Morrison government’s changes to welfare payments were among its most significant responses to the coronavirus crisis.

In April, the new Coronavirus Supplement roughly doubled the level of benefits for unemployed people on the JobSeeker Payment (called Newstart until March) and a range of other working-age payments.

But this huge increase will not last, with the $550 fortnightly supplement due to expire in late September.

If we want to keep unemployed Australians out of poverty in future, significant changes will be required to the base rate of JobSeeker.

According to my analysis, an increase of $185 a week is needed.

Debate brewing over the future of JobSeeker

A political debate is now brewing about what happens next to the JobSeeker Payment.

Before coronavirus, there had been consistent calls across parliament, business and community groups to raise the rate of Newstart/JobSeeker, which has scarcely increased in real terms since 1994.




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Prime Minister Scott Morrison appears to be holding firm to the idea that the increased payments will stop later this year.

As he recently said,

we’ve put a COVID supplement in place for the period of the pandemic and that’s what we’ve budgeted for and that’s what our policy is.

But Labor and the Greens say there should be a permanent increase to the JobSeeker Payment (although they do not agree on an amount). Some Coalition MPs are also pushing for a boost.

Millions of Australians will need JobSeeker support

There are currently about 1.6 million Australians receiving the JobSeeker Payment, while the Coronavirus Supplement also goes to recipients of other payments, including Youth Allowance, Parenting Payment, Farm Household Allowance and Special Benefit.

In December 2019, there were more than 400,000 people receiving these payments – and possibly more now.

It is also possible that many of the estimated 6.1 million people currently on JobKeeper will need to claim JobSeeker as the former is phased out. So, would the government really halve income support for more than two million people at the end of September?

As the Grattan Institute has pointed out, cutting income support in this way this would be “a recipe for a second downturn”.

The Coronavirus Supplement and the “benefit cliff”

While the Coronavirus Supplement is a crucial element of support for newly unemployed Australians, it is not well designed. This reflects the speed with which it was developed and the fact it was intended to be temporary.

The chart below shows how the supplement combines with the basic JobSeeker Payment for a single person, and how the package of assistance changes by hours of work per week, paid at the minimum wage of $19.49 per hour.



The Conversation, CC BY-ND

What is most striking here is the “benefit cliff”: a person working 27 hours per week takes home around $720, but a person working 28 hours takes home $508. This is the result of the loss of the entire Coronavirus Supplement when the last dollar of JobSeeker is lost under the current income test.

This also creates significant anomalies: a person working up to three hours per week would have a higher disposable income than someone working 28 to 31 hours per week. And someone working 38 hours would have a lower disposable income than someone working between 19 and 27 hours.




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What’ll happen when the money’s snatched back? Our looming coronavirus support cliff


The same benefit cliff applies to couples, but because of the relaxation of the couple income test, the effect is not felt until higher levels of income.

At the moment, these anomalies and the benefit cliff are not very pressing because many people on payments will have reduced hours of work, if any.

But as workplaces open up and people return to employment, these design issues will become more problematic. Put simply, the Coronavirus Supplement in its current form should not be continued.

We need to increase the basic JobSeeker rate

This means that to continue to adequately support unemployed Australians and avoid a double dip economic downturn, the basic rates of payments need to be increased.

Last month, a Senate inquiry released its report into the adequacy of Newstart/JobSeeker.

The report by non-government members made 27 recommendations, including:

once the Coronavirus Supplement is phased out, the Australian Government increase[s] the JobSeeker Payment, Youth Allowance and Parenting Payment rates to ensure that all eligible recipients do not live in poverty.

They also recommended that

the Australian Government set a national definition of poverty. The Government should immediately commence work in collaboration with academic experts and the community sector to determine this definition.

Keeping people out of poverty

Clearly, we need to look at how to make the payment more adequate immediately, without waiting for an inquiry to determine how much is enough – a process that could take months.

There is a simple benchmark already available that can be used. This is the rate of pension paid to the aged, people with disability and carers. Including supplements, a single pensioner currently receives up to $944.30 per fortnight.

When the Coronavirus Supplement ends, a single person on the JobSeeker Payment will receive $574.50 (including the Energy Supplement) – a gap of $370 per fortnight or $185 per week.

Setting working-age payments at the same rate as pensions will significantly simplify our overly complex system and provide a consistent treatment of all adults.

It will reduce incentives for people to seek to qualify for higher payments.

It would also mean that if the federal government sets up an inquiry into poverty standards – as the Senate recommended – we would not have to worry about anomalies in current payment rates. We could focus on clear principles of adequacy for all Australians instead.

JobSeeker must increase by about $185 a week

In January, the Australian Council of Social Service called for a minimum $95 a week increase to Newstart.




Read more:
How to tweak JobKeeper, if we must


This would have applied at the time to around 850,000 people, at a cost of about $3.8 billion a year.

I estimate that an increase of $185 per week could cost around $7.4 billion, but this does not factor in the projected increase in the number of people needing support.

If we have more than two million people on working age payments in September this year, this would imply a rough budget cost of around $17 billion in a full year.

Raising JobSeeker payments is a substantial budgetary cost. But the current cost of the Coronavirus Supplement over a full year is likely to exceed $30 billion.

The alternative of cutting rates is also extremely costly: a deep increase in poverty among millions of Australian households and the likelihood of a double dip recession.The Conversation

Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

We need to plan for life after JobKeeper now. We need to make it portable



Shutterstock

John Quiggin, The University of Queensland

As an emergency response to the potential mass unemployment created by the sudden lockdown, the Morrison government’s JobKeeper program has been reasonably successful.

An estimated 700 000 employers, accounting for 4.7 million workers have signed up.

On the other hand, the sign up of workers has been been about one million less than expected.

Plenty of problems have emerged with limits on coverage.

Some reflect the difficulty of defining a “job” in an environment in which permanent employment has been eroded in favour of casual employment and contracting and the gig economy.




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How to tweak JobKeeper, if we must


Others seem arbitrary, such as the effective exclusion of local government and university employees, and workers whose employers are companies owned by foreign governments.

There will be bigger problems as time goes on.

Working life will change

Many workers will need to move.
Dan Peed/AAP

JobKeeper helps workers keep their existing jobs, but it can’t do anything for those who are already unemployed, who leave their jobs, or who need to switch employers.

As the crisis continues, the number in these categories is going to grow, while the number of workers protected by the scheme will shrink.

In six months time, when JobKeeper is due to end, it seems reasonable to assume that most of the restrictions requiring businesses to close their doors will have been lifted.

Shops, cafes, gyms and bars will be open, with adaptations for social distancing.

But other parts of the economy won’t be anything like the “normal” that existed before the crisis.

Even after the domestic restrictions end, large-scale international travel won’t resume until an effective vaccine is found and distributed widely enough so that (at a minimum) all intending travellers can be vaccinated.

Tourism will be very different, as will work and commerce, with the shift to online working, shopping and medicine only partly reversed.




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A much smaller number of people coming into the country (even if long-term arrivals are be allowed in subject to quarantine) means weaker construction and education industries.

And even if we recover fully, our customers in the rest of the world will not. Europe is already in a deep recession. The pandemic was slow to reach the United States, but the likely impacts on both health and the economy look to be even worse.

These shocks would be a challenge even to a strong economy. But Australia’s performance before the crisis was sluggish at best.




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Unemployment had barely come down from the levels reached during the global financial crisis and under-employment had reached all time highs. Inflation was persistently below the Reserve Bank’s target range, reflecting the overall weakness of the economy.

In these circumstances, the idea that the economy will magically “snap back” to normal once restrictions are lifted is a dangerous fantasy.

If we are to avoid an era of sustained high unemployment similar to the one we had in the early 1990s, the government must act to stop it happening.

JobKeeper should be made portable

The first step should be to convert JobKeeper into a wage-subsidy program, in the hands of workers, not tied to previous employment. Unemployed workers could assign the subsidy to whichever employer willing to hire them under standard wages and conditions.

There are plenty of difficulties with such a program. The most immediate is the need to ensure that it creates additional jobs, rather than allowing employers to sack existing workers and replace them with subsidised new hires.

A second lot of problems arises, as with JobKeeper, because of the increasing prevalence of non-standard forms of employment.




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These problems are not reasons to abandon the idea of wage subsidies. Rather, they imply that the government should be thinking about these problems now, rather than deferring the problem with the assertion that everything will return to normal in six months.

Much more will be needed to avoid mass unemployment.

Public services such as health and education will need to employ more people to deal with the extra requirements of social distancing, and the need for training and retraining.




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Restructuring the economy will require the abandonment of free-market doctrine in favour of direct government involvement, including public ownership where necessary, at least for a while.

And while it is appropriate to meet the immediate needs of the economy through increased borrowing, we will ultimately need increased revenue, and we will probably need to forgo the lavish legislated tax cuts that were due to kick in from the mid-2020s.The Conversation

John Quiggin, Professor, School of Economics, The University of Queensland

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Were it not for JobKeeper, unemployment would be 11.7%, up from 5.2% in one month. Here’s how the numbers pan out



ABS

Jeff Borland, University of Melbourne

After all the forecasts and speculation, now we know the worst.

Today’s numbers from the Australian Bureau of Statistics lay out the catastrophic impact of COVID-19 on the Australian labour market.

Total hours worked fell 9.2% – in just one month, between March and April.


Percentage fall in hours worked

Months from start of recession.
Author’s calculations from ABS 6202.0

The scale and speed are difficult to comprehend.

By comparison, in the major recessions of the 1980s and 1990s, hours worked fell by 6% – but after 18 months.

Women have been hurt more than men, losing 11.5% of the hours worked in March, compared to men who lost 7.5%.

Queensland and NSW have so far fared better than other states.


Percentage fall in hours worked by state


ABS 6202.0

Predictions of much bigger job losses for the young than the old have been proved correct.

Workers aged 15 to 24 losing about 11% of employment compared to 3.4% for those aged 25 to 54, and 4.3% for the over 55s.

The official rate of unemployment in April 2020 rose to 6.2%. This is the highest rate since July 2015.




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It doesn’t seem a big rise amid talk of a new great depression, but this is one of those times when you need to read the fine print.

To calculate its official rate the Australian Bureau of Statistics follows International Labor Organisation conventions in classifying employment and unemployment.

These classify as employed anyone who worked zero hours but was still being paid or who believed they had a job to go back to.

Much worse than it looks, the bureau says so

This is important because the JobKeeper scheme means many workers in Australia fit these categories. It makes a difference.

For this reason, the bureau has provided an adjusted rate of unemployment which counts these workers as unemployed.

It puts our unemployment rate at 11.7% in April, up from 5.2% in March.

It is more in line with what we have been seeing in Canada and the United States.


Unemployment rates, January 2019 to April 2020


ABS 6202.0 and Canndian and US statistical agencies

Under-employment is also an important part of the story. Workers who kept their jobs are now much less likely to be working the hours they want.

Between March and April the rate of underemployment (working fewer hours than wanted) jumped from 9.8% to 13.7%.




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And many workers have also withdrawn completely from looking for work.

In the past month the labour force participation rate fell by 2.5 percentage points.

Again, women have been hurt more than men, with an extra 2.9% of women out of the labour force compared to an extra 2.1% for men.

Statistically, these people have vanished. They are not employed, but they are not counted as unemployed because they say they are no longer available for work.The Conversation

Jeff Borland, Professor of Economics, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.