The contribution of policy reforms to improved labour market performance
The first section of the Statement discussed how Australia’s labour market performance has improved over time. Particular attention was drawn to the experience of the late 1980s, 2000, and the period since 2002. While the unemployment rate was around the low points of recent decades in each case, at around 6 per cent, the most recent period has been characterised by a structurally more sound economy, with steadier employment growth and low inflationary pressure. This suggests that low unemployment is now more sustainable and raises the prospect that unemployment can fall further.
The improved performance of the economy over recent years, of which the lower unemployment rate is an important dimension, has been achieved through a long-term and comprehensive package of reform measures. These measures have been complementary and reinforcing, and have been aimed at improving the microeconomic efficiency of the economy, its ability to grow steadily and consistently and to respond to change. An important characteristic of the reforms has been to ensure that the institutions affecting our social and economic activities are better suited to meeting contemporary and future needs.
The reforms have been extremely diverse and broad based, including: trade reform; deregulation of financial markets; wide-ranging tax reform; enhancing competition across many areas of the economy; increasing the flexibility of the labour market; the development of skills and capacities; reforms to welfare arrangements; and creating a transparent medium-term framework for fiscal and monetary policy in order to enhance economic stability. But there is scope to do more in some of these areas, to produce further gains in productivity, labour force participation, employment and overall wellbeing.
Lower unemployment brings valuable economic and social benefits. Higher income levels and a more equal distribution of income lower household poverty. Better access to income-earning activities provides greater opportunities for people to engage in economic and social activities, thus allowing the development of social capital. As a result of a more inclusive and connected society, with a greater capacity to support those who are disadvantaged, the risks faced by an individual in the modern economy are reduced. It is for these reasons that policies have been developed and refined in a balanced way to promote lower unemployment.
Policies to reduce unemployment from its current levels are needed to address the medium-term challenges which the Australian economy faces as a result of demographic change. In the 2002-03 Budget, the Government published the first Intergenerational Report in which it outlined the scale of these challenges, such as the effects on the potential labour force and living standards. In February 2004, the Treasurer released a discussion paper, Australia’s Demographic Challenges, to promote community debate on these longer-term issues.7
In this context, this section surveys the changes in policy settings which have contributed to the improved labour market performance in recent years and considers where there may be scope for policy settings to be tuned to further reduce unemployment, including by removing the impediments to job creation and participation.
A framework for policy
The OECD has undertaken extensive cross-country research into the factors that drive employment and economic growth, culminating in the OECD Jobs Strategy8 (see Box 6) and the related OECD Growth Study.9 These strategies were in part developed in response to the stubbornly high rates of unemployment that many OECD nations have had since the 1970s.
The major elements of the OECD Jobs Strategy are to: increase the flexibility of working time and labour costs; reform employment security provisions; deliver active and effective labour market programmes; improve skills and competencies; and reform unemployment and related benefit systems and their interaction with the tax system.
The major elements of the overarching OECD Growth Study relate to: strengthening economic and social fundamentals; facilitating the diffusion of information and communications technologies; fostering innovation; investing in human capital; and stimulating the creation of firms.
Importantly, these strategies are complementary and need to be implemented together to have greatest effect on labour market performance. For example, reforms to welfare policies will not be as effective in improving employment and community wellbeing in the absence of steady macroeconomic management.
The elements of the OECD Jobs Strategy can be classified into three broad groups: general economic policies, labour polices and welfare policies. This provides a useful framework in which to survey the policy settings in Australia and how those settings have changed over time to address unemployment more effectively.
Recent policy reforms and areas for further development
Australian governments have made substantial progress in their general economic policies, labour and welfare policies over past years to achieve lower unemployment, consistent with the directions of the OECD Jobs and Growth strategies.
General economic policies
Critical to achieving low unemployment are: stable and well-tuned macroeconomic policies; well-functioning and competitive markets; innovation and a climate of entrepreneurialism; and the diffusion of new technologies. Policy developments in these areas and their contributions to wellbeing have been extensively discussed in previous budget papers.10
Since the 1970s, many reforms have been designed to improve the competitiveness of the Australian economy domestically and internationally. Greater competition and depth in Australia’s product and financial markets has been fostered through mechanisms such as National Competition Policy, an agenda agreed by the Australian Government and State governments in the mid-1990s. Reforms have been implemented in the communications, energy and transport sectors, and by commercialising and privatising government businesses, removing anti-competitive regulation and broadening the scope of competition. Similarly, the reduction of barriers to trade and reduced support for export activity has opened the Australian economy to international competition, markets and cultures.
Box 6: Summary of the OECD Jobs Strategy11
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These improvements in competitiveness, combined with more strategic support by government for education, research and development, have gradually infused the economy with greater innovative capacities. Improvements in governance frameworks and corporate law have also played their role by ensuring transparency in economic activity, thereby enhancing the underlying confidence in the economy.
While many gains have been made under Competition Policy in a wide range of industries so far, there is scope to achieve further gains in efficiency, quality and resilience of the major infrastructure industries that provide critical inputs into many other economic sectors. Australian and State governments are looking to identify areas of opportunity for significant gain to be made through further competition reform, and the recently announced Productivity Commission inquiry is important in this regard.
The microeconomic foundations of the Australian economy are important to promoting lower unemployment. However, it is also worth highlighting the role that macroeconomic management plays in reducing unemployment. A medium-term framework for monetary and fiscal policies has been found to best contribute to steady and sustainable economic growth, helping to minimise the episodes of boom and bust due to poor macroeconomic policy that were a feature of Australia’s past economic performance.
After the recession of the early 1990s Australian monetary policy started to focus around a medium-term inflation-targeting regime. In August 1996 in a Statement on the Conduct of Monetary Policy (the ‘Statement’) by the Treasurer and the Reserve Bank Governor a formal targeting regime was put in place and set out a target of 2 to 3 per cent on average over the course of the economic cycle. This Statement was reaffirmed and updated for current practice in July 2003. The Statement formalises the operational independence of the Reserve Bank in implementing monetary policy to achieve the Government’s inflation goal. The inflation target provides discipline for monetary policy decision-making and serves as an anchor for inflation expectations in the community.
Australian fiscal policy was also placed by the Government into a medium-term framework from 1996. The Charter of Budget Honesty Act 1998 (the ‘Charter’) states that fiscal policy should be directed at maintaining the ongoing economic prosperity and welfare of the people of Australia, and therefore should be set in a sustainable medium-term framework. The purpose of the Charter is to improve fiscal policy outcomes. It provides for this by requiring that fiscal strategy be based on principles of sound fiscal management and by facilitating public scrutiny of fiscal policy and performance. This transparency is important for the credibility of fiscal policy. The primary objective of the Government’s fiscal strategy is to maintain budget balance, on average, over the course of the economic cycle.
A continuation of general microeconomic reform and sound macroeconomic policy settings will be important for assisting labour and welfare policies to maintain low levels of unemployment and to achieve further reductions in unemployment.
Labour policies
The first section of this Statement indicated that Australia’s unemployment rate has averaged 7½ per cent since the late 1970s. A belief that lower unemployment was an integral component of a better Australia, plus the desire for a higher rate of sustainable economic growth, led to the pursuit of labour policies which have fostered productivity, participation and lower unemployment. Labour and welfare reforms have been particularly important for addressing the various disadvantages that many people face in the labour market and whose employment prospects are less responsive to general increases in labour demand.
Employment arrangements, wages and conditions
Flexible employment arrangements and conditions are more able to promote productivity at the workplace level and to better match employer and employee preferences, a key to good labour market performance and community wellbeing. These more flexible arrangements tend to reduce unemployment, as more people who are unemployed are able to find suitable work.
The Australian workplace relations system has evolved to reflect contemporary economic and social factors. In the early part of the twentieth century, a complex system of awards developed through industrial courts with the objective of equity and justice in wages and working conditions. Unfortunately, over time these complex and rigid institutional arrangements came to inhibit employment outcomes.
Significant reforms were achieved with the Workplace Relations Act (Cth) 1996. The Act set primary responsibility for determining matters affecting the relationship between employers and employees with the employer and employees at the workplace level, taking into account the specific circumstances of the individual firm and employees involved. The Act also provided a framework of rights and responsibilities for employers and employees, and their organisations, to support fair and effective agreement-making; ensured freedom of association; and enabled employers and employees to choose the most appropriate form of agreement for their particular circumstances. This included the creation of Australian Workplace Agreements, individual agreements between an employer and employee which would be recognised as legally binding by the Australian Industrial Relations Commission.
These reforms were to significantly redefine the role of awards, with increases in award rates of pay to be modest and focused on the low paid, consistent with the intention that awards operate as a safety net of minimum standards.
As a result of these policy developments, the percentage of workers reliant on arbitrated awards for pay rises has fallen from 67 per cent of employees in 1990 to around 21 per cent in 2002. Around 38 per cent of employees now have their terms and conditions determined through collective agreements between employers and their employees, while another 41 per cent rely on individual agreements reached between an employer and an employee, the latter predominantly being informal arrangements or common law contracts.12
While these reforms have focused on encouraging productivity and a more direct relationship between employers and employees, they have had a significant effect on the incentive for employers to hire workers and to boost output, thereby reducing unemployment. The Productivity Commission, for example, has attributed Australia’s improved productivity performance in the 1990s in part to better management practices and work arrangements.13 This has allowed structural reform in product markets to encourage ‘the adoption of new production processes and firm organisation, for example through multi-skilling, performance-based remuneration, the introduction of split shifts and the reduced rigidity of job demarcations.’14 These innovations led to increased competitiveness and a greater capacity for the economy to create employment.
These improvements in flexibility and reduced complexity have also had a supply side effect by creating greater opportunities for people to find jobs, increase their incomes, and respond positively to structural change.
While an improvement in productivity growth was achieved over the 1990s, international comparisons suggest that further improvements in productivity can be made in Australia. As discussed in Statement 4 last year, Australia’s productivity level is still below some other major developed nations, particularly the United States.15 There are a number of aspects to the labour market where further reforms could be made to improve productivity and reduce unemployment.
Workplace agreements, including collective and individual agreements, are considered to be more effective tools for promoting productivity improvements than are awards. However, around 21 per cent of employees remain reliant on awards for determining their conditions of work rather than workplace agreements of some kind. This is one sign that there may be significant potential for the community to further draw on the flexibilities provided by the Workplace Relations Act to achieve higher productivity and employment. While it will be necessary to retain a safety net for many employees, the attractiveness of workplace agreements may increase as the community learns from others’ experience in developing agreements and as employers compete for higher quality employees.
Similarly, workplace relations law remains complex and the role of labour law in reducing unemployment could be improved. The Australian Government has over ten bills presently before the Parliament which are designed to increase flexibility, reduce employment transaction costs and achieve a closer link between wages and productivity. More specifically, the proposed amendments to the Workplace Relations Act aim to reduce the degree of regulation around the termination of employment; address pattern bargaining; streamline agreement-making processes; and further simplify awards to promote workplace agreements.
It is important to minimise the employment transaction costs and other on-costs to improve the demand for labour and hence raise employment and reduce unemployment. While employment protection legislation in Australia is generally more refined and less stringent than in other OECD nations,16 there is scope to improve employment protection law, particularly in relation to small businesses, as existing regulations can be an impediment to these employers taking on additional workers.
Wages are, of course, a key influence on the level of employment. The award system which operates in Australia provides a menu of minimum wages that can significantly affect the employment prospects for unskilled as well as more highly skilled people.
Adult minimum wages in Australia, as a proportion of median earnings, are the second highest in the OECD at around 58 per cent of median earnings. In the United Kingdom and United States, by contrast, minimum wages are around 45 and 34 per cent of median earnings respectively.17 Australia’s award system also provides minimum wages for a range of individual jobs and levels, rather than the single statutory minimum wages that are present in the UK and US jurisdictions. There are around 4,500 industrial awards in operation in Australia, with around 2,000 in the State jurisdictions. These high minimum wages could ‘price out’ many people from employment and hence result in higher unemployment than otherwise. The rigidities in the wage structure reduce the capacity for wages to adjust to meet labour demand and supply over time.
Governments now intervene more effectively to achieve equity objectives through the tax and welfare systems. By comparison, the award system is a blunt and ineffective mechanism for promoting equity. There may be scope to further refine the award system, including through reductions in its complexity and breadth as well as changes in the responsibilities of the Australian Government and State government jurisdictions.
There will be an ongoing need to review the workplace relations system more broadly to ensure that it meets contemporary and future needs. However, a return to more centralised and less flexible workplace relations, with more extensive powers for third parties such as industrial relations commissions and more regulated employment conditions, would be a regression in policy as it would adversely affect many people in the labour market, including those who are unemployed. A flexible workplace relations system, supported by a safety net of minimum conditions and complementary economic and social policies, can best promote lower unemployment and improved wellbeing.
Skills and capacities
The importance of skills and capacities for labour market performance and wellbeing has become increasingly apparent over time.
The people most likely to be unemployed for sustained periods of time are those who have relatively low education and skills, are of indigenous origin, come from a non-English speaking background or lack labour market experience.18 Hence, appropriate skills and labour market assistance are necessary to achieve lower unemployment.
Both the level and composition of skills can help in addressing longer-term structural unemployment, which sometimes reflects the declining relevance of some existing skills in the face of economic, technological and social change. New skills can help these people move from unemployment to work, and allow the unemployment rate to fall without creating other pressures in the labour market.
A well-skilled labour force assists the dynamic efficiency of the economy and its ability to expand. In the medium-term, a more appropriately skilled labour force means that as the economy expands there is more likely to be an effective labour supply available and posing less of a wages and inflationary risk to an economic expansion. Over the longer term, a well-skilled labour force can allow the labour market to adjust well to the many forms of structural change and economic dynamics that occur, both boosting economic performance and reducing social dislocation in the face of change.
Over time, governments have developed more active labour market policies which have been found to be more effective than the passive alternatives in getting people into employment.19 Active labour market policies are in part designed to develop the skills and competencies needed by employers, beyond what have been developed through the mainstream education and training systems. They are targeted at the particular needs of disadvantaged labour market groups and are often remedial or transitional in nature.
By the mid-1980s, labour market programmes had proliferated, with a complex web of options provided for employers and employees and without clear, overarching objectives.20 As a result, the late 1980s saw some reforms to labour market programmes, with steps taken to achieve a better integration of employment, education and training programmes. In response to the recession of the early 1990s, there was a particular focus on expanding programmes which provided work experience combined with training, in return for income support.21 For example, the Newstart programme, introduced in 1991 and focused at the outset on the long-term unemployed, introduced obligations on recipients to actively seek work and assisted the acquisition of skills necessary to gain work. However, these programmes were introduced at too late a stage in the economic cycle and in a relatively under-developed form to be effective in quickly redressing the unemployment which emerged as a result of the recession of the early 1990s.
The Working Nation package in 1994 saw a significant expansion in labour market programmes, with the development of a case management system for the unemployed, training wages, direct job creation schemes and a Job Compact. The Job Compact guaranteed an education or training place to a long-term unemployed person to enhance their employment prospects. Many of these initiatives were designed to address long-term unemployment, by developing skills and labour market experience.
In the 1996-97 Budget, the Government announced a new framework for the delivery of labour market assistance. The framework was to provide better-quality assistance to unemployed people, target that assistance according to need, address the weaknesses present in the earlier forms of labour market assistance and achieve better value for money. Greater competition in the provision of employment services was introduced, with a greater focus on achieving outcomes for jobseekers.
The framework was centred on a Job Network. Beginning in 1998, Job Network was a national network of private, community and government organisations contracted by the Government to assist unemployed people to find jobs. A government agency, Centrelink, became the gateway to Job Network and undertook the registration, assessment and referral of jobseekers to Job Network members. Over time, the elements of the programme have been developed to better address the varying needs of the unemployed, with mainstream access to the programme supplemented by additional assistance for different categories of disadvantaged jobseekers.
Significant changes were made to the Job Network in 2003, centred on the introduction of an Active Participation Model. The key features of the model have been to provide more intensive assistance the longer a person has been unemployed and a dedicated Job Seeker Account, providing financial support to meet the particular training needs or other expenses involved in getting a person into employment. The model involves stronger linkages between Job Network services and a range of other complementary employment and training programmes, such as the Transition to Work programme and Job Placement Employment and Training.
As a result, a jobseeker now has access to a range of workforce information, education, training and employment services that can be customised to their particular needs in order to get them into sustainable employment. The gains made by the new policy framework have been positive. For instance, the OECD has found that the Job Network has delivered comparable results to those obtained under previous systems but at considerably less cost overall.22
While the labour policy framework has evolved over time to provide more effective support, it will be important to ensure that people access the support services that are available to them and that those services work most effectively to meet a person’s labour market needs over the short and longer terms. As a result of these policy evolutions, the current system of labour programmes should be better placed to provide support for ongoing employment growth and participation.
As the first section of this Statement illustrated, the flexibility of the Australian labour market is reflected in the ready availability of part-time employment. This flexibility has assisted in reducing the duration of unemployment, as it has provided an avenue for those who have been unemployed for a considerable period of time to develop skills and experience which can then lead to more extensive and continued employment.23 Without access to part-time employment, many unemployed people may have found it more difficult to gain sustained employment and to become less welfare dependent. This is a key aspect to the effectiveness of labour market programmes, as their objective is to assist unemployed people to find work in a way which places the jobseeker on a path to sustainable employment over the longer term.
Labour market programmes are usually remedial or reactive in nature, drawn upon when they are needed. However, Australian and State governments have focused also on investing in skills as a way of improving a person’s labour market prospects. People with a higher level of educational attainment are more likely to participate in the labour force and to be employed than those with lower levels of educational attainment.
Skills and capacities are a key driver of labour force participation, productivity, employment and reductions in unemployment. Solid foundation skills which are adaptable to different circumstances are important for reducing the likelihood of unemployment.
Structural unemployment can be further reduced using the education and training system to better match the skills demanded and supplied in the labour market. In addition, education and training can play a dynamic role in diffusing technologies and promoting innovation, thereby leading to the creation of new industries. Improvements in skills also lead to increased labour mobility which can help to reduce pockets of unemployment in particular regions or occupations.
Those Australians who have not completed secondary school education have a lower labour force participation rate as a group than those with post-secondary qualifications (see Chart 12). This suggests that improving their foundation skills and capacity building could assist in improving employment prospects.
The National Agenda for Early Childhood, initiated in 2003, is one part of the effort to improve foundation skills and capacities to engage in the community, by ensuring that children have a better start in life. A further part of the effort is being made through the National Education Framework for Schools, promoted by the Australian Government to improve the quality of schooling across all key learning areas and to improve the transition to further education and work.
Chart 12: Labour force participation by educational attainment |
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Per cent of the population age group |
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Males
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Females
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Source: S. Kennedy and D. Hedley (2003), ‘A Note on Educational Attainment and Labour Force Participation in Australia’, Australian Treasury, Working Paper 2003-03.
Education and training policies are also important in ensuring that Australians are able to upgrade their skills over time in order to meet areas of emerging demand for labour. Lifelong learning is important for all workers, whether they have trade qualifications or tertiary qualifications, as it allows people to maintain or improve their productivity, respond to change in the world of work and continue to participate in the labour force.
People with already high educational attainment are more likely to participate in formal training, whether on-the-job or in an educational institution, than those with lower levels of attainment. This may be due to cultural factors and to the various costs of training. For example, significant fees often have to be met by participants up-front without access to financing mechanisms such as those which are available in higher education.24 As a result, improving equity in access and participation in skill development is a priority for the Government and the Australian National Training Authority.25
The skills of the labour force are a function of training as well as the health of the workers involved. Poor occupational health and safety practices, for example, have a significant cost for the Australian economy, through the injuries themselves and the lower levels of participation in the labour force that follow. Hence, improving the health of the labour force will be important for improving productivity and participation, and reducing unemployment.
Reactive health care is expensive relative to preventative health care and, as the population ages, health care costs are expected to rise substantially. Health practices that are focused on preventative health care could mitigate rising health costs but also have substantial benefits in terms of labour force participation and the ability for an individual to continue to engage in employment.
Welfare policies
While skills are an important factor behind labour force participation and the likelihood of employment, welfare and taxation policies also have an effect.
Welfare policies have a substantial effect on the wellbeing of individuals, their households and communities. Greater labour force participation and low unemployment mean that there are higher incomes to draw on. High labour force participation and the minimisation of welfare dependency is better able to create an economically sustainable and inclusive society that is well-connected and better able to manage risks to the economic and social environments.
Policies around publicly-funded income support and income tax arrangements can affect a person’s decision to participate in the labour force (and therefore to be employed), along with the extent of their participation. Australia’s policies in these areas have changed significantly over the twentieth century, from a comprehensive income support system and wage-earner’s welfare state up until the 1980s to a more targeted welfare system in the late 1990s.26
The proportion of the Australian working age population in the 55+ age group is rising very significantly and people in that category are less likely to participate in the labour force than those who are below 55 years of age. For example, around 72 per cent of men aged between 55 and 59 years participate in the labour force, compared with 91 per cent of 35 to 44 year olds. Similarly, only 50 per cent of women aged between 55 and 59 years participate in the labour force compared with 71 per cent of 35 to 44 year olds.27
The trend towards early retirement, coupled with increasing life expectancy, will have implications for the living standards of all Australians. The community needs to consider how to best provide for its retirement incomes and one readily available solution is to improve labour force participation amongst mature age Australians.
Chart 13: Labour force participation rates by population age category
Source: Australian Government (2002), Budget Paper No. 5, Intergenerational Report 2002-03.
Overall labour force participation rates in Australia are also modest in comparison with many other OECD nations, with Australia ranked twelfth highest in the OECD in 2002. In keeping with most other developed countries, Australia’s overall participation rate is expected to decline over the long term as the population ages (see Chart 13), even though the participation rate of those of working age is expected to remain broadly stable. That is, the fall in aggregate participation of those aged 15 and over reflects the declining proportion of working age people as Australian society ages.
The effect of population ageing can be illustrated by comparing Australia’s and Japan’s current situations. The average age of the Japanese population is older than Australia’s and participation rates for most age categories are generally similar to or significantly higher than the equivalent age groups in Australia. If Japan had the same age structure as Australia, its labour force participation rate would be some 2 percentage points higher than at present.28 Hence, the further ageing of the Australian population is projected to have a significant effect on participation and, hence, on growth in national living standards.
Income support is designed to provide a safety net to an individual or family while the primary income earner is out of employment for one reason or another. However, an imbalance between incentives and assistance is a key factor behind structural unemployment. As a result, governments here and abroad have sought to improve the incentives and obligations contained in the income support system.
The Australian income support system for the unemployed was largely designed in the immediate post-World War Two period, when the labour market had very different characteristics to what it has now.
Over time, access to income support has become better targeted according to need, with a reduction in the range of benefits and a tightening of eligibility criteria.
Incentives for some income support recipients to participate were improved through The New Tax System and the Australians Working Together (AWT) packages. The AWT package in the 2001-02 Budget addressed the principles contained in the 1999 McClure Report on welfare reform, which set out ways in which welfare dependency could be reduced with an overarching aim of assisting out-of-work people back into the workforce. Specific reforms included the introduction of working and training credits; training accounts; as well as other initiatives targeted at parents, the mature-aged, indigenous Australians and people with disabilities — demographic groups which tend to exhibit lower labour force participation rates than other groups, or who are marginally or precariously attached to the labour force.
Reforms announced in the 2001-02 Budget sought to encourage Disability Support Pension recipients to maximise their attachment to the labour market, while similar measures have been introduced for certain Parenting Payment recipients.
The AWT package built on changes that had already been made to the incentive system in the 1997-98 Budget. The Work for the Dole programme attempted to infuse a principle of ‘mutual obligation’ into the welfare system. Many unemployed people, particularly young people, are now required to undertake community work in return for income support. The programme is predicated on the view that it is fair and reasonable to ask unemployed people to participate in an activity which both helps to improve their employability and makes a contribution to the community in return for payments of unemployment benefits.
Effective marginal tax rates have also been targeted as part of the welfare-work reform agenda. The concept acknowledges that the decision to participate in the labour force, or to actively seek employment if currently unemployed, is affected not only by the additional income taxation paid on earned income but also by the loss of income support payments through income testing arrangements.
The reduction in income tax rates has improved the incentive to work for those on low incomes or on income support, as after-tax income would be higher for an additional hour of work than it otherwise would have been. This substitution effect is particularly strong for those people on relatively low incomes.
Reductions in effective marginal income tax rates (largely through reduced income tax rates and reduced family assistance taper rates) and an increase in the tax-free income threshold have been delivered at various times since the early 1980s, most significantly through The New Tax System reforms in 2002. In its 2003-04 Budget, the Government further reduced income taxation by raising the income thresholds, with the amount of the low income tax offset, and the income threshold from which it starts to phase out, increased. These reforms have allowed income support recipients to retain more of their income support than they would have otherwise been able to do as their employment income rises.
In the 2004-05 Budget, the Government has announced its More help for families package of assistance to families, tax cuts and incentives for saving for retirement. The package builds on the reforms delivered through The New Tax System and in the 2003-04 Budget. The package increases the adequacy of assistance for families by increasing the rate of Family Tax Benefits and reducing the withdrawal rates, with improvements in the rewards from work for low and middle income families, and particularly assisting women wishing to re-enter the workforce after having children.
The package also delivers tax cuts by increasing the thresholds for the top two marginal tax rates. This will ensure that high marginal tax rates are not a disincentive for those taking on additional work, wishing to work overtime, seeking promotion, or acquiring skills. The tax cuts will help ensure that Australia is able to retain and attract people with highly regarded skills.
Of Australia’s total working age population of around 14 million, only about 10 million are currently part of the labour force.29 Around 2.7 million working age Australians presently receive income support, representing around 20 per cent of the working age population.30 Among others, this group includes sole parents and recipients of the Disability Support Pension. There are now more people in receipt of the Disability Support Pension than there are people in receipt of standard unemployment benefits (see Chart 14).
Chart 14: Number of selected income support recipients
- Unemployment benefits reflects Newstart Allowance and Youth Allowance (non-students).
Source: Department of Family and Community Services.
Many of these people entered the income support system after becoming unemployed or after having left work voluntarily. Others in this group have sought work but with limited success because of a lack of relevant training or skills, or one or more of the various impediments discussed above. Of the group in receipt of income support, only around a third are subject to an activity test and only half of that group is required to actively look for work. Although many of these people are involved in other important activities, such as education and family-related commitments, there is scope for increasing their attachment to the labour market to improve their longer-term economic and social wellbeing and to realise their potential.
In order to increase Australia’s participation rate and further reduce unemployment, it is important that the income support system encourages, promotes and supports people to seek out and participate in paid work to the extent they are able. A balance of incentives, assistance and requirements will be needed to maximise the participation of people with diverse capacities and availabilities for work. More consistent arrangements between different forms of income support and better integration of access to programmes that provide active assistance to an individual could assist in improving participation amongst income support recipients.
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7 Australian Government (2004), Australia’s Demographic Challenges, February (http://demographics.treasury.gov.au).
8 OECD (1994), The OECD Jobs Strategy, Paris.
9 OECD (2003a), The Policy Agenda for Growth, Paris; OECD (2003b), The Sources of Economic Growth in OECD Countries, Paris.
10 For example, Australian Government (2003), ‘Sustaining Growth in Australia’s Living Standards’, Budget Paper No. 1, Budget Strategy and Outlook 2003-04, Statement 4.
11 J. Elmeskov (2000), Implementing the OECD Jobs Strategy — assessing performance and policy, remarks at the Conference on Jobs, Helsinki, January.
12 Employee Earnings and Hours (ABS Cat. No. 6306.0).
13 Cited in OECD (2001), OECD Economic Surveys — Australia, Paris, p. 75.
14 OECD (2003), OECD Economic Surveys — Australia, p. 84.
15 Australian Government (2003), ‘Sustaining Growth in Australia’s Living Standards’, Budget Paper No. 1, Budget Strategy and Outlook 2003-04, Statement 4.
16 OECD (2003), OECD Economic Surveys — Australia, pp. 100-101.
17 OECD data cited in Low Pay Commission (2003), The National Minimum Wage — Fourth Report of the Low Pay Commission, London, p. 254.
18 B. Chapman and C. Kapuscinsky (2001), ‘The Transformation of Australia’s Population, 1970 to 2030: Labour Force, Employment and Unemployment’, Centre for Economic Policy Research, Discussion Paper No. 436, Australian National University, Canberra.
19 J. Martin (1998), ‘What works among active labour market policies: evidence from OECD countries’ experiences’, in G. Debelle and J. Borland (eds), Unemployment and the Australian Labour Market, proceedings of a conference held by the Reserve Bank of Australia and the Australian National University, Sydney.
20 Kirby Inquiry (1985), summarised in Committee on Employment Opportunities (1993), Restoring Full Employment : a discussion paper, AGPS, Canberra, p. 94.
21 J. Dawkins (1992), Working for the Future: jobs, skills, innovation, AGPS, Canberra.
22 OECD (2001), Innovations in Labour Market Policies — the Australian Way, Paris.
23 Committee on Employment Opportunities (1993), Restoring Full Employment: a discussion paper, AGPS, Canberra, p. 2.
24 B. Chapman, L. Watson and L. Wheelahan (2001), ‘From silos to seamlessness: towards a cross-sectoral funding model for post-compulsory education and training’, Centre for Economic Policy Research, Discussion Paper No. 439, Australian National University, Canberra.
25 Australian National Training Authority (2003), Shaping Our Future — Australia’s national strategy for vocational education and training 2004-2010, Brisbane.
26 K. Green (2002), ‘Welfare reform in Australia and the United States: Tracing the emergence and critiques of the New Paternalism and Mutual Obligation’, The Drawing Board 3 (1) July, pp. 15-32.
27 OECD (2003), Labour force statistics, 1982-2002, Paris.
28 M. Parkinson (2004), ‘Growth drivers: the medium to longer-term challenges to maintain Australia’s growth performance’, address to the Country CFO Forum, Melbourne, 6 February.
29 Persons Not in Labour Force (ABS Cat. No. 6220.0).
30 Australian Government (2004), Australia’s Demographic Challenges, February.