Factors affecting labour utilisation decisions
The focus of this section is on the role of recent government policy in influencing labour utilisation decisions. These policies have implications for both the supply and demand for labour.
Ultimately, the decision to participate in the labour market is based on an individual's preferences for work and leisure. Paid work provides individuals with substantial benefits, including a means to satisfy their material needs and those of their families, the opportunity to develop personally, live independently and interact socially. Factors that influence a decision to participate in the labour market include family situation, educational attainment, age, tax and welfare payment implications.
Macroeconomic performance
Australia has experienced more than a decade and a half of continuous economic growth. GDP growth since the turn of the millennium has averaged above 3 per cent per annum, among only a handful of OECD countries achieving such rapid growth.
During this 15 year period, Australia has experienced a number of external and internal shocks — the Asian financial and economic crises, two major droughts, the global slowdown of 2001, the uncertainty after the 9/11 attacks, SARS, a housing boom, natural disasters, significant increases in oil prices and the commodities boom. Any of these shocks could have triggered an economic slow-down and/or higher inflation in years past, but there have been notable improvements in resilience compared with earlier times. Australia not only continued to experience stable economic growth but thrived, surpassing the per capita income levels of the average of OECD countries. Australia has reached record employment levels and attained the lowest unemployment figures for 30 years, with low inflation.
Australia has maintained a strong economic record in the face of these shocks because the economy is more flexible and better able to adapt quickly to change. The OECD (2006a) has recently commented that wide-ranging macroeconomic and microeconomic reforms, particularly to promote competition, were instrumental in engendering greater flexibility in the Australian economy. These reforms are broad and deep, and have been implemented progressively over many years.
Key macroeconomic reforms of recent years include the adoption of a fiscal policy strategy with the primary objective of budget balance over the economic cycle and formalising the independence of the central bank to pursue a medium term inflation target. Together, these policies act to maintain economic stability, encourage private investment, entrench low public debt and ensure that, over time, the current account continues to reflect private saving and investment decisions. The fiscal pressures associated with demographic change are addressed in the fiscal strategy through a supplementary objective of improving the Government's net worth. This has led to the creation of the Future Fund.
Microeconomic reforms have also played a significant role in helping to maintain the stability and flexibility of the economy. Microeconomic reforms include: liberalising Australia's foreign trade and investment; liberalising financial markets and workplace relations regimes; major tax and transfer payments reform that broadened the base and lowered tax rates for both corporations and individuals; reforms of the indirect tax system; targeted incentives to work and save; corporate law reform; and a broad ranging National Competition Policy agenda. By 2003, Australia's economy wide product market regulations were judged to be the least restrictive in the OECD.
Notwithstanding the above, the reform task is far from complete. Substantial issues around national markets remain difficult to progress because of federalism constraints. Areas of 'new scarcity' require economic solutions — notably water and greenhouse. There is also a need for attitudinal change in policy making, away from promotion of resource utilisation — job creation — to resource allocation and resource creation; that is, supply side improvement.
The taxation and income support system
Australians' decisions on whether to work and how long to work are influenced by the tax system and the provision of income support. The tax and income support systems should minimise distortions between reward and effort, while providing assistance for those in need. The challenge is to avoid undue disincentives to work.
Over a number of years, the Government has lowered the marginal income tax rates and increased the thresholds at which the rates start to apply. For example, compared with their income tax liability prior to the introduction of The New Tax System, and including changes in the 2007-08 Budget, on 1 July 2008 a person on $25,000 will have had a tax reduction of around 54 per cent, a person on $65,000 will have had a tax reduction of around 33 per cent and a person on $100,000 will have had a tax reduction of around 29 per cent. This has improved incentives to lift workforce participation.
In particular, the increases announced in the 2006-07 and 2007-08 Budgets in the 30 per cent tax threshold from $21,601 to $30,001 and the substantial increases in the Low Income Tax Offset will have increased incentives for workforce participation, particularly for secondary income earners who are more responsive to changes in tax.
The earlier reductions in the top two tax rates to 40 per cent and 45 per cent and increases in the top two tax thresholds, with further increases in these thresholds from 1 July 2008 announced in the 2007-08 Budget, are seeing increased returns to individuals from supplying more labour and enhanced international competitiveness of Australia's personal income tax system. Maintaining this competitiveness is important for sustaining workforce participation and productivity in Australia. The overall rates and thresholds of Australia's tax system now compare favourably with other similar countries.
Australia has a highly targeted welfare system. The Family Tax Benefit system recognises that households with children face greater costs than those without. Family Tax Benefit Part A is directed towards those families with lower incomes. The necessary implication of targeting benefits is that as family income increases benefits are withdrawn. The alternatives are either not to provide these benefits (thereby leaving beneficiaries worse off) or creating a universal entitlement system with the higher spending, higher taxing and greater churning that such a system would entail.
While Australia's tax and targeted welfare systems necessarily create higher effective marginal tax rates, the Government seeks to identify and act where it can to reduce these and minimise their impacts. Over recent years, effective marginal tax rates have decreased significantly for families. For example, before 2000-01, families faced a 50 percentage point increase in their effective marginal tax rates from the withdrawal of family payments above the base amount. The New Tax System of 2000-01 reduced this withdrawal to 30 percentage points. In 2004-05 the withdrawal rate was reduced further to 20 percentage points.
The Government's Simplified Superannuation reforms provide greater incentives for labour force participation by older workers by introducing greater flexibility in how superannuation savings can be drawn down in retirement. The reforms will encourage people to maintain their connection with the workforce.
From 1 July 2007, superannuation benefits paid from a taxed fund will be tax free for people aged 60 and over. This will increase retirement incomes, particularly for individuals who make additional superannuation contributions. Further, people aged 60 and over may pay less tax on other income as superannuation amounts paid from a taxed fund will not be included as assessable income. This will increase the incentive for individuals to undertake work whilst also drawing down their superannuation. The halving of the assets test taper rate for the age pension will also provide greater incentives for individuals to work.
The reforms will also increase incentives for the self-employed to participate in the labour force and save for their retirement as they will be eligible for a full deduction for their superannuation contributions (up to $50,000 a year), and for the Government's co-contribution for personal contributions.
These reforms follow significant changes in 2004, when the Government announced a number of measures to broaden access to superannuation and improve the flexibility of the superannuation system. Changes included simplifying the work rules for those over 65, and the introduction of the 'transition to retirement' measure to allow individuals to draw down on their superannuation while still working.
Family and individual circumstances
The ability to balance family responsibilities with work is a key issue for many Australians. Access to affordable, high quality child care is a key factor in participation decisions, particularly for women of child-rearing age, who are relatively under-represented in the labour force.
The accessibility of child care in Australia has improved. Since 1 July 2006, there has no longer been a limit on the number of outside school hours care and family day care places. These places are now treated the same way as long day care places, which were already uncapped. This allows existing and new child care providers to expand child care places to meet demand. Overall, child care places have increased from around 300,000 in 1996 to around 600,000 places currently, and by 2009 there are likely to be over 700,000 child care places.
The cost of child care directly affects female labour force participation. The international empirical literature bears out this inverse relationship, although the range of responses varies widely. In Australia, the results are similar, yet tend toward the lower end of the range found in the international literature (Doiron and Kalb 2005; Rammohan and Whelan 2005; Kalb and Lee 2007). Evidence also shows the impact of child care costs on labour force participation varies across different subgroups within the female labour force. For example, Kalb and Lee (2007) show that a given change in child care costs has a greater impact on the participation of sole parents, mothers of preschool age children, and low income parents.
The affordability of child care has been improved through the Child Care Benefit and the Child Care Tax Rebate. Child Care Benefit is a subsidy which varies according to parents' income, the number of children in care and the type of care. The Child Care Tax Rebate is a non-refundable tax rebate on 30 per cent of out-of-pocket child care expenses; that is, fees incurred for approved care less Child Care Benefit.
In the 2005-06 Budget the Government announced a comprehensive package of reforms to the welfare payments system. The Welfare to Work reforms involve rebalancing the welfare system to increase the workforce participation of those working age Australians with the capacity to work, while maintaining a strong safety net for those who need it. The reforms focus on improving the labour force outcomes of people with disabilities, parents, mature age people and the long term unemployed through a combination of new eligibility rules for income support payments, more places in employment services, changes to participation requirements, a new compliance framework and an Employer Demand strategy.
The major component of the Welfare to Work package includes measures designed to encourage parents and people with disabilities to re-enter the workforce. In addition, the participation obligations for mature age people on Newstart Allowance are now more consistent with those for younger recipients and assistance for the long‑term unemployed has been expanded.
The new participation requirements are also supported by improved employment services that include a new Employment Preparation service in Job Network for parents, carers, and mature age people returning to the workforce.
The income test for a number of allowance payments was also made more generous through a reduction in the maximum taper rate from 70 cents to 60 cents in the dollar. This initiative reduces effective marginal tax rates, thus improving the rewards from part-time work.
To assist employers to employ people with disabilities and parents who require flexible working arrangements an Employer Demand strategy has also been introduced. This strategy provides funding of up to $100,000, for up to 12 months, for innovative recruitment, employment and retention projects that are specifically aimed at the Welfare to Work target groups.
Labour market regulation
There have been significant reforms to the Australian labour market and workplace relations system in recent years. Simplifying workplace agreement procedures and allowing wages and conditions to be better linked to productivity improvements provides greater incentives for work and the creation of new jobs and assists many families with marginal labour force attachment to participate in paid work.
The Workplace Relations Act 1996 increased scope for direct bargaining between employers and employees at the workplace level, either collectively through Certified Agreements or individually through Australian Workplace Agreements, thereby reducing the role of awards in setting pay and conditions. This formed a framework of rights and responsibilities for employers and employees to choose the most appropriate form of agreement for their particular circumstances. However, workplace relations laws remained complex, particularly in relation to unfair dismissal laws.
Research by Harding (2002) found that unfair dismissal laws made it difficult for the most vulnerable job seekers to find work and contributed to the loss of about 77,000 jobs. The regulatory burden on employers and flexibility in hiring and firing decisions are key factors affecting labour utilisation. Employment protection legislation (EPL) — the set of rules governing the hiring and firing process — tends to limit firms' ability to fire workers. As a result, firms may be more reluctant to hire workers if they face high lay-off costs so the unemployed may face longer durations of unemployment. Chart 14 shows that Australia is relatively lenient on EPL, although not as flexible as some countries including the UK and the US.
Chart 14: Summary index of employment protection
legislation strictness, 2003
Source: OECD 2006a.
The Government's Work Choices reforms which came into effect in March 2006 have a number of interrelated elements designed to reduce unemployment, improve productivity and participation and deliver higher real wages. Work Choices involved the introduction of a national workplace relations system; the simplification of the agreement making process with a greater emphasis on direct bargaining between employers and employees at the workplace level; the creation of the Australian Fair Pay Commission and the Australian Fair Pay and Conditions Standard which are enshrined in legislation; and changes to the unfair dismissal laws.
Under Work Choices firms with 100 or fewer employees are exempt from the operation of unfair dismissal laws. In addition, for employees of larger firms there is a six month qualifying period and any dismissal on the grounds of operational requirements is permitted.
The OECD has identified cross-country factors that have been important for achieving employment and economic growth. Increasing the flexibility of the labour market is central. The OECD (2006d) stated that ‘the increasing scope for direct negotiations between employers and employees has probably also helped to raise productivity, as enterprise bargaining allows firms to adopt productivity enhancing practices and promotes a more co-operative work environment where performance and reward are more closely linked.’
Other findings in the OECD survey included the greater use of bargaining over working conditions, including wages, at the collective and individual level due to the introduction of a number of reforms. These reforms included reduced complexity in awards and the reduced number of allowable matters in awards.
There has also been an increased take-up of collective and individual agreements by employees in recent years, with a continued decline in employees on awards.
Lawson and Bierhanzl (2004) look at the relationship between labour market flexibility and unemployment and find that the five OECD countries with the least regulated labour markets had, on average, unemployment rates of 4.7 per cent. This compares to an average unemployment rate of 7.3 per cent for the five OECD countries with the most regulated labour markets.
More flexible labour markets are also important for an economy to more easily adjust to external shocks. The OECD (2006d) stated that 'Recent experience confirms the importance of policies to assure that wages adjust flexibly in response to supply- and demand-side pressures, so as to support high levels of employment in a constantly changing economic environment.' Kent, Smith and Holloway (2005) and Cotis and Coppel (2005) found that labour market reform in OECD countries results in fewer economic downturns and reduces the size of the downturns if they do occur.
Education and training
The link between educational attainment and increased labour utilisation is well established. The OECD (1998) found that, on average across countries, individuals with below upper secondary education attainment spend more than twice as much time unemployed as tertiary graduates in the course of their working life. A more recent study by the OECD (2006b) suggests that the employment rate for graduates of tertiary education is markedly higher than the rate for upper secondary graduates.
Looking specifically at Australia, Kennedy and Hedley (2003) found substantial variation in labour force participation rates of males and females with different levels of educational attainment (Chart 15). Workers with no post-school education participate less in the labour force at all ages. Employment rates rise with educational attainment in most OECD countries.
In 2003, the proportion of Australians aged 55 to 64 with at least an upper secondary education was 11 percentage points below the weighted average of the rest of the OECD, but the proportion of 25 to 34 year olds with the same qualification was marginally above the OECD average. As older workers retire, the secondary education attainment gap will narrow under existing policy settings. The proportion of Australians with a tertiary education (including vocational education and training) is above the OECD in all age groups.
Chart 15: Participation by education and age
Males |
Females | |
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Source: Kennedy and Hedley (2003).
In recent times, Australia has performed better than the OECD average on some indicators of education quality. For example, Australia ranks above the OECD average, and well above the US, on mathematics performance of 15-year old students, based on data from the Programme for International Student Assessment (PISA) (OECD 2006b). Countries with a higher ranking than Australia include Finland, Korea and the Netherlands. Improving education outcomes does not always correspond with higher expenditure. Australia spends around US$ 7,500 per student per annum, in line with the OECD average but achieves above average outcomes. In contrast, the US spends around US$ 12,000 per annum but falls at the lower end of the PISA scale.
The Australian economy is currently operating somewhere near full capacity. In this macroeconomic environment further gains in labour utilisation are unlikely to come from policies that target aggregate demand. Instead, policies will need to focus on resource allocation and resource creation. Improving the skills of the Australian workforce is one such approach, given the positive link between education and workforce participation and productivity. Those with higher levels of education are generally more employable and able to earn higher wages than those without.
A high quality and responsive education system is vital to increasing skills. With the right policy settings, the Australian education system will deliver the workforce that Australia needs for future prosperity. It will be an education system responsive to the needs of students and employers. It will also improve the capacity of individuals to participate in society. This budget includes a comprehensive package of assistance to Australia's education system through the Realising Our Potential package that covers the university, vocational and school systems.
Immigration
With the economy at near full capacity and in the face of an ageing population, migration, with particular emphasis on skilled migration, continues to be a priority source of labour for Australia. As a result of net migration, one in four Australian residents is foreign born, the highest proportion in the OECD after Luxemburg and well above the OECD average of one in twelve (OECD 2004b). Net overseas migration has been increasing recently and reached a record high of around 125,000 per annum over the past few years, with most migrants being highly skilled.
Migrants tend to be younger, on average, than the resident population but they also tend to have lower participation rates. The Productivity Commission (2006) found that the average participation rates for all immigrant groups in 2004, was 62.1 per cent compared to 67.3 per cent for those born in Australia. The difference can be explained by compositional differences across the two groups in terms of education, location, gender, age and English ability.
Australia's emphasis on skilled migration will help lift total labour utilisation rates, however, as skilled migrants have significantly higher participation (82 per cent) than Australian born. Skilled migrants are, on average, more highly educated and of prime working age. By contrast, the participation rates for humanitarian settlers and those entering under the family stream are significantly lower, at 39.6 per cent and 57.9 per cent.
There is little evidence that migration adversely affects the labour market outcomes of Australian born workers, and studies have found that immigration has not resulted in higher aggregate unemployment. Employed immigrants worked an average of approximately half an hour longer per week than Australian-born workers based on data obtained from 1986 to 2001. The difference in hours worked can be explained by differences in age, industry and occupation of employment of migrant workers.
In recognition of the valuable economic contribution and high participation rates of skilled migrants, the size of the migration programme will increase by 8,800 in 2007-08 to up to 152,800 places. Of these additional places, 5,000 will be migrants in the skilled stream. This expansion will build on previous expansions of the skilled migration programme over recent years.
Migrants also add to general demand in the economy. Immigration programmes can selectively reduce particular labour market pressure points, but can also shift excess demand pressures to those parts of the economy where supply is relatively unresponsive — in particular, the housing market.