The work/welfare nexus

Jeff Borland

Department of Economics

University of Melbourne

Presentation to The Conversation Conference on ‘The future of welfare’, October 30

Overview

• What is happening in the Australian labour market?

• Why is the rate of unemployment increasing?

• But what about ‘xxxx’?

• Policy options

- 1) Macroeconomic policy

- 2) Unemployment policy - The announced settings

- Limited unemployment benefits

- Job search requirements

- Public sector work experience programs (WfD)

- 3) LMPs - What is a better way?

What is happening 1? The rate of unemployment

3

3.5

4

4.5

5

5.5

6

6.5

7 Fe

b-0

8

May

-08

Au

g-08

No

v-08

Feb

-09

May

-09

Au

g-09

No

v-09

Feb

-10

May

-10

Au

g-10

No

v-10

Feb

-11

May

-11

Au

g-11

No

v-11

Feb

-12

May

-12

Au

g-12

No

v-12

Feb

-13

May

-13

Au

g-13

No

v-13

Feb

-14

May

-14

Au

g-14

Rat

e o

f u

ne

mp

loym

en

t

What is happening 2? E/POP and LFP

59

60

61

62

63

64

65

66

67

Feb

-08

May

-08

Au

g-08

No

v-08

Feb

-09

May

-09

Au

g-09

No

v-09

Feb

-10

May

-10

Au

g-10

No

v-10

Feb

-11

May

-11

Au

g-11

No

v-11

Feb

-12

May

-12

Au

g-12

No

v-12

Feb

-13

May

-13

Au

g-13

No

v-13

Feb

-14

May

-14

Au

g-14

Pe

rce

nta

ge o

f p

op

ula

tio

n

LFP rate

E/POP rate

Why is the rate of unemployment increasing? It’s the business cycle

-4

-2

0

2

4

6

8

10

-3 -2 -1 0 1 2 3 4 An

nu

al r

ate

of

gro

wth

in G

DP

Annual change in rate of unemployment

Okun’s relation: 1978/79 to 2013/14

Square = post qtr3/2008

The maths on the business cycle and unemployment

• Average rate of growth in GDP since 2008/qtr3 = 2.45%

• Effect on rate of unemployment

• = (Years)*(Gap in rate of growth in GDP per year)*(Effect of 1% growth in GDP on rate of unemployment)

• (5.75)*(0.75)*(0.40495) = 1.76 percent

• Compared to actual increase in rate of unemployment since GFC of 1.9 percent.

But what about ‘xxxx’ 1? Youth unemployment

0

5

10

15

20

25

30

Feb

-197

8

Mar

-197

9

Ap

r-1

98

0

May

-198

1

Jun

-198

2

Jul-

1983

Au

g-19

84

Sep

-198

5

Oct

-198

6

No

v-19

87

Dec

-198

8

Jan

-19

90

Feb

-199

1

Mar

-199

2

Ap

r-1

99

3

May

-199

4

Jun

-199

5

Jul-

1996

Au

g-19

97

Sep

-199

8

Oct

-199

9

No

v-20

00

Dec

-200

1

Jan

-20

03

Feb

-200

4

Mar

-200

5

Ap

r-2

00

6

May

-200

7

Jun

-200

8

Jul-

2009

Au

g-20

10

Sep

-201

1

Oct

-201

2

No

v-20

13

Rat

e o

f u

ne

mp

loym

en

t

15-19

20-24

25-64

But what about ‘xxxx’ 1? Youth employment

15-19 years 20-24 years 25-64 years

1989/qtr3 50.4 76.8 69.6

1993/qtr3 39.4 67.5 66.9

2008/qtr3 49.2 76.1 75.4

2014/qtr3 43.1 69.7 75.2

But what about ‘xxxx’2? Long-term unemployment

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

0 2 4 6 8 10 12

Rat

e o

f lo

ng-

term

un

em

plo

yme

nt

Rate of unemployment

2008/4

2014/3

1993/3

But what about ‘xxxx’3? Regional dispersion in unemployment

Source: Matt Cowell, ACTU – Analysis of ABS 6291.0.55.003

Policy options 1) Macroeconomic policy

• Main solution is to achieve rate of economic growth above 3.2 percent per year.

• How to do this?

• a) Interest rate policy

• But the current dilemma: Two targets and one instrument

• b) Budget policy

• The importance of unwinding the deficit slowly

Policy options 2) UE policy - The announced settings

• a) Unemployment benefits

• Trade-off between:

- Providing income security; versus

- Potential adverse effects on incentives to engage in paid work.

- Also, the costs of monitoring job search.

• Job search does not create extra jobs – Those pushed into employment may simply be displacing other unemployment from gaining jobs.

• About getting the balance right.

• i) Limited unemployment benefits

• The evidence:

• Increases job search effort, and hence rate of movement into employment; but

• Reduces income security; and

• Reduces quality of job attained -> Lower job duration.

• ii) Job search requirements

• Increase incidence of job search, and hence rate of movement into employment

NSA/YA(o) payment recipients – Difference in proportion of treatment and matched control groups exiting payments by month after Job Seeker Diary commencement (New spells commencing July 1997 to June 1998)

-.01

0

.01

.02

.03

.04

.05

.06

trea

tme

nt e

ffect (p

rop

ort

ion e

xite

d)

1 2 3 4 5 6 7 8 9 10 11 12months since JSD commencement

• ii) Job search requirements

• Increase incidence of job search, and hence rate of movement into employment; but

• Costs of monitoring for government plus costs of sorting applications by employers;

Socially optimal number of job applications

Number of job applications required

Marginal cost of monitoring and sorting applications

Marginal benefit to society from increased probability of obtaining a job

Optimal number of applications

• ii) Job search requirements

• Increase incidence of job search, and hence rate of movement into employment; but

• Costs of monitoring for government plus costs of sorting applications by employers; and

• Evidence that jobs obtained by unemployed persons who are required to engage in job search come at the expense of other unemployed job seekers - Shuffling the queue.

• b) Public sector work experience programs • ‘…our analysis suggests subsidised public employment

programs are relatively ineffective’ ‘the least successful programs are public sector jobs programs’

David Card, Jochen Kluve and Andrea Weber - From a review of 97 studies of labour market programs in the Europe and US (Economic Journal, 2010)

• Commenting on direct job creation by the public sector in a 1998 paper written for the Reserve Bank former OECD Head of Labour and Social Affairs John Martin wrote ‘The evaluation literature shows fairly conclusively that this measure has been of little success in helping unemployed people get permanent jobs in the open labour market’.

John Martin (Former OECD Head of Labour and Social Affairs) commenting on direct job creation in a 1998 paper written for the Reserve Bank Annual Conference

• ‘The evidence from both North American and European studies indicates that government employment and training programs have at best a modest positive impact on adult earnings.’

James Heckman, Robert Lalonde and Jeff Smith - A review of 75 programs in the US and Europe (Handbook of Labour Economics, 1999)

Proportion of NSA payment recipients exiting NSA payments – Difference between WfD participants and matched control group – Aged 18 to 24 years - By month after commencement of WfD spell

-14

-12

-10

-8-6

-4-2

0

Pe

r ce

nt e

xite

d N

SA

pa

ym

ent

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18Months after commencement of WfD spell

• Why don’t public sector work experience programs work?

• No improvement in skills

• No pathway to a permanent job

• Lock-in effects

• Scale of intervention

3. LMPs – What is a better way?

• Initial phase of job search monitoring and counselling

• Use private sector wage subsidy program for unemployed with higher level of job readiness

• Use training + job placement for unemployed with higher level of disadvantage

- Must link training to a job

- Job with pathway to permanent employment

- Value of local decentralised schemes

- Funding via an ARC type scheme

• Value of early childhood interventions

• Thank you

• If you would like to be on mailing list for my monthly Labour Market Snapshot – Send me an email: jib@unimelb.edu.au