When economic liberal reform is well designed it can deliver higher employment rates and living standards and a more resilient economy. It also has the potential to widen the community’s social options (e.g. work/leisure and public goods).
However, some forms of economic liberal reform can (for a time) hurt poorer households. This is true of John Howard’s 2005/6 workplace and welfare reforms. Its supporters claim that it is the ONLY way to create and sustain jobs. And it is true that traditional Keynesian demand-side policies have only a limited role to play, as many of the employment problems we face are ‘structural’ in character rather than a product of aggregate demand deficiency. But are there other ways to improve Australia’s workforce participation without hurting the poor?
Over the last quarter of a century, successive Australian governments freed up and restructured the economy. But they did so one moderate step at a time and used various redistribution devices to cushion the social effects – a progressive tax structure, cash benefits (especially family tax benefits, which increased in real terms under successive governments), benefits in kind (such as Medicare) and, until recently, core elements of worker protection regulation.
This strategy of combining steady-as-you-go economic liberalisation with multi-dimensional redistribution enabled Australia to boost its productivity growth in the 90s, reduce its ‘headline’ unemployment rate to below 5% (a 30-year low) and keep the demon of inflation at bay – without greatly disturbing the overall distribution of final incomes.
With such a heartening historical experience behind him, and with clear evidence from the literature that deregulation starts to yield diminishing economic returns once markets reach a certain level of freedom, John Howard could reasonably have decided that, apart from some fine tuning, Australia’s tried and tested policy mix should be retained.
For a time this is what happened. In his first three terms of office, John Howard resisted pressures to radicalize his reform agenda. He had to. There was no obvious economic rationale for a shift in gear, the public mood was still less than fully receptive to big reform leaps and he lacked Senate control.
By the end of 2005, all that had changed. Firstly, wider public awareness of the prospective ageing of the population (hyped up more than a little by government and media), coupled with evidence of relatively low workforce participation rates in Australia (especially among those aged 25 to 54), provided a stronger economic and fiscal rationale for governments to address Australia’s ‘hidden unemployment’ problem. Secondly, by 2005, community values had become less friendly to egalitarian policies in the workplace – reflecting such changes as the fracturing of worker solidarity, the growing equity investment culture (which aligned workers’ interests more closely with those of companies), the cumulative effects of globalization in encouraging competitive individualism and the increasing community hostility to government hand-outs for able-bodied people in the buoyant economic conditions. Thirdly, and most importantly, the Coalition gained control of the Senate in 2004 – removing one big hurdle to radical reform.
In this new political and cultural environment, Howard was able to give freer rein to his ideological propensities – especially his dislike of trade unionism and worker protection regulation.
WorkChoices became operational in April 2006. In essence, it involves a shift from regulated awards and collective bargaining to individual contracts, and a marked strengthening of managerial powers over the deployment and remuneration of staff (e.g. hiring and firing, penalty rates, working times and access to foreign guest workers).
At the same time, the Howard Government has made welfare less accessible and more conditional, with much tougher penalties imposed for compliance failures (including ‘no-payment’ for up eight weeks), and it extended the new rules to many sole parents and people with disabilities, who will now be forced to look for part-time, low-skilled work. The fear of losing eligibility to welfare benefits will also make it more difficult for employed workers to exit from unsatisfactory jobs or, if retrenched, to reject lower-paid jobs. The net effect of the changes in the welfare system will be to further increase the potential market power of employers relative to vulnerable employees.
The new rules on unfair dismissals will give managers more flexibility in managing human resources and this should have a positive effect on productivity. On the other hand, the increased scope for downward wage-cost flexibility is likely to reduce average productivity. Apart from bringing more marginal workers into employment, it will have the same effect on industry as tailored tariff protection – lessening the urgency of improvements in workplace efficiency and helping to artificially prop up firms which are less efficient than the norm. The Howard reforms may also reduce the willingness of employers to provide work-related training for lower-paid workers. As to the effects of lower unionisation on productivity, the literature is inconclusive. While “bad” unions can interfere with efficient management decisions on resource management, good ones can have the opposite effect, leading to improved morale, trust, workplace harmony and team spirit.
In short, the Howard Government’s latest reform agenda is, on balance, unlikely to do much for productivity.
However, there is little doubt that it will help speed up the transfer of low productivity workers from welfare to work because it will allow employers to effectively pay them less, demand less predictable, more anti-social hours from them (without penalties or loadings) and fire them at will if they prove unsatisfactory. The Howard reforms will also put extra pressure on welfare recipients to take up the first available job.
In terms of its impact on the distribution of market power, Howard’s WorkChoices and welfare-to-work agenda should be seen as a fundamental break with the past. By markedly clawing back collective bargaining (even when wanted by nearly 100% of employees), by greatly increasing managerial autonomy, by transforming what was an indirect power to make labour laws (through an independent arbiter) into a direct power under the control of the Executive, by completely disempowering many workers and by fundamentally redefining the right to welfare, Howard has taken a big step towards (and even in some respects beyond) the US social model and retreated much further from Australia’s consensus-based ‘wage-earners welfare state’.
If international experience is any guide, Howard’s workplace/welfare agenda will inevitably lead to greater earnings inequality. Moreover, for most vulnerable workers (i.e. those without individual bargaining power) it will mean less income security, less say in the workplace decisions that affect their wellbeing (such as on working hours) and less capacity to achieve their desired work-family balance. All this will compound the problems many of them already face from ongoing structural and skill-biased technological change.
Leaving aside the effects of Howard’s reforms in reducing joblessness, an issue I return to later, Howard’s losers will all come from the poorer sections of the working population whereas the winners will generally come from much better-off homes. What will this do to aggregate utility? To assume, as many economic rationalists do, that a dollar’s worth of gain to one has the same utility weight as a dollar’s worth of loss to another, irrespective of their starting incomes, is quite simplistic. Surveys consistently show that people generally become happier when their incomes rise from low to median – but after that they do not get any happier as they get richer (unless they markedly out-perform their peers). So, even if winners outnumber losers, the Howard reforms will only be utility-enhancing overall if they have a large positive effect on per capita national income. Given the uncertain productivity effects of the reforms, this is unlikely even when one allows fully for the effects of the reforms on work participation. If, as I will now argue, the same job benefits can be obtained by other means without hurting the poor, the utilitarian case disintegrates completely.
Over recent decades, many social democrats (SD) gradually discarded the ‘old’ model of workplace regulation and passive redistribution (still dominant in a few continental European countries ) and replaced it with one which embraced many liberal elements and a greater emphasis on ‘active’ forms of redistribution.
The new SD model is ‘liberal’ in that it tries to ensure that (a) the regulatory framework is light enough to allow employers considerable flexibility in hiring and firing and in the structure of wages and (b) people of working age receive welfare benefits only subject to reciprocal work or training obligations.
However it departs from the Howard agenda in three key respects. Firstly, it is more tolerant of social and workplace regulation, where such regulation is the only effective way to protect important values such as employees’ right to bargain collectively and to control their working hours and family time.
Secondly it is more generous with compensation to workers who are forced by policy change into lower-paid jobs (e.g. it may incorporate a system of wage insurance or temporary wage supplements for older retrenched workers).
Thirdly, and most importantly, the SD agenda includes additional investment in ‘productive’ social programs – those which enhance human capital and help correct labour market imperfections (such as geographical immobility). Such programs are varied and seek to:
- correct early childhood disadvantages (such as through conditional grants, improved pre-school and child care , parental counselling, regular health visits to ensure childhood nutrition etc.);
- assist older school children and youth who are at risk of dropping out early from high school;
- improve access to key employment-enhancing public services like health, public education, housing and public transport in disadvantaged areas;
- facilitate adult training, retraining and life long learning;
- increase the work incentive structure for inactive low-skilled persons, such as through tax credits or more generous tax offsets;
- make work more family-friendly (e.g. more working time flexibility for employees, paid or longer unpaid parental leave and good quality and affordable child care assistance in the workplace),
- create new job opportunities for the low to semi skilled in under-resourced community and public sector services;
- improve the competitiveness of economically viable regions suffering temporarily from low job opportunities; and
- make it easier for people to relocate from non-viable (e.g. remote) areas.
There is no doubt that the social investment elements of the SD approach can deliver broadly the same aggregate employment outcomes as the Howard approach. Indeed, they have one big advantage. The Howard policy framework offers a ‘quick fix’ to the ‘hidden unemployment’ problem but it does nothing to overcome the underlying barriers to employment resulting from early childhood and teenage environment, poor education, inadequate training, geographical immobility and low work incentives. It attacks the symptoms of joblessness after they have occurred. By contrast, SD goes back to the root causes and tries to break down the barriers to upward income mobility.
What about its effect on productivity? I noted earlier that the Howard reforms had little to offer on this front. SD should perform no better or worse in net terms. On the one hand, it will require higher taxes and, per se, this may well impact adversely on risk-taking and work effort. On the other hand, SD spending programs should generate productivity benefits. Studies have found that social spending which is specifically targeted at improving the income earning potential of the low-skilled and disadvantaged is positive for productivity growth and pays for itself over time.
The SD model, with its mix of market-friendly policies, compensation and social investment, has been applied for a long time by Scandinavian and many smaller European governments. Historically they have delivered productivity and employment outcomes broadly similar to the USA, UK and Australia – but with lower levels of inequality and higher levels of income mobility. The experience of the UK over the last decade is also interesting. The Blair Government retained a good deal of the Thatcher liberal regime but it also did two other things. It partially re-regulated (e.g. it increased the minimum wage substantially, albeit from a low starting point); it improved work incentives for the low-paid (through earned income tax credits); and it considerably increased social investment in child development, education, health and housing, principally targeted at the disadvantaged. The result was a strong economic and employment performance but with a halving of poverty rates between 1997 and 2006.
While the nation’s total employment and economic ‘cake’ would increase by a similar amount under both the Howard and SD agendas, the net gains would be very differently distributed. Under SD, the losers would be relatively well-off taxpayers – at least until the social programs have had time to ‘pay off’ and enhance the revenue base. Under Howard, the losers (in income, opportunity and quality of life) are low-paid workers – at least until the benefits start to trickle down to them. The losers under Howard are almost certain to have a higher marginal utility than the losers under SD. On utilitarian (aggregate utility) grounds, therefore, SD seems superior.
Many doubt that the SD model can be successfully transposed to Australia (the Scandinavian version has evolved over decades and in a different cultural environment). Even those who accept that it might work in theory warn of the pervasive risk of ‘government failure’ in implementation. Such fears would be justified if a government were to try to quickly embrace the Scandinavian system lock stock and barrel. But no one is proposing that. Most economists (like the author) are only suggesting that a few of the more successful elements of the model be gradually adopted over time.
SD allows the benefits of economic reform to be more widely shared than the Howard formula. But equality is only one dimension of ‘equity’. There are two other dimensions highly prized by Australians. They are ‘personal freedom’ and ‘self-reliance’.
On the criterion of personal freedom, there are pluses and minuses for both agendas. The Howard agenda is superior in that it allows an individual to retain what he or she earns or produces and to choose more freely from the consumption possibilities in the market. But freedom is also about capability or ‘positive liberty’ – the ability to actively participate in society and attain one’s full potential. From this broader ‘capability’ viewpoint, the SD strategy offers a better outcome: it widens the range of longer term employment opportunities and choices available to low-paid workers and jobless workers and makes it easier for them to rise up the income ladder over their lifetimes.
On the other hand, the SD agenda does involve more government paternalism and therefore scores lower on the criterion of self-reliance. For those of libertarian inclination, this will weigh heavily against it.
It is not clear how such value conflicts will ultimately be resolved. We may see mainstream Australia lose patience with the state of the social and environmental infrastructure and with the growing inequalities of opportunity and demand. This could mean that governments would give these problems higher priority, even if it means higher taxes and government borrowing. But it is equally possible that the steady individualisation of Australian values will continue unabated – to the point where it will be hard for any leader or political party to reverse.
Australia needs to remove unnecessary barriers to workforce participation so as to ease the fiscal and economic pressures of an ageing population. Howard’s workplace and welfare agenda offers one policy route to higher participation, but it relies overwhelmingly on market forces to achieve its goals, so the costs and benefits are unevenly spread. The divisiveness it is creating could sow the seeds of its own destruction.
Howard’s way is not the only way to improve workforce participation rates. There is an alternative, equally effective and in many respects more sustainable policy agenda which retains some of the market friendly ideas of Howard but throws out the harsher ones and instead relies heavily on social investment.
The two strategies produce different sets of winners and losers and appeal to sharply different social values.