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Friday lay day – wage subsidies do not work

Its my Friday lay day and a shorter blog day than usual. Today, it was revealed that one of the Australian government’s premier measures to combat unemployment has failed. Not just a small failure. Rather, the data just released shows the plan is a disaster. It was always going to be. The supply-side measure to provide wage subsidies to firms to take on unemployed workers who were above 50 years of age and were enduring entrenched unemployment failed because it doesn’t address the problem. Mass unemployment arises not because wages are too high relative to productivity (the mainstream myth) but because there is not enough sales to justify firms putting on extra workers. The lagging sales are because there is deficient total spending. Firms will not employ more workers if they cannot sell the extra output, no matter how cheaply the workforce becomes. The data we were apprised of today categorically supports that view. The data accompanying such programs always supports the view that demand is the problem not supply.

Wage subsidies do not work, do not work, do not work

How many more lessons do the supply-siders need?

As the newly-elected conservative Federal Government in Australia was elected in September 2013 it started to hack into public spending and the unemployment rate has risen sharply since. It is now higher than at the peak of the GFC upturn.

To cover its tracks it claimed that it was prioritising the creation of jobs through a wage subsidy scheme known as – Restart – which provided financial incentives of up to $A10,000 for up to two years to any firm that employed an unemployed person who was above 50 years of age and who had been on income support for more than 6 months.

The workers had to be “employed for at least 30 hours per week” to attract the full subsidy.

The Government allocated $524.8 million over four years to the scheme and projected that 32,000 workers would be employed per year for each of the years of the funding as a result of the initiative.

The scheme was introduced on July 1, 2014. Official data from the Senate estimates show that in the first five months of the scheme just 510 unemployed workers have been given jobs under the scheme of the 175,000 Australians who are eligible.

The official estimates suggest that “the program could fall 95 per cent short of the government’s target.”

Wage subsidies typically fail and are an inferior way of stimulating employment. They are motivated by the flawed idea that mass unemployment is the result of excessive real wages relative to productivity and if the wage that the firm has to pay is cut – either directly, by the workers accepting a lower wage or indirectly, by the government paying some of the wage – then firms will employ more workers.

Two obvious points are overlooked, which always conspire to undermine such wage subsidy schemes.

First, firms will not employ workers no matter how ‘cheap’ they become if the output that the workers might produce cannot be sold. Firms do not produce to generate infinite stores of inventory.

Second, firms might try to substitute subsidised workers for non-subsidised workers as long as the subsidy is in place, which renders any net employment effect negligible. In this case, there also appears to be no substitution occurring because firms are laying workers off generally as total spending is weak.

The better public policy way to increase employment is to create jobs directly via large scale public employment schemes.

There is a litany of failed wage subsidy schemes.

See this article from Joseph Stiglitz (January 1, 2015) – The politics of economic stupidity – where he says:

The malaise afflicting today’s global economy might be best reflected in two simple slogans: “It’s the politics, stupid” and “Demand, demand, demand” …

The near-global stagnation witnessed in 2014 is man-made. It is the result of politics and policies in several major economies-politics and policies that choked off demand. In the absence of demand, investment and jobs will fail to materialize. It is that simple.

Unfit for public office

Regular readers will know of my contempt for the former Federal Minister of Immigration Scott Morrison, who is now Minister for Social Services. His brief has shifted from treating refugees cruelly to imparting his own particular form of nastiness to the unemployed and other disadvantaged citizens in this nation.

Today, two snippets reveal his contemptuous approach to public office. First, there was this article in the Melbourne Age (January 2, 2015) – A taxing tale of two peak bodies – which reports that:

1. In one of his first acts as Minister for Social Services, Morrison cut funding to the Blind Citizens Australia (BCA), Deaf Australia, Homelessness Australia and Down Syndrome Australia, which are groups that provide advocacy and support to disabled and homeless people.

The rationale for the cuts – the public statement – centred on the need for fiscal austerity.

But without these organisations, the plight of these disability and disadvantage groups remains below the public radar and the Government can then all but ignore them. So the public can never find out about the government neglect for those in need.

But the article also revealed that the other public body carrying the initials – BCA – in this case, the – Business Council of Australia – which “represents the chief executives of approximately 100 large Australian corporations” (aka ‘the top-end-of-town’) received a very lucrative gift from the Government before Xmas.

The article notes that a week before Morrison cut funding to the disability and homeless groups:

… the government had back-flipped on a proposed tax avoidance reform (Section 25-90) entailing some $600 million in tax deductions that multinational companies could claim on interest on their debts in offshore subsidiaries.

As it turned out, the “stakeholders” with whom the government had “consulted” before it made its decision were the big audit firms (whose best clients are the multinationals) and assorted peak bodies such as the Minerals Council of Australia.

Austerity, it appears, doesn’t apply to some. As usual.

The article documents a range of other concessions that the Government has extended to big business since its election in 2013 while hacking into the support provided to groups, which provide services to the poor and disadvantaged.

Second, , we learned today that Morrison, in his previous role as Minister for Immigration and Border Security has tried to bully local governments who oppose his vicious approach to refugees. In this Melbourne Age article (January 1, 2015) – Scott Morrison threatens to stop citizenship ceremonies by Moreland City Council – we learn how the former Minister has threatened a Mayor over her stance against refugee policy – to wit, locking them up with their children on remote Pacific Islands in deplorable conditions and allowing bullying security guards to murder and beat them.

On Australia Day each year (January 26), local governments hold citizenship ceremonies around the nation. One local government area in inner-Melbourne, which has a policy of welcoming refugees and opposes the government’s brutal approach wrote to the Minister informing him that they would not read:

… out a ministerial message during the ceremonies.

The message is meant to be read before official speeches.

It turns out that the Ministerial message is a personal political statement from the Government and is not required under the law that governs citizenship ceremonies. It is thus gratuitous politicking.

The Mayor has refused to include the message in the upcoming ceremonies in her jurisdiction. She told the press that she did not want to be:

… forced to act as a mouthpiece for a government whose policies this council does not agree with … Many citizens-to-be at Moreland are former asylum seekers … I do not feel comfortable acting as a spokesperson when it comes to personal messages from the minister. I feel that the reading of a message from the minister in fact politicises what should be an apolitical occasion, as does threatening to remove Moreland’s ability to confer citizenship.

The Minister’s response? He claims it was his “prerogative” to enforce the reading aloud of his political message and he told the Mayor that:

If you fail to comply with this request by January 10 2015, I will withdraw your authority, and that of the deputy mayor and general manager, to preside at Australian citizenship ceremonies …

Nice! A bully boy who claims to be implementing his Christian values.

Time for Jazz Reggae Meltdown

To restore equinimity after reading all that we need some melody.

Here is Ciyo & YolanDa Brown’s Jazz Reggae Meltdown with Ciyo Brown on guitar and YolanDa Brown on tenor sax, with an all star supporting cast of British jazz-reggae fusion musicians.

This was recorded at the Hideaway Jazz Cafe in Streatham (London) on April 13, 2013.

Its mellow – which is a necessary tonic sometimes when dealing with matters of economic and social policy.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

This Post Has 15 Comments

  1. That Restart didn’t work very well during the second half of 2014 isn’t too surprising because unemployment was rising during that period, and when unemployment rises, employers normally dispose of their least productive employees first: the unskilled, youths, those near retirement, etc. I.e. to really gauge the effectiveness of Restart, we need to know what would have happened to over-50s unemployment ABSENT RESTART. Unemployment amongst the over-50s might have risen by 10,000 (which would mean that Restart was a huge success). We just don’t know.

    Conversely, given falling TOTAL unemployment, unemployment amongst youths, the over-50s etc normally falls relatively fast. And that tempts the “anti employment subsidy” lobby to claim that lack of AGGREGATE demand is the root and only problem. But a weakness in that claim is that in taking on primarily the less productive, employers soon start running short of suitable / skilled labour, and inflation rears its ugly head, which puts a block on further rises in demand.

    Thus I favor a COMBINATION of increased demand and employment subsidies: subsidies which keep unemployment amongst vulnerable groups at about the same level as exists for prime aged skilled workers.

  2. I’m not certain about which years were the “peak age” years. It is based on demographic data which shows that the working age population is peaking, or like Japan, have already peaked, therefore the consumption by that cohort will start declining. It was 2006 in the USA. It’s about now in Australia and China and according to the UN all the OECD economies will be feeling the effects well before 2020.
    Therefore jobs are going to decline anyway, while age and healthcare will rise. The government cannot change it so it will have to find how to adjust. They have to adjust to deflation. Deflation is here to stay.

  3. Considering only 510, out of the projected 32,000, took up of the Restart wage subsidy, I would propose that we have an excellent idea of “what would have happened to over-50s unemployment ABSENT RESTART”.

  4. The current federal government is unfit for public office,lock stock and barrel.

    That was obvious when Hokey brought in his budget to fix the budget which was broken,or so the story goes. The fact that this dangerous nonsense was largely accepted by those docile,domesticated animals, the Australian public (aka sheep), is a good indication of where we are heading as a nation.

    The fact that the opposition,so called,refused to pull the pin on the government at that time by blocking supply and forcing a double dissolution, is an indication of just where we stand with the alternative government.

  5. These subsidies are just a way of putting money in employers pockets. Agreed.

    That’s not necessarily a bad thing but there are better ways. Like looking at payroll taxes which suddenly kick-in when turnover/wage levels reaches a certain limit. $750,000 on wages in NSW for example.

    That doesn’t make a lot of sense, economically. It is a tax on jobs -effectively. We don’t need those taxes right now, of course.

  6. Doesn’t work for the economy.
    Austerity works for those few who benefit directly in the short term?
    Not sure if it is a win for anyone long term.

    I am sceptical about NDIS because my impression of the PLI scheme is that we have now got a tax paid to the insurance sector on any community activity from CWA to charity to community celebrations and culture. PLI is reducing our community capacity to help each other. I saw an insurance rep speak at a presentation for groups who were volunteering to help the elderly and he suggested that they needed product liability insurance in case someone hurth themselves on a staple in a brochure and personal liability insurance in case someone fell off a ladder – in addition to pli.

    Is NDIS just the funding shifting from actual services provided to an insurance scheme which funds those same entities without really providing anything to people who need services?

  7. “”” But a weakness in that claim is that in taking on primarily the less productive, employers soon start running short of suitable / skilled labour, and inflation rears its ugly head”””

    Only there is no real ‘shortage of skilled’ labour in ANY major industry. Especially Australia based on the number of graduates at university level or in trades courses.
    For this statement to be true it assumes a large divergence from the assumed starting conditions for capacity related inflation to occur.

    Perfect example is IT + america. In fact it onlyreinforces EXACTLY what Bill is saying.

  8. Having worked in Employment Services I found most employers that had a vacancy really weren’t too concerned about the subsidy as we were filling the position. If I was creating a position for a Job Seeker then they were more likely to look at the subsidies.
    I think it is up to the the ec to work with the employer to create new positions that will help the business owner, and offer the subsidies to help set up the job.
    There is no use saying the subsidy wasn’t taken up, providers need to focus on showing the business owner how placing theperson will help their business, the sudsidy will not get nor create a job.

  9. Bill,

    The monopolisation (or oligopolisation) of capital continues. The top oligarchs are getting much richer. The biggest transnational and conglomerate corporations are getting bigger, absolutely and relatively. More and more capital ownership is being concentrated right at the top . Neoliberal policies, supply side nonsense and “Austerity” policies are symptoms of this capital concentration which amounts to a crisis of capital accumulation. This is the real phenomenon. This is the real problem. It’s a dynamic inherent to unfettered capitalism. This has been known since Marx wrote and I know I am not telling you anything new.

    I think we are at a stage in history where we must recognise that capitalism is inherently unreformable. We’ve tried that and it is not a permanent solution. Reform is subject to rollback, global labour arbitrage and the natural re-concentration of capital. Capitalism will always exploit the poorest and the weakest and do so very savagely. Witness the Apple workers in China, the Nike workers, the Reebok workers, the Bangladeshi garment workers, the Jack Abromoff CNMI (Commonwealth of the Northern Mariana Islands) scandal and so on. The list just goes on and on right through the whole history of capitalism. I am sure you have read Engles’ historic “The Condition of the Working Class in England” as I have.

    Capitalism is unreformable. We might as well ask a tiger to become a vegetarian. Or ask Scott Morrison to become a nice guy. These things are simply not going to happen, ever.

    Capitalism has to be replaced by a new system or else we will collapse civilization and very likely go extinct. Capitalism is totally inimical to the environment. Not only are the oligarchs not the least interested in protecting the environment, but also the internal dynamics of capitalism, the credit system, the profit motive, the concentration of wealth and power and concomittant destruction of democracy are all inherently destructive of the environment. Capitalism cannot function in any way other than by an destroying the environment. This is the reality we have to confront.

  10. It’s interesting (at least to me) that my reaction to jazz is widely varied. For example, I really enjoyed that piece “Jazz Regae Meltdown”. I even enjoyed the Sax playing and I normally don’t like the sound of the saxaphone at all. I usually find the saxaphone any of braying, squeaky, fuzzy and even “f*rting” depending on the notes being hit and the skill of the player. The saxaphone is sometimes termed “an ill wind that nobody blows good”. This has also been applied to the oboe but I disagree there.

    I also enjoy some three piece jazz with pianist, double bass and drums (snares mostly). I often like jazz bands that include “vibes” (vibraphone ) and very often I like many styles of music that strongly feature instruments from the struck idiophone family. For example some Indonesian music (I don’t know the style name) I much like. Strangely, I like “classical” Indian music too and listening to Russian Orthodox bell ringing and Russian Orthodox Church choirs (the deep bass in wonderful) and Gregorian chants.

    On the other hand, I detest big band jazz, brass band jazz and dixie jazz. I reserve a special hatred and loathing for dixie jazz and 1920s jazz. I absolutely hate it. I hope I don’t offend anyone by saying that.

    I think partly my liking of musical style in jazz is more affected by the instrument mix than my liking of say orchestral classical is affected by the instrument mix. Brass in jazz bands I mostly hate. Yet brass in much orchestral music is fine to me and orchestral trumpet well played can be heavenly. Yet again, I really dislike jazz trumpet playing.

    Can anyone think of theories for reactions like this? I think the actual timbre and “sound colour” of the instrument can affect me just as much as the actual notes, intervals, chords, structure etc. I can accept dischordance in music as well as conchordance (correct term?).

    In popular music I lean to blues, rock, hard rock, acid rock, (but not much heavy metal), and bluegrass (strangely to me I like it). I most generally hate hate disco, rap and dubstep. Though I can point to the odd song I like in rap or substep. BTW I am 60 so no doubt a person of my era in some ways.

  11. Ralph, your comment would have been that much stronger if Bill had posted about how Restart had had huge takeup yet employment had still fallen. We don’t really need to know what would have happened to over-50s unemployment without Restart since it cannot have had much impact given its low takeup. Worst case, unemployment would have been 510 people higher, right?

  12. ‘Second, firms might try to substitute subsidised workers for non-subsidised workers as long as the subsidy is in place, which renders any net employment effect negligible.’

    For me that’s the whole point of a wage subsidy scheme. It’s not about economics, it’s about social inclusion. I volunteer for an organisation which helps to get disabled and disadvantaged people into work here in the UK and many of our clients have such lonely and isolated lives that having a job would be a massive boost to their morale and confidence…and social acceptance. They just need a chance, someone to have a bit of faith in them…as do I by the way – I’m 54 years old, have Asperger’s syndrome, and have never had a job.

  13. Lee – I think you are missing Bill’s point. He is saying that this “social inclusion” “subsidized” hiring method is misguided. Because it will lead to other people being fired & socially excluded – which is surely not your aim!

  14. Lee – I think you are missing Bill’s point. He is saying that this “social inclusion” “subsidized” hiring method is misguided. Because it will lead to other people being fired & socially excluded – which is surely not your aim!

    This is the point I’m making; the social exclusion needs to be shared out more. A wider range of people need to experience periods of unemployment so that people like myself will at least have some relatively short periods in employment when we might be able to make the social connections which are so vital to our emotional, psychological, and physical wellbeing. The people who will be displaced by a wage subsidy will probably already have these vital social networks in place and therefore are more able to cope with unemployment.

    I’m 54 and have never had a job; you can’t imagine how lonely and socially isolated I am. If a wage subsidy paid to an employer is what it takes for him to consider employing me then I’m going to support it.

  15. This is the point I’m making; the social exclusion needs to be shared out more.

    I agree with you that this could be more just – if there “needed” to be social exclusion at all, which you seem to assume, very, very wrongly. Why not just decide “no such imposed social exclusion, period, forever, for anyone”? You are asking for too little. A guaranteed job offered by the only entity that can do this, the government, makes this kind of social exclusion permanently zero for everyone. And it makes everyone more prosperous.

    As is not often enough emphasized – one cannot repeat Keynes’s & Wigforss’s words on this topic often enough, the idea that a guaranteed job will mystically make societies poorer (rather than richer of course) is something that belongs in an insane asylum, something that nobody could say if they understood what they are saying.

    But full employment most often is just not how societies are run – they are instead run by a wealthy class that acts to increase its relative wealth and power. The colossal economic and social, individual costs counts for nothing. Having the streets of prosperous countries filled by homeless people, when there were none before – and having people forget this fact – is the usual choice made. Bill’s point is that wage subsidies are a game of musical chairs, which is completely unnecessary, a sop, a diversion, that is used by the wealthy class to prevent real change, to continue this ludicrous and disgusting situation.

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