Posted: April 15, 2005

Wage subsidies - more nonsense!

In the Melbourne Age today Misha Schubert's article Six-month wage subsidy aimed at chronic jobless says that "Employers would be paid wage subsidies for up to six months to hire the long-term jobless under a new plan to cut unemployment queues. The second part of the strategy, to be discussed by cabinet today, proposes harsher treatment of long-term dole recipients who are "job avoiders", imposing extra obligations to get them looking for work."

The Government realises that its hubris about Australia being close to 'full employment' is not washing given the evidence that there remains around 1.8 million workers in Australia who could provide more hours of work if there were enough jobs. It is also fairly offensive for the Prime Minister and the Treasurer to be exhorting older workers to stay work longer when increasing numbers of the older, experienced workforce have been forced into retirement (or pension recipence) by the misconstrued macroeconomic policies of the Government.

With on-going economic growth, the evidence is also mounting that the long-term unemployed (LTU) do get jobs. I am just about to complete a paper which shows there is strong irreversibility in long-term unemployment if there is sufficient jobs growth. The reason people get stuck in long-duration unemployment is because the economy fails to produce enough hours of work to match the desires of the labour force.

Apparently, the Government is about to unveil its new strategy, which if Schubert is right, will further seek to divide and conquer the most disadvantaged workers in our community. Schubert says:

The new strategy on cutting the chronic-jobless numbers would divide people into three groups: those deemed to be genuinely looking for work, "job avoiders", and those in-between. The serial avoiders would have to meet extra mutual-obligation requirements such as Work for the Dole.

Wage subsidies are a labour demand measure (unlike labour supply policies like tax credits) and are paid to the employer to reduce the costs of hiring and and to encourage firms to substitute in favour of the long-term unemployment (in this case). In other words, they assume that the unemployment is "classical" in nature rather than deficient-demand. The evidence remains overwhelmingly that the long-term unemployed are unable to get jobs because they are at the bottom of a queue that has formed because there are not enough jobs. The unemployment is demand-deficient in nature and can be traced to an inadequate level of net government spending (given the private spending plans). Why would a firm take on an extra worker if there was inadequate demand for its product?

The rationale for wage subsidies is that the LTU need some competitive break so that firms will hire them, given that they are considered to be less productive (higher cost) with less skills. By lowering relative costs, firms have an incentive to use the subsidised labour (the LTU) instead of the more expensive production inputs (skilled labour or capital) which locks the private sector into 'creating' low productivity jobs.

Wage subsidies are not an effective way to create sustained jobs in the economy for the most disadvantaged workers. First, they encourage firms to displace other workers in their employment of the LTU worker.

Second, if there are enough jobs firms will seek workers themselves and offer appropriate training to redress any job-specific skill mismatch. This was the practice in the full employment period between 1945 and 1975. Wage subsidies encourage what economists call 'deadweight losses' if the employer was going to have created a job anyway but takes the wage subsidy.

Third, a common experience of past wage subsidy policy experiments is that the firms abuse the policy by churning the workers through the program - hiring the cheaper worker and sacking them at the end of the subsidised period and then taking on another subsidised worker.

Fourth, the extra admimistration that is involved in enforcing compliance and making sure that firms do not create 'bogus' jobs and take the subsidy where jobs do not exist and other known issues with wage subsidies is usually very significant and lowers the effectiveness of the job creation potential of the policy.

Fifth, with wage subsidies, you are really running an implicit and destructive industry policy by allowing high-cost, low productivity firms room to stay in business. They will never be forced to restructure their processes to meet competitive productivity goals if they can indulge themselves in wage subsidies.

A far better approach is to ensure the economy has enough jobs available at all times for those who want to work. That is the rationale of the Job Guarantee. The Government should create value-adding jobs in local communities and make the offer of this work unconditional at the Safety Net wage. Anyone who is unable to find work is always assured of a job. All the problems of wage subsidies are then avoided. Private firms, of-course, benefit because they have a working pool of labour that they can always hire from when they have sufficient demand for their output to create extra work. It is a win-win.

Blog entry posted by bill