Jeff Lawrence: Boosting Labour Supply

Address to the 2008 Economic and Social Outlook Conference.

An ageing Australian population, a burgeoning China, and a carbon-constrained world combine to put the squeeze on Australia’s economic capacity over the next decade or two.
 
Even allowing for global emissions constraints, China’s strong sustained ‘catch-up’ growth will underwrite expansion of Australian commodity exports for many years.
 
The Chinese demand will not be limited to our commodities – prospects are similar for Australia’s knowledge intensive services exports too.
 
With natural gas, coal and iron ore, so too go education, health, financial and business services.
 
Australia’s capacity to meet that demand will be determined in large measure by our success in securing sufficient suitable labour.
 
That is, we need to boost labour supply.
 
To this end, we can:
1. encourage and assist people not in the labour force to join it;
2. raise the skills and capacities of persons presently in the labour force; and
3. have recourse to migration – prioritising permanent migration.

Labour Force Participation
There are numerous policy options for encouraging people who are not in the labour force to join it, and to keep people in the labour force when they are at risking of dropping out.
 
First things first – is making work pay.
 
Minimum wages are critical.  The return from work relative to its opportunity cost – the level of social security benefits – is a fundamental consideration at the bottom end of the wages distribution.
 
The costs of working – transport to and from work, clothing, childcare, and incidentals – must be met out of the gap between wages and social security income, with something left over to provide a real return from work.
 
WorkChoices, of course, ostensibly sought to increase employment by cutting the return from work at the bottom end, by removing loadings and allowances.

Fortunately, with the passage last week of Labor’s transitional Bill to ban new AWAs and begin award modernization, the first steps towards dismantling WorkChoices have been taken.
 
WorkChoices ignored the fact that wages are both a cost to the employer, and an income to the employee.
 
A naïve-economics view says that cutting wages will raise demand for labour and reduce its supply.
 
On the available international evidence, minimum wages would have to be cut a lot, to get just a little more employment in low paid jobs, and doing this would leave low paid workers as a whole worse off.
 
In a capacity constrained economy such as we have now – where employers are already experiencing labour shortages – cutting minimum wages doesn’t make sense.
 
The effect would be to reduce incentives to work and thereby reduce labour supply without impacting at all on employers’ demand for more workers.  This is the opposite of what should be done to boost labour supply by making work pay.
 
More decisions like the last one from the Fair Pay Commission will undermine this effort, by eroding both the real value of minimum wages and the differential between returns from work and returns from social security support.
  • A year ago the AFPC delivered increases of $10.25 and $5.30 a week to low paid workers
  • 96% of minimum wage workers suffered a decrease in their real wages as a result of that decision
  • Taking both AFPC decisions together, 62% of minimum wage workers have had a real wage reduction
  • Allowing for the impact on the CPI of changes to the Child Care Tax Rebate, 100% of award reliant workers have had a real wage cut occasioned by the AFPC
  • Minimum wages have fallen relative to average earnings under the stewardship of the AFPC
  • This during the longest economic boom on record
  • No sharing of the fruits of prosperity for low paid workers resulted from those decisions
  • There is a view, of course, that social security recipients are on easy street and that a widening of the incentive to work should come from the application of the big stick with a slashing of social security payments.  This would enable low wages to be cut too, without reducing the differential between wages and social security.

    This is not a view I share, and in my judgment not one a fair society should embrace.
     
    To succeed in boosting labour force participation, Australia needs first and foremost a decent increase in minimum wages from the next decision of the Fair Pay Commission, to maintain the reward from work relative to social security.
     
    To make work pay.
     
    The ACTU claim for a $26 a week pay rise – that’s just $5.20 a day less tax – is affordable and appropriate. 
     
    Other measures that will encourage higher participation, make work pay and boost labour supply include:
  • paid maternity leave consistent with our international obligations;
  • more (and more affordable) child care places;
  • family-friendly employment provisions; and
  • lower effective marginal tax rates for low and middle income earners.
  • These are not optional extras.
     
    If Australia is serious about boosting employment, we need to look at why Australia has one of the lowest workforce participation rates for women: ranking 23 out of 24 OECD countries (for women between 25-44 years old).
  • Is it because, only in Australia, is the gap widening between women’s pay?  With women earning 84 cents in every dollar earned by a man. 
  • Is it because Australia is the only OECD country, besides the US, that does not have a national paid maternity leave scheme?
  • Or is it, that women who try to return to work after maternity leave can find their jobs gone: that they’ve been made redundant, or offered their job with less pay, reduced hours and conditions?  
  • If Australia is serious about boosting employment, keeping up with the demands of the mining boom, catering for the skills gap, then as a nation we need to be serious about the rights of women at work.
     
    This includes family friendly employment provisions.  Paid maternity leave would be a good start. But also, flexible working hours, ability to return to work part-time after having a child, greater and more affordable access to childcare.
     
    These inequalities need to be addressed.
     
    Similarly the interaction of the tax and social security systems over the range of incomes generated by part-time and full-time work on minimum wages can and should be reviewed.
     
    Working people with incomes up to ~$50,000 pa typically have an income shandy – part wages, part social security, part special income tax entitlement.  As their incomes rise (whether from working more hours or from a pay rise) they are affected by withdrawal of social security entitlements and the LITO [Low Income Tax Offset].
     
    The resulting effective marginal tax rate (EMTR) can be very high – well over 50% of the additional income earned. This is much higher than the top marginal income tax rate.
     
    Because the thresholds where these withdrawals kick in are low, and the rates of withdrawal are high (between 30% - 50% per dollar of earned income), persons moving from part-time to full-time work can face extremely high effective marginal tax rates.  For example:
  • A single person receiving Newstart Allowance can earn the princely sum of $31 a week before their allowance is reduced by 50 cents in the dollar.
  • If their income exceeds $125 a week the withdrawal rate is 60 cents in the dollar.
  • This means a single part-time worker with no dependents earning $125 a week in wages, effectively pays 75 cents in tax on each additional dollar of wage income if they increase their hours of work. [60% from Newstart withdrawal plus 15 cents in the dollar income tax rate]
  • Imagine the hue and cry from our corporate executives if they faced a tax rate of 75% on their additional earnings!
     
    In any concerted effort to boost labour supply, the interaction of the tax and social security systems must be reviewed and reformed.


    Skills
     Our present skills shortages reflect chronic neglect of skills formation throughout the term of the Howard government.
     
    This neglect had it continued would have cost Australia’s economy an estimated 550,000 jobs by 2025 and caused national GDP to be lowered by more than $100 billion. 
     
    There is a long-term challenge to rectify that neglect, with many facets.
  • Despite low unemployment rates, many potential workers have given up looking for work, because they have been rejected so many times over many years.  Long-term unemployment has long-term costs, which concerted retraining and re-employment programs for mature aged workers can substantially rectify.
  • Privatisation of public utilities over the past two decades has seen these skills nurseries – particularly in traditional trades - shut down.  Training budgets are too often a cost to be minimized, rather than viewed as a social investment in the future of the company and the community.
  • The trend to casualisation and the growth of precarious forms of employment is at odds with investment in skills, because the consequent employment churn makes it close to impossible to reap a return on that investment.
  • Wage rates for apprentices are so low (especially in the early years) that far too few young people are attracted to commit to them.  For example, the current rate of pay for a first year apprentice carpenter and joiner in the construction industry award (an area of acute skill shortage) is just $7.96 per hour.
  • The system of government subsidies and support for employers who do train their workers needs to be refocused to properly encourage training in areas of real skill needs that will benefit the economy.
  • Public policy can make a difference in each of these areas.
     
    There is an abiding market failure here, because individual employers acting unilaterally in their own private interests will seek to poach skilled workers from each other rather than invest themselves in skills if they can not be certain that their competitors will do likewise.  
     
    Government programs play an important role.  What little money was spent by the former Liberal Government on skills, was poorly directed.  Left to the will of the market, money was spent ad hoc; their focus lasting only long enough to target marginal electorates and key voter groups.
     
    It has been reported that the greatest use of the Liberal government’s $3000 voucher scheme was for nail technicians – manicurists: personally, I have frequently found this particular shortage quite frustrating. 
     
    It has also been reported that the biggest beneficiary of the employer incentive scheme was Hungry Jacks and Coles-Myer.  Now it’s important these workers receive appropriate training, but I question why in the middle of a mining boom, with 90 occupations listed by the government as being in demand, fast food and retail operators should be the major recipients of training investment by government?
     
    Poor and inadequate investment - has led to a structural mismatch in the labour market.  Between 15-20 per cent of workers with Vocational Education and Training (VET) qualifications are employed in jobs that don’t require their qualification, or are unemployed, or are not in the labor force.  The rate is higher for women.
     
    There needs to be substantive, targeted investment now.  Both to fill the immediate gap and to plan now for the skills Australia will need in the next 10 years.
     
    It is not a problem that lies with government alone.  Employers need to take up the challenge.  


    Migration and temporary work visas
    For more than 60 years, the ACTU has supported a robust permanent immigration program for Australia, and it still does.
     
    We have long opposed temporary work visas to fill shortages arising from chronic underinvestment in skills formation.
     
    We do however accept that, where an employer has and continues to invest in training Australian workers, some temporary work programs for overseas skilled workers may be necessary.  Such programs must however respect the rights of those workers and provide them with the same employment standards and wages as the Australian workforce.
     
    A long-term migration program will only deliver long-term benefits to labour supply if these new workers (and their Australian compatriots) can be housed suitably and within commuting distance of their places of work.
     
    In a carbon-constrained world, compact cities with effective, fast, reliable public transport systems and energy-efficient dwellings, are sustainable cities.
     
    Our cities are our pre-eminent pieces of network infrastructure.
     
    Affordable housing for low- and middle income families is critical to ensuring our potential labour supply is an effective labour supply.
     
    Heritage areas apart, over the next 50 years our cities will substantially be rebuilt.  We must invest with vision in our cities, if we are to ensure that our resident population can supply the labour resources needed in tomorrow’s world economy.
     

    Conclusion
    Australia can and must boost labour supply.  In today’s global economy Australia will not be forgiven for inaction.
  • There must be greater concentration on removing barriers on entering and staying in the workforce.  The Fair Pay Commission, whose jurisdiction it currently falls on – must make work pay.  A $5.20 a day pay rise for the lowest paid workers would be a good start.
  • Better, family friendly work provisions would also go a long way.  Australia has no excuse for having one of the lowest female workforce participation amongst developed countries. 
  • There is an urgent need for the Government and employers to invest in skills – to address both the immediate shortage and to plan for future now.
  • Australia’s current reliance on temporary migration is like applying a bandaid to fix a broken leg – it is entirely inadequate.  Long-termed migration program is part of the answer to boosting labor supply, but it must be met with investment in skills and also planning to make sure there is affordable housing, proper infrastructure and sustainable cities that go with increasing population size.
  • It’s not simple.  But by encouraging entry into the labor force; developing those within the labor force; and assisting sustainable population growth – a significant and sustainable boost in Australia’s labour supply can be achieved.