Among the relatively few points the opposition has scored in this Parliament has involved the unwillingness (or, in the Opposition’s telling, inability) of Treasurer Wayne Swan to respond substantively to a question from Malcolm Turnbull about the level of the NAIRU (non-accelerating inflation rate of unemployment), AKA “the concept formerly known as the natural rate”.
At this point I was going to refer readers to Wikipedia but, as with quite a few economics articles, it’s not entirely satisfactory. However, rather than complain, I’ve edited it to include a slightly better explanation.
Coming back to Australia, the fact that inflation is rising suggests that, if the NAIRU exists, we are now below it. It doesn’t seem as if there is much scope for fiscal and monetary policy to be tightened further. Given the risk of a breakdown in global credit markets, raising interest rates any further seems very dangerous. And the tax cut promises (which should be kept – the credibility of political processes is more important than the risk of inflation) mean that the scope to tighten fiscal policy is limited.
What remains is the possibility of reducing the NAIRU by improving the performance of labour markets. Education and training will help in the long term, but not so much in the short run. What is needed is to take advantage of the tight labour market to reduce long-term unemployment and to bring discouraged workers back into the labour market. At this phase of the cycle, the best policy instrument to achieve this goal is a targeted wage subsidy. Employers who take on workers moving off unemployment and disability benefits, or re-entering the labour force after a long absence should receive a subsidy for a period of say, three to six months. I’ll try to post a bit more on this, and why it’s superior to suggested alternatives like cutting minimum wages, before too long.
John Quiggin 
Is it really such a problem? You have commented on the fact that despite the unemployment rate being quite low there is still significant underemployment. I know that wages in many key areas are going through the roof (not just mining) but to me the chance of a larger wages breakout seems quite low. Workers who are not highly skilled or in mining don’t seem to be that more more in demand than usual.
just a smart arsed question from a smartarse
Given how much effort and expense the Howard government put into reducing the effective labour supply of married women with children, I would suggest that there is plenty of untapped supply to be found. Employers will just need to lose their expectations of a 24/7 on-call, Blackberry-dependent, all-hours work culture.
“At this phase of the cycle, the best policy instrument to achieve this goal is a targeted wage subsidy.”
No! No! No!
From what Professor Kim Swales’s work has shown, the important thing is that such things should be broad based, not targeted. My own game theoretic analysis of the mechanism he suggested (tax breaks on GST per worker on each payroll, pro rata for part timers) seems to bear this out (but crede experti, he is a better authority than I am). Before anyone comes in about the cost of not being targeted, there are two things to bear in mind:-
– there is no point saving money and ending up with something that won’t do the job by not being broad based enough (better not to bother at all); and,
– it isn’t a true subsidy with a funds outflow, but has been engineered to be revenue neutral on start up and budget neutral over time (revenue only falls with social security, based on an identity acting through an invariant and not through any time lagged adjustment).
I won’t recap the problems from these things not being broad based, but they account for the failure of a “test” of Negative Income Tax in the ’70s that had its test and control groups in the same geographical area, thus preventing things from flowing through properly. At best you get a lot of churning that way, with a time lag with funds outflows before any benefit shows up (and guess when the subsidies would cut out…).
John Quiggin compensating for the inflationary threat of collective bargaining and one size fits all remuneration, not to mention the new unfair, unfair dismissal laws. Fat chance, particularly now the central bankers’ game is up. Perhaps we could have some favourite make work programs like more supermarket and petrol price monitors John, while we’re all waiting for Garnaut.
I’d suggest cutting payroll tax or else lifting the tax free threshold on income tax. Cutting the minimum wage or at least freezing it would also ensure that no low skill workers with undesirable employment qualities are excluded from productive contribution. Rebates and subsidies are so keynesian.
Does anybody remember the accord under Hawke? The unions restrain wage demands in exchange for tax cuts.
I’d also suggest that interest rates are the wrong target. We should be using OMO to more directly target the value of our currency. Whilst we continue to weaken against commodities we will continue to endure inflationary pressure. And tightening against commodities need not mean higher interest rates. When the pound sterling was targeted against gold from 1800 to 1900 interest rates were eternally low in spite of massive economic expansion.
p.s. The free immigration agreement (FIA) we have with New Zealand could also be expanded to agreements with other nations. Nations with similar GDP per capita such as Singapore would work. As would some of the smaller pacific nations such as Fiji and Tonga. I would have an expectation that any such agreement should be bilateral but other options could be considered also.
Why not cut the minimum wage and provide a subsidy for all low-paid jobs in the form of a negative income tax?
What you mean besides the fact it’d be vastly more expensive and many people in low-paid jobs are teens and Uni students working part-time jobs who don’t need the top-up?
Well how about how the whole point of the proposal is to increase the labor force by encouraging employers to give the long-term unemployed a go?
I note the mining industry is currently recruiting school leavers and women returning to the workforce, neither group likely to have relevant experience. Whether or not this has been assisted by training or other subsidies I think this is better than ‘renting’ guest workers under Section 457 visas. I suspect the mining boom has coloured our perception of everything, not just the labour market but terms of trade and reluctance to tackle greenhouse emissions. When the boom levels off it will be back to an employer’s market.
why not attack from the other end? go on a 4 day week, reduce stress and emissions, and have more goodies in the ground for the grandkids to exploit.
seems obvious that ‘not enough labor’ = ‘too much work’.
Wage subsidies (or cutting wages, for that matter) are not the answer to getting the long term unemployed back into employment. The problem is these people probably have very few skills, and few employers are going to want them on, even if they could get them for free.
What would, or could, today’s long term unemployed actually do in a work place? And even if their wage cost was minimal, they have to be supervised, provided with equipment and so on, all of which costs.
John, if someone offered you a long term unemployed person with no skills to work in your centre at a subsidised wage, would you take up the offer?
al loomis has made the only sensible suggestion so far, especially the part about leaving goodies in the ground for our grandkids.
In addition, we need to stop growing our population by ending immigration and the baby bonus. The economy is being pumped up with people, which not only disguises the decline in sustainable jobs due to unrestrained cheap imports, but locks up a lot of the labour force to banging bloody nails in and glueing stuff to floors.
Salient Green – and what should we do with the illegal immigrants that a zero immigration policy would produce? I’d support an immigration tariff but not zero immigration.
Working less is always an option. But it should remain a personal option not a government mandated one. Even the French are giving up on their mandatory 35 hour week.
Uncle Milton, I would most definitely employ that long term unemployed person on a subsidized wage on my orchard and if I had a manufacturing business would do the same. After being kicked repeatedly in the financial balls by this ridiculous ‘liberal market economy’ and it’s flint-hearted idealogues, a break like this would be most welcome, but it would have to be substantial.
Terje, good point. We would need a policy of zero immigration which would encourage more humanitarian efforts where the illegals are coming from, while taking on some refugees under great sufferance!
I am sympathetic to John’s proposal – it doesn’t try to use employers as social welfare agencies and effectively relies on the tax transfer mechanism to boost wages for the unskilled. That accords with standard economic theory.
But I am surprised John doesn’t go the whole hog and accept fully the correct logic of his position. Abolish all minimum wages, fair pay commissions, the lot and allow markets to determine wages for all. Then boost those wages using transfers for all those society believes are underpaid.
Presumably John sees wages as determined by bilateral bargains rather than markets but that seems to me an almost fantastic position in an economy with labour shortages where unemployment is low. I am studying labour supply issues in taxi markets at present and there is huge competition – between employers and from other transport service providers. It seems to me this is an accurate picture of much of the economy.
Moreover creating close to full employment by maximising the freedom of workers and employers to do deals will help drive competitive efficiency in labour markets buy providing plenty of fallbacks for both workers and employers.
I think Uncle Milton your example is unhelpful. No I would not employ an unswkilled worker on a research project but I might employ them as a shop assistant or to mow my lawn.
Salient Green – would a ring fence around the Sudan make them more humanitarian? I doubt it. Anyway we can tell your a nationalist not a humanist by the flavour of your policies so there is no need to pretend.
Harry, I assert that the number of job opportunities for the truly unskilled is far less than the number of truly unskilled (the long term unemployed andThe those that have been shuffled off to disability pensions). And what positions there are, like garden maintenance and stacking shelves in supermarkets, are always going to be filled first by students and the like, who are looking for a bit of a part time work.
The long term unemployed are always going to be at the back of the queue.
That we have labour shortages and an inflation problem with 4% unemployment, not to mention those that have left the work force and aren’t counted as unemployed, reflects decades of failure of the education, training and re-training systems. It’s not going to be fixed by cutting or subsidising wages.
I’m curious as to why Salient apparently believes that people from Singapore, a country with a per capita GDP and average educational accomplishments similar to our own, will be rushing to Australia to take low-paid jobs.
This proposal is far more likely to founder on the other side – the Singaporean government’s racist attitudes about Australia are likely to prevent them signing such a deal.
I mean you wouldn’t want the poor white trash of Asia contaminating the minds of decent folk with a load of nonsense about freedom of the press and contested elections.
Terje,I don’t understand your comment about a ring fence. By humanitarian efforts, I meant aid to solve that country’s problems so that it’s people would be able to stay and be happy.
I am a conservationist, very concerned about the state of the planet’s ecosystem and resources and the danger that presents to our survival. No pretence there. If you need to drop some other labels on me as a consequence of that position then I won’t argue.
Ian Gould, You haven’t had enough sleep, up all hours thumping Mugwump.
Singapore has not been mentioned or thought about in this thread.
I fully concur with JQ’s policy proposal. It is exactly the targeting of specific actual and possibly short-term problems that is called for.
I do not agree with removing the minimum wage rate. (The minimum wage is the only saving grace aspect of the Howard era). A regulated minimum wage is a crucial variable to address, at least approximately, the ‘minimum wealth constraint’ condition in G.E. models. (Incidentally, the former West Germany did not have minimum wage legislation. This worked very well during the so-called ‘economic miracle’. It did not work at all after the unification of West and East Germany.)
The complete allocation of the promised tax cuts to the raising of the tax free threshold is, IMHO, a complementary ‘broad based’ fiscal policy.
I have found no use for the notion of ‘NAIRU’ or the related notion of ‘natural rate of unemployment’ in trying to understand the world around me. In my mind, these terms are filed in the same box as the ‘Laffer curve’ – something one has to know for the sake of demonstrating that one has passed an undergraduate economics course; something one can pull out from this box to illustrate sloppy theorising. (Not a humble comment but an honest one.)
“I mean you wouldn’t want the poor white trash of Asia contaminating the minds of decent folk”
Ian, I think you are missing reality here. Australians are the poor white trash of Asia, whether you like it or not. They have THE highest crime rates in the OECD (more than 10 times Singapore), high rates of substance abuse, and many other things many people generally perceive as negative. Simply because Singapore is willing to say this (as they said of Malaysia also) is not racist — it is simply the reality as they quite logically see it in that they are not willing to to create social problems for themselves — especially when a simple skilled immigration check-list can solve the problem.
conrad, where are you sourcing your figures that suggest Australia has the highest crime rates in the OCED? It certainly contradicts my admittedly subjective “common-sense” experience from overseas travel. And what sort of crimes are we talking about?
http://www.lawlink.nsw.gov.au/lawlink/bocsar/ll_bocsar.nsf/pages/bocsar_mr_290306
I too would like to see the numbers that conrad relies on. My bullsh*t detector is going nuts right now. And why are we ‘poor white trash’? We aren’t all white, we aren’t poor by Asian standards, and although trash is rather subjective, I can’t help but feel it’s a little harsh.
“After being kicked repeatedly in the financial balls by this ridiculous ‘liberal market economy’ and it’s flint-hearted idealogues, a break like this would be most welcome, but it would have to be substantial.”
Salient Green, maybe the orchard business just isn’t for you? You seem to be fairly articulate, you obviously take an interest in the world, etc. The ‘liberal market economy’ has worked out for many millions of Australians so far. Perhaps agriculture is not the best use of your talents? As for leaving ‘goodies’ in the ground for our grandkids – why stop there? Why not leave it in the ground for a thousand years? Then our descendants will really have it good! Jesus wept.
BBB
Actually, I have to say, looking up some numbers, Australia’s violent crime rates are nothing much to be proud of.
While our murder and robbery rates are relatively low (and certainly far lower than the U.S.), assault and rape are as much as twice as frequently reported here as many other OECD nations, including the U.S. But it’s very hard to know to what degree this is a higher willingness to report, or a looser definition of “assault”.
Isn’t the problem with wage subsidies that they are only really cost-effective if they can be fairly closely targetted to people with a low probability of otherwise getting a job, but employers aren’t really interested in them unless they are broadly enough targeted to enable them to employ someone they would consider employing anyway?
My recollection of the good old days of Working Nation was that, even though the Labor government of the time was offering generous wage subsidies that were not too closely targeted, they couldn’t get enough employers to offer long-term unemployed people jobs to enable them to meet their job guarantee and had to go and concoct pretend jobs through the New Work Opportunities program instead. Granted, that was a very different economic and labour market environment to what we have now, but I’m not sure that employer attitudes would be all that different now.
I have some sympathy with Harry’s suggestion that we abolish minimum wages and allow low-paid workers to receive means-tested income supplementation of some form (not necessarily a NIT), at least in theory. The only real problem with that suggestion is that I can’t imagine an Australian government implementing it, ever.
But while I don’t think it is politically possible to do away with the minimum wage in Australia (and I don’t think I would ever advocate that), I think there are some advantages to topping-up low wages through broadly-based income transfers rather than through specific wage subsidies. But we already have a pretty well-developed system in Australia to do this – we don’t need to go developing new tax credits or anything like that.
So, to take my reasoning a bit further, instead of offering a 3-6 month wage subsidy to anyone who was long-term unemployed or had been out of work for a long time, perhaps we could allow employers to offer a discounted wage to these types of people for a similar period and top up their incomes through income support. Just a thought.
Sure: At least from crime, here are the numbers you can look at in a nice spreadsheet. Note that I believe that 2000 was the last time the OECD did a big survey like this. As can be seen, Australia tops the tables in almost all types of crime.
http://www.oecd.org/dataoecd/39/44/2492201.xls
Milton’s guaranteed minumum income or the 5 economist’s family tax credits together with gradually abolishing mimimum wages is the way to go however it costs the Government bigtime.
Opportunity cost is too great for most politicians.
Harry is now finding out there are only two things in life death and taxis
Wizofaus — I think in terms of a Singapore/Australia comparison, you can make whatever realistic assumptions you want about reporting, and Australia is still going to be vastly higher. You might also like to consider that people in Singapore have a much more negative view of crime than Australians and hence are likely to be swayed more by these factors when judging others (I don’t have data for this one).
Lots of countries have no minimum wage. Some examples are Norway, Sweden, Denmark and Germany. Canada sets them at a regional level which is at least a better way to align them with economic reality. We should at least have a mechanism to allow a reduced minimum wage in economic regions with high unemployment. Maybe by setting the minimum wage as some function of the median wage for the locality.
The two safety net alternatives to minimum wages that make more sense are either a negative income tax or a basic income. The skills market should be free to price itself naturally without price regulation.
At the end of the day however inflation is a monetary phenomena and it should be managed as such. Monetary policy is not ham strung by a tight labour market. It is ham strung somewhat by an over reliance on interest rate targeting but thats the paradigm we are lumbered with.
BBCLB
The Australian social security system already operates as a fairly efficient guaranteed minimum income, albeit one where entitlement is sometimes tied to meeting work-related requirements. Just as I don’t think Australians would ever countenance abolition of the minimum wage, I don’t think they would countenance an unconditional GMI. As I said, there really is no need to invent something new – we already have the basic infrastructure in place, all you need to do is tweak it a bit.
And to be fair, I don’t think the 5 economists ever suggested abolishing the minimum wage, they just wanted to lower it a bit.
Terje
My understanding of the countries you cite is that they may not have a legislated minimum wage, but wages are pretty well regulated for all that. I don’t think too many people in those countries get paid next to nothing.
conrad, I wasn’t disputing the Australia/Singapore comparison. Though I will say if Singapore’s lack of meaningful democracy, suppression of individual rights, and use of capital punishment for victimless crimes is the price you have to pay for ultra-low crime rates, then I’m not sure it’s a price worth paying.
BG,
the eventual abolition was the long term aim of the 5 economists and to be fair we do not have the infrastructure to keep family incomes at the same level whilst reducing minimum wages over time.
Backroom girl,
Doing away with the minimum wage is not about having people paid next to nothing. If that was the objective we could merely legislate that people should be paid next to nothing. The point is that at some times and in some regions and for some workers the wage rate needs to be able to adjust downward if unemployment is to be avoided and participation maximised.
Markets clear when they are free to do so. I’m not sure of the details in all countries but in Denmark there is little in the way of wage rate regulation. Of course the genereous social safety nets in Denmark may mean that some people choose not to enter the labour market unless the price is high enough but thats still a better approach than having a price floor.
In Australia the cost of living varies from place to place and the labour market dynamics are also different. It is silly to have a uniform minimum wage that is the same in Sydney as in regional Tasmania. In so far as the minimum wage now includes economic circumstances and the interests of the unemployed it should be determined on the basis of regional economies not national aggregates.
One way forward would be for the ABS to publish median market wage rates for each postcode (revised annually) and for the minimum wage in each area to be a set percentage of that figure. Or else the minimum wage for a given area could be discounted by the sum of the unemployment rates over the last 5 years. So if a rural town had a 10% unemployment rate for 5 years then the minimum wage for that region would be 50% of the national minimum. Whilst a town with five years of no unemployment would provide no discount. The point being that our one size fits all approach is sub optimal.
The problem as I see it for JQ’s solution is the negative incentives to work currently in the system. Quite reasonably, a single mother (for instance) has a range of support mechanisms, many of which get stripped away if she enters employment. I recall reading of situations where the mother earned less for being employed than otherwise, before paying for childcare (which as all parents know is ruinously expensive).
Unemployed parents aren’t the only ones of course – this is only by way of example.
The subsidy, therefore, would in come cases have to be higher than the wage, and a time limitation of 3 to 6 months wouldn’t really cut it.
I don’t have a suggestion to fix this situation and am certainly not suggesting a cut in safety nets for the unemployed and their families.
There’s no such thing as “unemployed parents” – indeed there aren’t too many paid jobs that are harder work than raising children.
“Simply because Singapore is willing to say this (as they said of Malaysia also) is not racist —”
Wilful, you think Singaporean Chinese aren’t prejudiced against Malays?
Seriously?
#27 Bingo Bango Boingo, thanks for the complement. If I’m not suited to orchard business then no-one is, and I don’t believe that. Half the orchardists here have stopped operating to go and work in downskilled job which at least pays. The thing is, everyone else is very happy to make money and a decent living from my enterprise, workers, packers, transporters, agents and the supermarkets, but because of the free market, I don’t. If I don’t take the crap price the supermarkets give me, they will simply buy it from overseas, where the farmers are either heavily subsidised or pay very low wages.
Now I have a lot invested in this property, we have a community here with sporting clubs, social gatherings and a township. The system is wrong and I don’t intend to give up without a fight.
When my trees were young I worked plastics toolmaking in a nearby town which had three manufacturers. They have all closed down thanks to the free market. Jobs in my trade have declined rapidly in the capital city 100km away thanks to free trade.
Australia is exporting jobs in manufacturing, agriculture, IT and other high tech. while we become a quarry and grain producer. Our foriegn debt has blown out to over half a trillion dollars. Anyone with a dot of commensense can see this is not a good thing and it can be so easily fixed by a minor change from ‘free’ market ideology to ‘fair’ market good sense.
To your final comment, a thousand years is short sighted.
Oh and Lee Kwan Yu’s poor white trash comment had nothing ot do with crime rates- it was all about us not working hard enough, contaminating our gene pool by lettign in racial inferiors; tolerating those disgusting homosexual perverts and not jailing anyone who criticised the government.
Free trade is fair trade because it is consentual. If you think that coersion is fairer then I have to disagree. If I want to buy foreign fruit (or if Woolworths wants to buy foreign fruit) then it’s none of your business. You don’t own your customers and they don’t owe you any consumer loyalty. If foreign nations wish to subsidise their producers then it is certainly stupid and it isn’t free trade but their loss is our gain.
Terje, that to me is the essence of the problem of free trade. For it to work, everyone has to agree to it.
A bit part of the reason for the U.S.’s economic success has been (and still is) significant protectionism. Which is one reason that the gradual move to free trade isn’t doing workings in the U.S. a lot of favours.
Ian,
Lee Kwan Yu never said whites were _racial_ inferiors. In addition, it isn’t suprising that the Chinese there don’t have any super love for the Malays given the history of the place (and indeed the current circumstances in both Malaysia and Indonesia). Also, as I pointed out, if you happen to think things like crime and education are as important as people do in Singapore, then its a simple logical conclusion as to what they think of the average Australian, and given that they’ve gone from a bunch of rubber farmers to some of the richest people in the world with no natural assets at all, they might well have a point (cf. where Australia has gone in the same time). Also, just because LKY is a politically incorrect loudmouth doesn’t necessarily make him wrong.
Wizofaus – you and I can trade without others agreeing to it. Free trade does not necessitate everybody playing. And if the US wants to subsidies some producers or put tariffs on goods from Australia we gain nothing by reciprocating. Unilateral trade liberalisation is simple, requires no deals or compromises with foreign governments and offers immediate benefits. We should slash tariffs irrespective of what the rest of the world does. We should end industry welfare irrespective of what the rest of the world does. And we should avoid being a part of trade sanctions against any nation, even the ugly ones.
Terje, I believe foriegn nations subsidise their producers because it’s smart. Those producers use some of the nations resources to provide jobs, create productive communities, supply fresh food, prevent or reduce foriegn debt, decentralise commerce where it could be overcrowded, have a higher degree of control over production, greater security against threats to supply, keeping local knowledge and expertise, and arguably the most important, to reduce the global warming and resource depletion caused by goods being sent from one side of the planet to the other unecessarily.
In comparison with the rest of the world, Australia is employing free trade ideology to protect its big business exporters at the expense of the enterprises which supply the domestic market.
Wizofaus wrote “use of capital punishment for victimless crimes is the price you have to pay for ultra-low crime rates, then I’m not sure it’s a price worth paying.”
Not so sure about that one. A quick google reveals that over the last decade, Singapore, a country roughly the size of Melbourne, on average executes one person every 10 days.
With a per capita execution rate like this anyone who believes they have an “ultra-low crime rate” can’t be serious.