Unemployment (reprint from Crikey coverage)

The budget projects that, despite the effects of the stimulus package, unemployment in Australia will reach 8.5 per cent next year. It’s striking then, how little the budget contains in terms of measures specifically directed at improving the lot of the unemployed. Most obviously, unemployment benefits have not been increased, further widening the gap between these benefits and other pensions. In an environment where suggestions that unemployment is partially or wholly voluntary can no longer be sustained, it is hard to avoid a feeling of injustice here.

The direct response to unemployment in the budget amounts to $1.5 billion for the Jobs and Training Compact, much of which has already been announced or foreshadowed. The main focus is on training, which is good long term policy, but may not be all that helpful in a recession.

Most of the timing, training is the best way of making people more employable. A lengthy recession strengthens the case for participation in school, university or TAFE diploma courses.

If the labour market is weak, the option of staying in school, or of going back to university or TAFE to enhance your qualifications is more attractive. It’s safe to predict that demand for tertiary education places is going to be quite a bit higher for the next few years. Even with the expansion of places announced in the budget, it is likely that the number of qualified students unable to find a university place will increase in 20101.

On the other hand, short-term training programs directed at those who are already unemployed are of little use in recessions. When few employers are hiring, those who do so can pick and choose from a pool of experienced and qualified candidates. A training course of a few months is unlikely to move an unemployed person to the front of the queue.

In a sustained recession, there is a strong case for direct job creation, targeted at the unemployed. In addition to existing infrastructure projects the government is offering a $650 million Jobs Fund, designed to ‘support local jobs in areas hardest hit by the downturn’.

While welcome, the government’s measures represent a small fraction of the expenditure allocated to the Keating government’s Working Nation program. As with other responses to the 1989-90 recession, Working Nation was not introduced until high unemployment was firmly entrenched. The Rudd government’s limited steps in this respect contrast unfavorably with its rapid, indeed pre-emptive, adoption of fiscal stimulus policies.

64 thoughts on “Unemployment (reprint from Crikey coverage)

  1. 1. Yes. However company taxes as currently structured do reduce retained earnings relative to the approach I proposed. My point remains.

    2. Yes. However if you need to carry more debt because of ongoing tax liabilities then your finances are more subject to debt rigidity. Increase retained earning via tax reform and the need for debt declines. My point remains.

    3. Yes the Australian corporate system is in many ways superior to the US corporate tax system. I don’t know why you raise this because I never claimed otherwise. What I did claim was that in one particular regard the structure of the Estonian corporate tax system is superior to the Australian corporate tax system. The state of the tax system in the USA is irrelevant. My point remains.

  2. PM @46, there are a number of issues here that I would like to address.

    I didn’t actually suggest that time limiting unemployment benefits is necessarily the best policy. There are advantages and disadvantages to either having time limited or unlimited unemployment benefits.

    All I suggested is merely that there is some trade-off between the value of benefits relative to average earnings and the need for time limits and the like, i.e. the more generous the payments, the more that eligibility must be restricted in order to make the system affordable and sustainable. I don’t have that strong opinion either way as to which option is better (a more universal but less generous approach, or a more restricted but more generous approach). There are advantages and disadvantages of each.

    If unemployment benefits were time limited, it would be fairer to vary the time limits according to economic conditions. That is, if someone loses their job in difficult economic times or they live in an area with less employment then they should have a longer time limit before benefits cut out. Similarly if someone is unemployed in more favourable circumstances the time limit should be shorter.

  3. PM, in relation to your second paragraph there is little evidence to support the idea that welfare expenditures reduce crime or promote general social order.

    Indeed, in most countries there has been a strong relationship between growing welfare states and rising levels of crime and social disorder (I know correlation does not always prove causation, but I would be interested to see if anyone has a different explanation). In Australia and the US between the 1960s and 1990s welfare state expenditures rose dramatically, while crime rates also rose dramatically. In the US during the 1990s the welfare rolls were cut considerably while crime rates also fell heavily (despite predictions by the critics of welfare reform that it would trigger a new crime wave).

    There are a few reasons why higher welfare expenditures don’t reduce crime or social disorder, and if anything may increase it:
    – higher taxes and government expenditure has the effect of making crime more attractive to legitimate work or business
    – the welfare state often reinforces the very social conditions that lead to higher crime, like encouraging family breakdown or dysfunctional parents to have more children etc.

    The notion that the welfare state helps promote social cohesion and reduce crime is something that many people simply assume to be self-evident, but there is little evidence to support.

  4. TerjeP @51,

    You seem to have forgotten the original problem, namely debt rigidity.

    Your arguments @51 are wrong and this is easy to demonstrate.

    Assuming your arguments were true, then there would be no debt rigidity in an economy where there is no government and there are no taxes. Such economies do not exist in reality or, if they do, their history is not sufficiently recorded to examine the data.* This leaves theoretical analysis. Consider a theoretical model of a competitive private ownership economy. Assuming your argument is true, then the solution to the model excludes debt rigidity. However, it is known that, except for the special case of complete securities markets**, the debt equity structure matters (eg Magill and Quinzii, previously referenced in full). That is, the problem of debt rigidity is not excluded.

    I leave it up to you whether you wish to categorise your arguments as Verbaltheorie with the property of wishful thinking or pure ideology or an exercise in political economy.

    I am aware of your initial qualification (part of a solution). However, I don’t accept this either because it would come close to you advocating a nanny state for business (its the governments fault if they can’t find an incentive compatible mechanism such that running a business requires no more than plucking in a few parameter values into a forumula and out comes huge incomes for the business ‘leaders’.)

    * I propose that societies without a government but consisting of sefl-interested idividuals, there is no aggregate data collection because of a ‘free-rider problem’.

    ** I am happy to revise my conclusion if you provide empirical evidence that financial markets are complete.

  5. Assuming your arguments were true, then there would be no debt rigidity in an economy where there is no government and there are no taxes.

    It does not follow from my argument that there would be no debt rigidity in an economy free of government. I made no such claim so your opening assumption is falsly based.

    Firstly I did not even suggest ellimination of government. I merely suggested an alternate corporate tax code. I wasn’t even arguing for ellimination of corporate tax just a different structure (ie the Estonian model).

    Secondly all I’ve claimed in regards to my alternate corporate tax code is that there would be less business debt for an equivalent rate of business expansion, not that there would be zero debt rigidity. I merely suggested a way to ameliorate a problem not a way to elliminate the problem. Plenty of businesses would still resort to debt even if they were allowed to keep 100% of profits for internal reinvestment. However clearly if they have more cash they don’t need to borrow as much or as often to do the same expansion activities.

  6. To summarise, unemployment is not necessarily a consequence of ‘wage rigidity’ because the contractual feature of debt securities are such that there is at least one other source of rigidity – debt rigidity.

    If, as TerjeP suggests, taxation policy should be used to reduce the consequences of debt rigidity (ie reduce the incentive to take on debt), then I propose an alternative to TerjeP’s proposal, namely to disallow interest payments as a deductable expense for publicly listed corporations. Yes, this would introduce a wedge between private (often small enterprises) and publicly listed companies (often large enterprises). However, this measure would seem to be consistent with the call for support for small enterprise.

  7. Monkey’s Uncle, I’ll reply properly when I have the chance, but the short answer is that these things are not monolithic, there are many causes of crime, the Vagrancy Costs driven category has already been cleared up by welfare and so doesn’t show in current statistics but only in historical ones (where there is plenty of evidence), because of this saturation further welfare wouldn’t help but less would hurt, and so on.

  8. Ernestine,

    I note you have offered an alternative reform proposal to deal with debt rigidity. I’d be happy to discuss this alternative but ideally I would have hoped we could finish discussing the proposal that I had already put on the table. At comment #54 you stated that the claims I made regarding my proposal were wrong and that you could easily prove it. As far as I can see you didn’t and I outlined why I think your proof is meaningless. It would be awfully decent if you could either clarify your case against my proposal or else recind the claim that my arguments at comment #51 were wrong.

  9. Terje,

    I make a distinction between ‘debt rigidity’ and possible tax induced incentives for (accounting) profit maximising organisations to take on debt.

    The easiest way to check whether making this distinction is important is to consider an economy where there is no tax at all.*

    No, I am not going to discuss further the relative merits of your proposed change to corporate tax laws because the heading of this thread is ‘unemployment’.

    However, I’d like to ask you a question in relation to debt rigidity and employment.

    My question is: Suppose an ’employer’ has debt and experiences financial distress (the nominal value of debt remains unchanged while prices for outputs fall with the consequence that revenue declines). Suppose the ’employer’ – by chance or otherwise – paid the ‘marginal product’ to each of its employees before experiencing financial distress. What is the incentive for a profit maximising ’employer’ to pay his employees their marginal product when the rigidity of debt becomes a binding constraint on the financial survival of the enterprise?

    *Note, you also realised that your tax proposal does not ensure that companies won’t take on debt.

  10. *Note, you also realised that your tax proposal does not ensure that companies won’t take on debt.

    Yes. I’d say “so what?”, but you seem disinclined to discuss the issue.

    What is the incentive for a profit maximising ‘employer’ to pay his employees their marginal product when the rigidity of debt becomes a binding constraint on the financial survival of the enterprise?

    The incentive would be that they risk losing their workers if they don’t. However if wages were flexible they may try and negotiate lower wages or a nominal wage freeze. They may cut back on optional activities and dismiss the associated employees. Alternatively they may try and negotiate more favourable terms with the creditors or they may seek an equity partner with deeper pockets. They could talk to suppliers about the need for better prices. It would all depend if the distress was merely a temperary issue or if the business itself has no prospects of future viability. It may be that the business (and the jobs) are doomed in which case there is little incentive to delay the inevitable.

  11. The unemployed have always been vilified, centerlink policy seems to infer that the countries unemployment rate is measure of it’s population’s lazyness. All this carrot and stick policy to get people into work is ridiculous when there simply isn’t enough jobs to go around, so rather than the middle class welfare of recent times this country should use some of its stimulus dollars to restore some of the dignity to those people out of work.
    If we are resigned to the fact that there is always going to be a percentage of people unemployed why not let that statistic be made up of those who really don’t want to work?
    Why force these people into a race for a job alongside those who really want one?

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