Where to now? Welfare and labour market regulation in Australia.(Invited Paper)

Introduction

Over the last decade and a half, Australia has been deregulating its labour market, with mixed results. One oft-quoted index of success is that, over the last decade, Australian GDP growth has been the second highest in the OECD. Over a similar period real wages have increased after a decade and a half of little change. These are good news stories.

At the same time, the Australian full-time employment-population ratio has remained near the historically low levels reached in the 1991 recession. Furthermore, over the 1990s, the proportion of welfare recipients to population of working age reached its highest level ever. The ratio of welfare recipients aged 15-64 years to the number of people in full-time employment is now a ratio one to two and a half. During the early 1970s, the ratio was one to sixteen. Labour under-utilisation affects all parts of Australian society. For example, one third of Australian children now live in households where no adult has a full-time job. These are bad news stories.

It is not surprising that Australians, given such mixed outcomes, have still to come to grips with the links between labour market deregulation and economic performance. How is it that the economy can do well in some dimensions and yet fail so badly in others? Is deregulation of the labour market responsible for both?

This paper focuses mainly on the bad news stories and our inability to solve the deep-seated structural problem of low rates of labour utilisation and high rates of welfare take up. It discusses where policy should move to now and attempts to draw lessons from our labour market deregulation experience. To do this, it is necessary to traverse briefly the history of labour market policy and outcomes since 1974-1975. The mid 1970s was a turning point for the Australian labour market, as it was for many other OECD labour markets, especially those in Europe. (1)

Some key Australian facts to be explained

The Australian structural problems revolve around low rates of labour utilisation. These problems are illustrated by three key facts.

First, Australian unemployment was very low during the fifties and sixties, rarely nudging two per cent, but between 1974 and 1982 unemployment increased to ten per cent of the labour force and since then has remained high. Even after a decade of strong GDP growth, unemployment is currently around six per cent--more than three times the levels prevailing before 1973 (Figure 1).

[FIGURE 1 OMITTED]

Second, unemployment increases have been accompanied by a substantial loss of full-time employment. The dramatic character of this change is emphasized if we compare the Australian full-time employment history with that of the United States (Figure 2). From the mid 1960s through to the early 1970s, the Australian full-time employment-population ratio was approximately 14 per cent above that of the US. It fell by 16 per cent between 1970 and 1983, and by the latter date it was below that of the US. The ratio then recovered slightly, but since 1990 has fallen again. The cumulative fall since 1970 is 17 per cent. The increase in the US full-time employment-population ratio over the same period was 18 per cent. (2) This difference has occurred even though GDP per capita has grown at similar rates in both countries (Figure 3). (3)

[FIGURES 2-3 OMITTED]

If Figure 1 and Figure 2 are considered together, a third key fact emerges: Australia's full-time job loss did not translate one-to-one into unemployment increases. After allowance is made for population changes, the full-time job loss since 1970 is 1,351 thousand. The unemployment increase is 420 thousand. (4) There is a gap of 931 thousand. Where did all these people go? How are they supporting themselves?

Many of the young have withdrawn from full-time employment and increased their education participation rates, but the overwhelming adjustment has been borne by workers who, failing to find full-time employment, have sought …