Fending Off Unemployment

There is an economic malady worse than single-digit inflation. You don’t hear about it much these days, but its spectre looms large: unemployment.

Unemployment is often quoted as a statistic; in the last 50 years it has ranged from 3.4% to 11.2% and it happens to currently be 3.8%. But, as with all human stories diminished and condensed into statistics, it is easy to forget the personal catastrophes that these numbers represent. Take an increase of 0.4%. It doesn’t sound like much, but that is 60,000 people whose lives are turned upside down. Hard working Australians who want to contribute but are now excluded through no choice of their own. And for every unemployed adult there is usually a family as well. Thousands of families at risk of losing their home and way of life. Thousands of couples facing a leading cause of divorce: financial stress. 60,000 men and women suddenly losing the dignity and purpose afforded by decent work. Childhoods destabilised. Educations disrupted with lifelong consequences. Mental and physical illness. Addiction. Hopelessness. Despair. This is the human toll of unemployment.

The unemployment rate is one of the starkest consequences of good government or lack thereof. Although global economic forces play a role, government decisions, both in the short-term management of crises and long-term economic reform dictate how many millions find themselves out of work when an economic shock inevitably arrives.

The most recent Liberal government has a strong claim to having managed the COVID crisis well, and having delivered very low unemployment. However, it’s my view that now, when unemployment is near an all-time low, that the danger of a significant and disastrous spike in unemployment is particularly high. This is for a few reasons. Firstly, our budget position is much worse than before COVID, therefore we have less capacity for delivering the economic stimulus that bailed us out of the GFC and COVID. Secondly, China is running out of things to build using our iron ore. They have an oversupply of housing to the tune of 50 million homes. This matters because Chinese demand for our iron ore probably played a bigger role in saving our economy during the GFC and COVID than government stimulus. Finally, there is a serious risk that the cost-of-living crisis will result in consumer demand falling off a cliff and a subsequent recession.

Perhaps even more concerning, the low general unemployment rate masks a disturbingly high youth unemployment rate of around 9%. It is an indictment upon our society when our young people can’t find decent work, and is evidence of serious shortcomings in our education system.

What does all this mean for Liberals today? We need to be preparing a comprehensive economic agenda for boosting youth employment and staving off general unemployment when it starts to pick up and become a major issue for the electorate. We need to have a plan not just for the next election cycle, but for the next decade. It should combine tax reform to boost investment and therefore job creation, welfare reform to get the incentives and support right for people out of work, and education reform to ensure we’re providing the skills the market needs.

Economic Reform

The single biggest thing the government can do to keep unemployment low is to stimulate business investment. At the end of the day, it is businesses that employ people and the bigger and more numerous our businesses are, the more jobs there will be. Unfortunately, our tax system disincentivises investment both from within and outside Australia. Within Australia, because dividend imputation discourages reinvestment of profits, and tax benefits for property ownership encourage a concentration of capital into housing. Outside Australia, because our corporate tax rate is 30% which is much higher than our competitors (it’s 17% in nearby Singapore), and a lack of consistency and certainty around our climate and energy policy. Investment is doubly important because it is what’s needed to establish the future high-tech industries that will be the driver of world economic growth this century. We must deal with these fundamental barriers to investment if we are to grow the industries that will be producing the jobs of the future. I have given multiple suggestions along these lines here.

Welfare Reform

A fundamental difference between Liberal and Labor can be summed up as follows: if you fall into a pit, the Liberal Party will throw you a ladder, the Labor Party will throw you a cushion.

As Liberals we understand that compassion is important, but compassion means doing what’s in the immediate and long-term best interests of people, and there is a fine line between providing a dignified minimum standard of living for the unemployed and not encouraging welfare dependency. Compassion also means providing every possible incentive and opportunity for unemployed people to get back to into the workforce.

I will write extensively on this topic in my next post, but my core policy recommendation is as follows: the reduction in welfare payments should not be 60c for every dollar earned, as it is currently. This strongly discourages finding work. It should be 42c in the dollar, for the first year of unemployment. This way, benefits persist right up to the minimum full-time wage of $46,000. Secondly, the base rate of unemployment benefit should be significantly increased for the first 3 months. For a person on a decent wage to suddenly drop to $375 per week is a massive financial shock and so stressful and disruptive that it can seriously impair that person’s ability to find work. A 2-3 month period at a rate closer to the JobKeeper would provide a much-needed buffer to help people bounce back, and not spiral into a vicious cycle of poverty.

Rising Sun, Falling Unemployment

There is one developed country that has had an exceptional track record of low unemployment for decades: Japan.

Unemployment rate

Although it is impossible to determine exactly what causes Japan’s outstanding performance, there are a few special features of its economy that are likely contributors. Firstly, they have very high wage flexibility. A large portion of workers’ total remuneration comes through bonuses which are tied to company performance. When business is bad (e.g. during an economic crisis), companies are not forced to sack workers to remain profitable, they have the option of reducing bonuses instead. This is a win-win situation: workers keep their jobs and companies are not forced to rehire and train new staff when the economy picks up again.

Australia should seriously consider incentivising this kind of remuneration scheme. For example, lowering taxes for companies that pay higher bonuses would encourage them to build in wage flexibility whether they realise it or not.

The other unique feature of Japan’s economy is tied to my final point: education reform. Japan has a unique arrangement where the majority of school and university graduates arrange their employment months before graduating. There is much better coordination between companies and education institutes and the qualifications of graduates are aligned with the requirements of employers. They also have much less incidence of teenagers dropping out of school to look for work compared with Australia, a situation that could be remedied by improvements to the quality of our public school system as I have written about here.

Education Reform

Australia has a problem with youth unemployment, but we also have an acute labour shortage. This suggests something is seriously wrong with our education system, and this dysfunction is a doing a massive disservice to our young people.

We have put choice and competition at the heart of our tertiary education system, which is admirable, but the result is students are choosing degrees that aren’t needed. Where taxpayer funds are concerned, commonwealth sponsored degree places should be strongly linked to employer needs. If only a few law graduates are needed, law places should be restricted accordingly. For those that miss the cut, they should be given the choice of a full-fee paying place, but not a government subsidised one. This could be achieved by surveying a representative sample of employers to find out their planned graduate intakes, and capping placements proportionately.

Secondly, as I have written about here, degrees should have a mandatory work experience component in order to receive government funding. This would force universities to engage with employers, leading to stronger relationships similar to the Japanese example mentioned previously, and also encourage universities to tailor their course content towards providing skills that employers are seeking.

A key objective for every government should be to keep unemployment as low as possible. The time to act is not during an economic crisis, but before one, i.e. now. In opposition, we must develop and advocate for the reforms that will make our economy more resilient to economic shocks and keep the scourge of unemployment at bay. It’s what a responsible alternative government ought to do.