Will a Newstart boost actually deter jobseekers?

Employment Minister Bill Shorten has ruled out an increase in the Newstart allowance - but would an increase really deter people from looking for work?

It’s been revealed that the Federal Government has been sitting on advice since 2009 showing the Newstart payment has dropped well behind other government allowances.

The National Centre for Social and Economic Modelling (NATSEM) has revealed its findings amidst a Senate Inquiry into whether the Newstart payment should be increased, a position backed by business, welfare groups and the ACTU.

Around 70 submissions have been received by the Senate Inquiry into Newstart payments, which will report in November.

Peak body Australian Council of Social Services (ACOSS) and Melbourne welfare group the Brotherhood of St Laurence have argued for a $50 a week increase in the level of Newstart payment for singles. The Business Council of Australia also argued that “the rate of the Newstart Allowance for jobseekers no longer meets a reasonable community standard of adequacy and may now be so low as to represent a "barrier to employment.”

But a joint submission from five federal government departments asserts an increase will deter the unemployed from finding work, a position backed by Employment Minister Bill Shorten who yesterday reaffirmed there would be no increase.

The joint Department submission argues, “work incentives are built into the design of Newstart Allowance and a substantial increase in Newstart payment rates would reduce the incentive for some recipients to move off payment and into self-supporting work”.

So would an increase of $50 a week in payments for the unemployed actually slow the exit rate from welfare?

At a theoretical level, the answer is yes. An increase in benefit levels raises incomes for those out of work – the so-called replacement rate - and thus reduces the gains from working. If replacement rates are “too high” as a percentage of wages, then work may not pay.

On the other hand, if replacement rates are too low, then the unemployed will experience significant poverty. This means that there is an underlying tension between the competing objectives of adequately supporting people who are out of work, while simultaneously encouraging them to find paid work.

At the practical level the issue is what do we mean by “too high”? If all we were concerned about was maximising incentives to work then we wouldn’t pay unemployment benefits at all – a zero replacement rate obviously provides the strongest work incentives you can get.

This appears to be the position recently put by ANZ Bank CEO Mike Smith (who earns a base salary $3.15 million) who has canvassed time limits on welfare payments as a way of dealing with the two-speed economy, by encouraging the unemployed to move to the mining States. As pointed out by the ACOSS submission to the Senate Inquiry, the main purpose of Australian income support payments is to prevent poverty. Indeed, the Australian social security system is more targeted to low income groups than any other welfare system in the OECD (and probably the world).

But while we target payments to the poor more than any other country, our payments for the unemployed are lower than many other countries. The latest OECD figures on benefit replacement rates show that for the short-term single unemployed (and including housing benefits) we now have the lowest replacement rates in the OECD.

It is worth noting that, overall, countries with lower benefit replacement rates currently have higher unemployment rates. Indeed, with the exception of Korea, every country that has lower long-term benefit levels than Australia has higher unemployment rates, and every country with lower unemployment rates has more generous benefit levels.

The decline in replacement rates in Australia reflects the fact that Newstart payment rates are indexed to the CPI. As wages have grown faster than the CPI, benefit levels have inevitably fallen relative to earnings and community incomes more broadly.

As the NATSEM report reveals, Newstart payments have also fallen relative to pension levels since 1997, when the Howard government started to index pensions to average weekly earnings, but continued to index payments for the unemployed to the CPI. In 1996, a single unemployed person received 92% of what was paid to a pensioner; that ratio is now 65%.

It is not just that the unemployed are falling behind other social security recipients – they are falling behind every other group in the community on virtually any measure that one can come up with:

  • Since 1996 payments for the single unemployed have fallen from 23.5% of the average wage for males to around 19% currently;
  • Newstart has fallen from 46% of median family income in 1996 to 36% in 2009-10 – or from a little way below the common relative income poverty standard to a long way below;
  • In 1996, a single unemployed person would have received an income that was about $14 a week (in 2010 values) less than a person at the 10th percentile of the overall income distribution. In 2009-10 they would have been $116 a week below a person at the 10th percentile.

In brief, Newstart recipients are falling into continuously deepening poverty. But in terms of incentives to work, the opposite applies – continuously deepening poverty means continuously improving incentives to work. So have we got the balance right?

Apart from periods of mass unemployment, unemployed people are generally disproportionately drawn from the low wage sector of the labour market and when the unemployed find jobs these are often lower paid than their previous employment. So rather than comparing incomes out of work to average earnings, the most relevant base for comparison is likely to be take home pay for a minimum wage worker.

Since 1996 the level of Newstart for a single person has fallen from around 54% to 45% of the after-tax minimum wage. An increase of $50 a week in the single rate of Newstart would take us back to the relativity in 1996. We would move from the lowest ranked OECD country for short-term replacement rates to the equal lowest ranked with New Zealand. In terms of longer-term replacement rates we would move from 14th lowest to equal 19th lowest.

While at the theoretical level an increase in Newstart may reduce incentives to work, on a practical level it is difficult to see that an increase of $50 a week would have a major impact. Getting a full-time job at the minimum wage would mean that a single unemployed person would still increase their disposable income by 85%. That’s a strong incentive to find work, even with the touted increase.

The welfare system in Australia exists to reduce the impact of disadvantage. While moving people off welfare to employment is one of the most effective ways of reducing disadvantage, we need to ask ourselves whether the continuing impoverishment of the unemployed is the best way to achieve this. Improving incentives to work can be achieved in other ways apart from holding real benefit levels constant while broader community incomes continue to increase in real terms. The gap between benefits and low wages can be increased by tax cuts targeted to the low paid or by measures like an earned income tax credit for people without children. Perhaps more importantly, as argued by ACOSS, many of the long-term unemployed need more effective training and labour market programs.

The joint Departmental submission to the Senate Inquiry appears to suggest that we currently have about the right balance between adequacy of payments and incentives to work. If this is correct, it is in some senses surprising, since the desirable relativities between payment levels and net minimum wages have never been explicitly set by Government. The relativity we have now is the result of the divergence between the indexation provisions for Newstart and the very welcome but unplanned increase in median household incomes and in wages and employment.

Moreover, if we do have the right balance now, we will not in the future. As the system is currently configured the gap between Newstart and broader community incomes will continue to grow over time. The impoverishment of Newstart recipients is effectively written into legislation and cannot be alleviated without deliberate government policy change.

What is needed now is a comprehensive review of where working-age benefits should be set relative to net minimum wages and a mechanism for guaranteeing that over the longer run benefits for the poorest keep pace with community standards.

It is important to get the right balance between adequacy and incentives, but the evidence shows that currently Newstart is a long way from being adequate.