Tonight’s budget will bring major policy announcements directed at improving labour market outcomes for unemployed persons and welfare recipients.
In her speech at the Sydney Institute on April 13, Julia Gillard gave as the rationale for policy reform that “our economy needs more workers”.
Low unemployment in Australia implies that there is both the opportunity and necessity to draw these extra workers from the ranks of the working age welfare recipients.
How should we go about getting more of those who are currently out of work into jobs? Experience with the Australian economy in recent years, and international evidence on programs for assisting the unemployed, provide a variety of lessons.
These lessons are the basis for general principles that should inform policy design; they can also be translated into specific proposals for what to do.
1. Keep the macroeconomy strong
The fundamental determinant of employment outcomes in the Australian economy – both for the average worker and for the person who spends time on welfare - will be the rate of growth in GDP.
So the best way to get the disadvantaged into work and keep them there is to maintain strong economic growth, and to avoid recessions.
The evolution of long-term unemployment in Australia makes this point. At the end of the last major recession in August 1993 there were 330,000 persons who had been unemployed for more than a year (making up 36.5% of the total unemployed).
Fast forward to August 2010 after the “long boom” of the 1990s and 2000s and there are now only 120,000 long-term unemployed (who account for just 20% of total unemployment).
As another example, the 1970s and 1980s saw large declines in labour force participation by older males; so that by the early 1990s low rates of participation were seen as a permanent feature of the Australian economy.
Yet with the “long boom” participation of older males aged 60 to 64 has rebounded from 46.6 per cent in August 1993 to be 61.6% by August 2010.
(Other factors also explain this rise – such as increasing education levels of older males, and older males synchronising their retirement with their spouses who are increasingly remaining in the labour force to older ages.)
2. Be willing to spend big
Julia Gillard may be right that some of those currently out of work and receiving welfare “can support themselves”.
But there are many more out of work because of long-term entrenched social problems and skill deficiencies. To remedy these problems often requires policy to address multiple dimensions – such as behavioural issues; an absence of stable housing; and lack of job skills.
And the intervention needs to be on a sufficient scale to deal with the severity of the problems.
An extra year of education in Australia raises average earnings of workers by 5% to 10%, but an increase in skills by this amount would only be a small part of the difference that would need to be made up by someone from a disadvantaged background.
So a large-scale policy solution – equal to the effect of several years of full-time education - is arguably needed to provide serious assistance to this group.
3. Prevent later problems by investing early
Overwhelming evidence exists that many of the barriers to employment faced by those who are out of work have their origins in the early years of childhood.
The likelihood of having a job depends to a great degree on a person’s levels of cognitive and non-cognitive skills.
The levels of these skills differ substantially between individuals by their socio-economic background. A very large part of this gap in skills is explained by differences that emerge before children reach the age of 5 or 6 years.
Differences in family background in children’s early years cause big differences in their early brain - and hence skill - development. Coming from a family where a parent has substance abuse problems or there is a history of violence for example results in significantly lower skills.
Early differences then become the basis for subsequent differences. Skill development in the later years of life follows a “building-block” model.
A child who falls behind in learning basic literacy skills in his or her early years will for example then find it more difficult to develop knowledge that requires reading texts.
Investing in programs to improve the skills of children from disadvantaged families is therefore the most profitable way for society to provide the access to opportunity of which Julia Gillard spoke.
The earlier society intervenes to remedy the gap in skill levels the cheaper it will be to close the gap.
And the earlier society intervenes, the greater is the future period over which the benefits of higher skills can be recouped (such as higher likelihood of employment, better health, and lower chance of contact with the criminal justice system).
Evaluations of programs in the United States to improve skills of children from disadvantaged backgrounds show that they can produce high benefit relative to cost.
Examples include the Abecedarian, Perry Preschool and Chicago CPC programs, all of which combine extra early education with home visits or parent education.
What must be remembered though is the word investment. Childhood interventions involve an up-front cost, and a return that occurs only in the years after this cost has been paid.
So there will be no headlines for the next election. But the long-term payoff is likely to be commensurately greater for a government willing to make this sacrifice.
4. Fund globally, choose locally
The track record of labour market programs intended to improve employment outcomes for those who are out of work is not a happy one. Government job creation schemes to provide work experience for the unemployed generally have little (and sometimes negative) effects.
The evidence on the effect of training programs is also mixed.
Some schemes, however, do seem to do better. Small-scale programs, targeted at the needs of local unemployed and employers, and where ideally an unemployed person obtains a formal certificate or qualification, are more regularly found to have positive effects.
This suggests a new approach to policy for choosing programs to improve labour market outcomes for those from disadvantaged backgrounds.
A body, independent from government, could be given funds that it would allocate to support these programs.
Funds would be tendered for by organisations (community or private sector) with proposals for improving employment outcomes for disadvantaged groups.
There would be a great deal of flexibility in the type of projects that would be funded – from early years interventions through to labour market programs to assist those currently unemployed.
Decisions on which proposals to support would be made using a benefit-cost method. Projects with the highest benefits to society relative to costs would be funded.
Allocating funds in this way would provide an organic process for identifying and developing programs to assist those from disadvantaged backgrounds.
Organisations with an understanding of how to improve outcomes in their local area and the capacity to implement their ideas could thereby obtain access to funds.
Making access to funds subject only to the quite broad objective of improving labour outcomes for those from disadvantaged backgrounds also increases the likelihood that programs can be tailored to meet the needs of that group.
And having a body independent from government (similar to the Australian Research Council) would remove the political dimension from decision-making on which proposals to fund.