Tony Abbott is having a horrendous run. He’s now more unpopular than Bill Shorten, who holds an 11 point lead in approval ratings, a reversal that is truly spectacular.
His big problem is a tough budget that broke promises.
One of the Government’s signature policies is to push young people into taking work. Their policy is called “earn or learn.” It will deny the Newstart (dole) payment to anyone under the age of 25; and people aged 25-30 will not be eligible for the dole in their first six months of unemployment.
”There is no right to demand from your fellow Australians that just because you don’t want to do a bread delivery or a taxi run or a stint as a farmhand that you should therefore be able to rely on your fellow Australian to subsidise you,” said Employment Minister Eric Abetz.
The rationale is to stir up resentment at the welfare state.
“The bludger should not be our national icon.” – Rupert Murdoch, (American citizen)
It’s an entirely political, dog-whistle ploy to make underpaid workers of Australia target their resentment at the unemployed, not the managers that dine with their own remuneration committees.
But doesn’t mean the policy intent is all bad. Here’s why the policy can do good for some people (caveats follow).
Long-run unemployment is one of the most damaging things that can happen to a person. It causes not just a fall in skills (human capital). It is associated with worse health outcomes, including mental health issues, falling life expectancy, higher chances of dropping out of the labour market, and their children’s school performance.
Long run unemployment is also bad for the economy. Hysteresis is now an accepted fact of macroeconomics. It describes the way long periods of high unemployment make the minimum achievable unemployment rate creep higher and higher. An economy that can match people into jobs swiftly increases the welfare of future workers.
Sure unemployment is bad. But people know that and want to get themselves a job. No?
Well, a new paper from the National Bureau of Economic Research shows that unemployed workers set a reservation wage that affects their willingness to take a job.
“workers are 24 percentage points more likely to accept an offer that is equal to or exceeds their reservation wage than to accept a job with a wage below the threshold.”
This fits with some excellent new research by Australian economist Justin Wolfers. He found arbitrary thresholds are a source of important irrationalities in human behaviour, and illustrated it with marathon finishing times.
Wolfers’ article focuses on how arbitrary thresholds could cause irrational investment behaviour, especially the case of people being unwilling to sell their house for less than they bought it for. But the analysis could as easily apply to reservation wages, which can be set with reference to what you used to earn.
If you refuse a job because if pays $5000 a year less than your old job, but then spend months more unemployed, you may well be worse off.
These pieces of research are part of the new behavioural economics that finds predictable irrationalities in human behaviours.
It is not uncommon for social outcomes to be improved with a “nudge” toward the more rational course of behaviour. Traditionally, of course, conservatives oppose these kind of nudges, preferring to let humans remain “free”, while liberals tend to endorse them. In the case of “earn or learn,” it is more of a shove then a nudge, and conservatives are more likely to be fans of it.
I don’t want to stand up for the exact policies that the Coalition has brought in. I think they are too blunt to have a net good effect. But the concept that the labour market will reach equilibrium without intervention is also likely wrong – unemployed people should be encouraged to not just search for, but take a job.
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CAVEATS:
- Geographic moves should not be encouraged. It is not smart to make people move away from their social networks and supports. Humans are not only economic actors, and as discussed in these very pages, jobs are found through people as often as through job ads.
- The ABS covered, just this week, how much unpaid work is being done in the economy. It is estimated at 40 to 60 per cent of GDP. A focus on paid contributions could be said to be discriminatory against the people doing this work, often women.
- Are all jobs equal? Sex work is legal – should young men and women be forced to take jobs as prostitutes if they are unemployed? Should young people be forced to join the armed forces, do coal mining or be prison guards? Some jobs can be really dangerous to your reputation – for example, not everyone would want to be a member of parliament.
Thomas the Think Engine 
Jason, I suspect there is an industry effect that matters here. Should someone trained in a speciality take a low wage job in preference to waiting for something to open up? Being out of the industry lowers their human capital too, and (perhaps) limits their freedom to enter that field (geographically especially, but also time). At what point should they exit that field (structural factors? ) and what is the loss in capital if they do so?
On a similar note, what do we know about entrepreneurs? They are normally young, businesses are borderline prospects on creation, and they need whole-hearted commitment. But as long as you can eat you can create. Business creation in the USA has been declining, and part of that is the increased risk from failure. 99.99% of people on unfettered unemployment benefits won’t produce anything, but the few who do could easily offset the losses.
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Russ, that’s a good point you make. If six to twelve months of the dole is the price we pay to help a new graduate in train propulsion systems wait for her dream job, and not become an accountant, the the dole may have an important role in rising productivity by job matching.
As for entrepreneurs, are they really on the dole when they invent new busineses? I am aware of this program that someone I knew was half-heartedly involved in: http://employment.gov.au/new-enterprise-incentive-scheme-neis
But I suspect most have some cash in their back pocket.
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I suspect the answer is very few (even if we broaden the term entrepreneur to all the so-called creative class) because being on the dole is hard work (much easier to get a part-time job). That said, many years ago, I spent a couple of months working on something while on the dole, that was put to a company who subsequently offered me a job. The mantra of earn or learn is a very narrowly constructed understanding of both concepts.
Are there any studies on the societal costs of unemployed people taking money and neither contributing any value (volunteering, own projects, family care) nor attempting to find work? Keeping in mind that the loss is probably close to zero until there is a sufficient labour shortage to raise wages. And do they exceed the significant dead-weight loss of the apparatus that ensures compliance?
Which is a roundabout way of saying I’d prefer a guaranteed income and no minimum wage, to a high minimum wage and forcing people who struggle to generate that level of value to hunt for a limited pool of jobs.
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Thought provoking post. One of the effects of making the dole harder to obtain is that it incentivises people to seek out more secure welfare schemes, hence the increasing number of disability pensioners.
Is there an effect that limiting welfare schemes results in more crime? Faced with eviction and stealing car stereos it might be tempting to choose the latter.
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What about the guaranteed income experiments in the US and Canada (and now others) that seemed to produce such good results? E.g. Mincome in Canada in the ’70s, the data from which has only been analysed in the last few years but showed things like lower hospitalisation rates and mental health issues, plus higher levels and better scores in education. The people who worked less were those it could be considered valuable to have working less – teenagers who could concentrate on school and new mothers who could look after their children. (These points from wiki). How does this fit into the research on long-term unemployment’s effects and whether and how to avoid it? Is cutting off people’s income the way to do it?
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Sounds like a whole other blog post is required!
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https://en.wikipedia.org/wiki/Hikikomori
What do you think of the possibility of a western equivalent? What if no economic incentive is going to be effective?
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I bet there’s lots of that these days even in Australia. As someone who works from home and often only talks to the dog from 9-5, it’s slightly too close to home!
The phenomenon is no doubt linked to labour markets. What looks like a private choice is so often about incentives. I bet if jobs were super prevalent for the young in Japan then hikikomori would diminish. Our job market is more flexible for young people than is theirs, but youth unemployment is still quite high.
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