27/7/95

Work to be Done

John Quiggin

Department of Economics

James Cook University

Work to be Done

Fifty years ago, the pathbreaking White Paper on Full Employment observed that unemployment was not the result of a lack of jobs to be done, but of an economic system that failed to do the job

Despite the need for more houses, food, equipment and every other type of product, before the war not all those available for work were able to find employment or to feel a sense of security in their future. On the average during the twenty years between 1919 and 1939 more than one-tenth of the men and women desiring work were unemployed. In the worst period of the depression well over 25 per cent were left in unproductive idleness. By contrast, during the war no financial or other obstacles have been allowed to prevent the need for extra production being satisfied to the limit of our resources.

The same point is valid today. At a time when 8 per cent of the workforce is officially recorded as unemployed (the true figure is probably closer to 15 per cent) a wide range of social needs is going unmet. Services which we managed to provide for ourselves twenty or thirty years ago are now deemed to be unaffordable. The economic policy framework that gave us the Great Depression has been revived, and has generated the same outcomes as it did then.

The purpose of this paper is to show that there is work to be done. With a more rational economic policy, we could achieve both full employment and the provision of vital services.

The 5 per cent target

The official view of the government is that the unemployment problem has been solved. All we need to do is wait, and full employment (defined as an official unemployment rate of five per cent) will be restored by the turn of the century. So confident is the government in this projection that it made large cuts to its Working Nation employment programs in the 1995-96 Budget. The program is scheduled to be completely phased out by 1998-99.

Before considering whether the government's five per cent target is likely to be achieved, it is important to endorse the reported statement by Mr. Kemp, the Opposition spokesman on employment that a five per cent rate could not be regarded as full employment, and that a three per cent target is more appropriate. Unfortunately, it appears that the Leader of the Opposition, Mr. Howard has disavowed this statement, at least as a policy objective for a future Liberal government.

The five per cent target was first presented in the Green Paper, Restoring Full Employment, commissioned by the govt from an expert working part appointed to examined the problem of unemployment. The expert committee reported that with consistent growth of 3.75 per cent, the unemployment rate would be above seven per cent until the turn of the century. It was estimated that more rapid growth, at a rate of 4.75 per cent, could yield unemployment rates of five per cent by the year 2000. In our book, Work for All, John Langmore and I suggested that this analysis was over-optimistic. Assuming that micro-economic reform would generate relatively rapid growth in labor productivity (largely through job-shedding) we argued that, in the absence of a change in the pattern of economic growth, even an average rate of 4.75 per cent would be inadequate.

Our analysis was based on some very simple equations

% Employment growth rate = % Economic growth rate - % labour productivity growth rate

% Labour force growth rate = % Population growth rate + % Change in participation rate

% Change in unemployment = % labour force growth rate - % Employment growth rate

From these equations, it is possible to show that the rate of unemployment is determined by economic growth, population growth, productivity growth, and the participation rate. We assumed partly on the basis of the period of 'jobless growth' following the recession that labour productivity would grow at around 2.5 per cent per year. Since population growth and the trend increase in participation mean that the potential labour force is growing at around 1.5 per cent per year, this means that 4 per cent growth would be needed even to hold unemployment steady.

As it has turned out, the last year has been one of very rapid employment growth and correspondingly low productivity growth. In fact, measured productivity has actually fallen. It now appears that the period of jobless growth was merely a statistical 'blip' and that productivity growth is likely to continue at around the 1.5 per cent rate observed from 1973-87. That is, the promised prductivity benefits of micro-economic reform have turned out to be almost totally illusory.

What this means is that the original calculations presented in the Green Paper are about right, except that unemployment is about one percentage point lower than might have been expected. Allowing for the strong employment growth of the past year, an average growth rate of about 4.5 per cent is necessary to achieve a return to 5 per cent unemployment by the year 2000. If an average rate of 3.75 per cent were achieved, unemployment would still be above 6 per cent at the turn of the century. While this would be an improvement on the current position, it represents a deterioration in performance relative the last cycle, when the seven years of (briefly interrupted) expansion from 1983 to 1989 were sufficient to push unemployment below 6 per cent (the low point was 5.7 per cent).

Even with superb macro-economic management, however , it will be impossible to avoid at least some years of economic downturn, say, one year of zero growth out of the next five years. To achieve an average economic growth rate of 4.5 per cent, it would be necess-ary to maintain growth rates of around six per cent in normal years. In the absence of fundamental changes in policy, this would almost certainly imply a balance of payments crisis and a rapid reversion to restrictionist policies.

An alternative

It is obviously unlikely that the rate of growth in Australia will return to six per cent any time soon. The only way to achieve a return to full employment is to reorient our economy so that a given rate of growth generates more jobs. One way of doing this has been illustrated by the United States. If wages are pushed low enough (by some estimates a 30 per cent cut is needed) and unemployment is made unattractive enough, low-wage, low-skill areas of the economy such as fast-food restaurants and domestic service will expand, and the level of unemployment will fall. To the extent that the economic fundamentalists who dominate policy discussion in Australia havea program to reduce unemployment, this is it.

There is however, an alternative. As was argued in Work for All an expansion of twenty per cent in employment in the education and health sectors could be generated simply by raising standards everywhere to the highest levels now prevailing in Australia. In many cases, this would simply be a matter of reversing recent cuts in service provision, or of abandoning plans for future cuts. If a similar process were repeated across the community services sector, the result would be the creation of around 370 000 new jobs, for a total gross expenditure of around $10 billion. These jobs would be spread across the public sector, private non-profit organisations including charities and private schools and some profit-making (but still in many cases publicly financed) enterprises such as nursing homes and day-care centres. This is quite credible since, even with severe funding constraints, unemployment in community services grew by close to 450 000 during the last decade. Removal of the artificial funding constraint, which prevents supply of services meeting demand, would allow the provision of services to catch up with need as well as to make improvements in quality.

Whereas under current trends a little under twenty per cent of the labour force would be employed in the community services sector by the end of the century, the proposals advanced here would yield an employment share of around twenty-three per cent. This would represent no more than a return to the growth trend of the sixties and seventies. As Baumol (1967) shows, this growth trend is a natural and economically desirable response to the underlying trends in demand for services and the technology of provision. Its interruption in the eighties reflected fiscal dislocation and the impact of fundamentalist ideology, rather than a community demand for poorer services.

There would not be a perfect match between the jobs created in this program and the skills of those currently unemployed. However, the community services sector encompasses jobs with a wide range of skill levels and types. Although white-collar professionals are heavily represented in areas such as education and health, many jobs in environmental preservation are blue-collar.

Similarly, it should not beassumed that a focus on jobs with low skill levels is desirable. Recent cutbacks mean that there are plenty of unemployed teachers, health workers and others ready to fill places created in the early stages of expansion. More generally, the unemployed, and even the long-term unemployed, are not all unskilled workers. Approximately 35 per cent of long-term unemployed workers have at least one post-school qualification (Chapman 1993). This is lower than the figure for the population as whole (50 per cent), but it points up the fact that unemployment in Australia now affects the whole workforce and not a concentrated and marginalised group.

Over time, there would be a need for increased training and retraining to ensure that the expansion in labour demand proposed here was met by a supply of suitable labour. But of course, such an expansion in training is a central element of our proposal. Thus, there is no reason to suppose that the program would run into labour supply 'bottlenecks'.

In addition to around 370 000 new jobs in the community services sector, the proposals presented in Work for All would generate between 75 000 and 100 000 jobs in the infrastructure sector. The net impact of the policy program on private sector employment is broadly neutral. A net gain of 450 000 jobs would therefore be possible.

Expanded and reoriented public expenditure

The biggest single element of the program proposed in Work for All is an expansion of employment in publicly financed community services. This would not be targeted directly at the unemployed, although there would be an attempt to design new jobs that would permit a transition into the permanent work-force from direct job creation and training schemes. The primary employment objective would be to raise the aggregate demand for labour and thereby improve the prospects of all workers.

An increase in community services employment, financed by taxation, represents a shift in demand, resulting in a greater intensity of employment demand for Australian workers. As a first approximation, the whole of the increase in public sector spending may be assumed to increase employment demand for Australian workers.

This increase in employment will, at least initially, be partly offset by reductions in private consumption spending. However, a significant proportion of discretionary spending goes on imports and other areas of consumption are significantly less labour-intensive than community services. Even in the absence of any other adjustments to policy, about half the jobs generated by a tax-financed increase in community services employment would represent net gains.

However, such an expenditure switch would create the potential for a more expansionary stance in other areas such as monetary policy. The main constraint on economic expansion in Australia has been the fear of excessive current account deficits. An increase in employment of Australians in the community services sector, funded by an increase in taxation would imply a reduction in the current account deficit. This would permit the adoption of more expansionary monetary policies and lower interest rates. Under favourable circumstances there would be no net reduction in private sector employment, and the entire increase in community services employment would represent a net employment gain. The basic point is that since the additional public demand is applied entirely to employing Australian workers, the level of private demand consistent with acceptable current account deficits is unchanged.

Major areas of expansion in community services would be health, education and public safety. But the range of community services is far broader than this. It encompasses services to the very young such as child care and baby health centres; services to youth including the provision and staffing of community centres and sports facilities; services to the aged (provision of increased support for the Home and Community Care Program to allow older people to remain in their own homes is a high priority here); and services to groups with special needs including Aborigines, ethnic communities and the disabled. Other social goals include the provision of housing for all, support for a vibrant Australian culture through assistance to literature and the arts and the expansion and adequate staffing of our system of national parks, to provide a well-managed system representative of all major ecosystems.

Unfortunately, it is precisely these services that are being cut back under the prevailing orthodoxy, frequently referred to as 'economic rationalism'. A large proportion of community services are in the public sector, and therefore continuation of rapid employment growth depends on expanding public outlays, and therefore on a community willingness to accept higher levels of taxation. A major reason for the growth of unemployment during the last two decades has been the severe restrictions on public outlays. Total Commonwealth funding for the states--which are the main providers of community services--has fallen from 9.5 per cent of Gross Domestic Product 'GDP' in the mid-seventies to 5.4 per cent now. This massive reduction is the main reason for the cutbacks to services which all state and territory governments have been forced to make. Much of the 'expansion' proposed here would simply involve preventing cuts in services that would otherwise take place, particularly at the state level. If the program of expanded public employment proposed here were implemented entirely through grants to the states, it would only restore them (in real, per capita terms) to the level prevailing in 1983-4.

Benefits of expanded public spending

Even if net employment gains were fewer than has been estimated here, the shift in policy we advocate would still be highly desirable. The policies proposed would yield substantial social benefits in themselves, even without considering their employment impact. In particular, the proposed expansion of education spending is based on a recognition that improvements in education are essential to the future of young people in a society that offers fewer and fewer jobs for the unskilled. This concern is supported by economic theory and empirical evidence. Education is the most important single input to increased future productive capacity. The existence of a skilled and adaptable work-force is the main prerequisite for high and rising productivity levels and hence high and rising standards of living. Most recent research on economic growth stresses the role of human and social capacity, as distinct from stocks of physical capital, as a primary determinant of economic growth.

Areas of spending typically perceived as 'soft' can in fact yield very substantial economic benefits. Two examples are services to abused and neglected children and marriage counselling services. The problems of abused and neglected children are some of the most difficult, and also some of the most important, that are faced by any society. The horrific cases of child abuse that regularly appear in the headlines represent only the tip of the iceberg. Furthermore the effects are frequently lifelong. The victims of child abuse are disproportionately represented in our prisons and mental hospitals, among those who commit suicide, and most tragically of all, among those who abuse their own children. The long-term social and economic costs of our failure to make an adequate response to the problem are immense.

There are no easy solutions to the problem. As a number of recent cases have shown, increasing the power of social workers to remove children from abusive homes may create as many problems as it solves, particularly when overloaded caseworkers are forced to make decisions based on inadequate evidence. The preferable solution of resolving problems within families often requires a commitment of resources which is not forthcoming. When children are removed from their homes, the same problems of inadequate funding emerge once more. According to the New South Wales Child Protection Council, there have been recent cases where children who have been placed in care are not even provided with shoes and clothing of their own.

Australia's response has always been inadequate, and is becoming more so. In the three years from 1989, the number of notifications of child abuse in New South Wales increased by thirty-six per cent (from 17458 to 23818) but expenditure decreased from $30.7 million to $27.9 million (Sydney Morning Herald, 21 September 1993). Expenditure per child has almost halved in real terms in three years, and the previous level of spending was woefully inadequate.

These cuts have not been the result of efficiency-based benefit-cost analysis. Any such analysis would show that the long-term social costs of allowing children to suffer abuse, or pushing them into inadequately funded systems of child protection, greatly outweigh any short-term savings. The cuts are the result of the remorseless squeeze on public spending, reflected most dramatically in the halving of grants to state governments as a proportion of GDP during the last two decades. Since child protection services are funded out of the general purpose spending of the states, they have suffered severely, even while Commonwealth spending on areas such as defence equipment has increased substantially in real terms.

One of the most effective means for reducing the causes of child abuse would be to make a significant improvement in support for marriage and human relationship education and conflict resolution. Despite the enormous economic, social, psychological and emotional costs of family conflict, services to prevent, ease or resolve these conflicts have been relatively neglected. For example, funding for the prosecution of war criminals, which did not in the end lead to a single conviction, was for a while being better funded by the Commonwealth than all the marriage counselling services around the country. Even in 1993-4 the Commonwealth Budget appropriation for marriage counselling totalled only just over $20 million.

The all-party Parliamentary Joint Select Committee on the Family Law Act concluded that a substantial increase in funding for marriage counselling and mediation is urgently required. This measure is warranted, not only because of the importance of reducing conflict in marriage, but also for the major savings in costs to the community, incurred through family breakdown, which such funding would help avoid. Such services should be made available without delay (at present there are delays of up to six weeks) and be readily accessible in all parts of the country. Funding should also be substantially increased for community education about the rights and responsibilities of marriage and parenthood, effective parenting, dispute resolution and anger management.

The provision of home-care to the aged is another area where spending in the short-term can yield dramatic benefits in the longer term. By permitting older people to remain largely independent, a relatively small expenditure on home-care can save much larger amounts that would otherwise be spent on nursing home care, at the same time as it yields people a much higher quality of life.

All of these areas of expenditure are highly labour-intensive. More spending would generate substantial employment gains. The Australian Council of Trade Unions (ACTU) in its A Program Towards Full Employment estimates that 50 000 jobs could be created in the areas of home and community care, child protection, support outside institutions for the mentally ill and supported accommodation.

Taxation

The policy framework proposed here has been rejected by government, not because it is infeasible, but because of the political imperative that taxes must not be increased. At one time this political imperative had an economic rationale, the idea that government needed to 'make room' for private sector expansion. It is now generally recognised that room has been made, and it has been left vacant. But the political prohibition on increased taxes

Australia is a lightly-taxed country, and the majority of Australians would be willing to pay higher taxes in return for improved community services (EPAC 1994). In Work for All, a range of possible tax measures were proposed sufficient to raise $10 billion a year in additional revenue. This would only increase the revenue share of GDP by 2.5 per cent and would still leave Australia very lightly taxed. Among the measures that might be considered are:

Table 1 Summary of financing options

Income taxes $4-6 billion

Inheritance taxes $1.5 billion

Reduced tax concessions $3-$4 billion

Indirect tax changes $1-$2 billion

Defence expenditure cuts $2 billion

Road and infrastructure cost recovery $1 billion

None of the measures proposed here is politically easy, and some will undoubtedly prove too hard. However, given the right leadership and a strong commitment to fighting unemployment, it is perfectly possible to raise the required revenue.

Concluding Comments

Unemployment represents the greatest single failure of Australian society. Many of the other problems we face, including growing inequality, crime and rising rates of youth suicide are, in large measure, the product of persistently high unemployment rates. Australia has always been well-endowed with natural resources. Along with continuing technological progress this gives us the capacity to ensure a decent standard of living for all.

Given the political will, unemployment could be greatly reduced. There are no fundamental obstacles to a restoration of full employment, nor is there a shortage of jobs needing to be done. Mass unemployment represents a fundamental breach in the social contract, and in particular in the contract between the older generation and the yonger generation.. We owe it to our young people and ourselves, to make the task of restoring full employment the central issue in economic policy.

References

Baumol, W. 1967, 'Macroeconomics of unbalanced growth: the anatomy of the urban crisis', American Economic Review vol. 57, pp.415-26.

Chapman, B., 1993, Long term unemployment in Australia: Causes, consequences and policy responses, Dept. of Employment, Education and Training, Canberra.

Langmore, J. & Quiggin, J. 1994, Work for All: Full Employment in the Nineties, Melbourne University Press, Carlton, Victoria.

Withers, G., Throsby, D. and Johston, K. (EPAC) (1994), Public Expenditure in Australia, EPAC Commission Paper No 3, AGPS, Canberra

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