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Work for All - what's stopping us ?

John Quiggin

Professor of Economics

James Cook University

Published as:Quiggin, J. (1997), 'Work for all -- what's stopping us?', Australian Options , 25 February

Work for All - what's stopping us ?

Unemployment is easily the greatest economic problem facing Australia. A return to full employment would raise GDP by between 6 and 10 per cent, and turn the existing Budget deficit into a massive surplus (Junankar and Kapuscinski 1992, Langmore and Quiggin 1994). Public opinion polls consistently report unemployment as the most important policy concern for the majority of Australians. Nevertheless, unemployment has virtually disappeared from the policy agenda. The only policy initiative so far undertaken by the Howard government has been the elimination of the remaining Working Nation employment programs, to be replaced by the gimmickry of 'work for the dole'.

This lack of concern extends to the main contributors to the policy process. A recent set of studies the Australian labour market, commissioned by EPAC (1996) and consisting of six separate articles, managed two brief mentions of unemployment. Unemployment has not been a major research concern for the economics profession more generally. None of the plenary sessions of the 1996 Conference of Economists dealt with unemployment, and few papers were even peripherally concerned with the issue.

Unemployment has not been ignored entirely by economists. From very different perspectives, Langmore and Quiggin (1994), published under the name Work for All, and Hughes (1994) have proposed policy programs aimed at a return to full employment. However, these contributions have had no impact on the policy process. This is not merely to say that the policies proposed have not been adopted; they have not even been seriously considered. The aim of this article is to consider why proposals to achieve full employment, and particularly those presented in Work for All, have received so little attention.

Work for All: a re-statement

The central assumption in Work for All is that full employment should be the central priority of economic policy. Hence, a wide variety of measures are considered, provided that their net impact is to reduce unemployment. Issues addressed include more flexible working hours (at employees' rather than employers' discretion), replacement of payroll taxes with carbon taxes and active labour market policies on a scale more ambitious than that of Working Nation.

The core of the proposed program is a substantial increase in expenditure on community services, financed by a variety of taxation measures. Since the effect on aggregate demand is approximately neutral over the cycle, this is not a traditional Keynesian policy of demand stimulus, although it has Keynesian elements. Rather the main idea is that of demand switching. By increasing the proportion of demand allocated to labour-intensive activities and reducing the proportion allocated to imports, it is possible to maintain a higher level of employment for any given level of aggregate output or any given current account balance.

This part of the argument may be expressed in terms of an input-output model of the economy. The basis of input-output analysis is the observation that goods and services are produced using a combination of factor inputs, such as labour and capital, intermediate goods that are themselves produced in the region concerned and intermediate goods imported from other regions.

The community services sector is the most labour-intensive sector in modern economies, including the Australian economy. The Australian Bureau of Statistics estimates the employment multiplier associated with a $1 billion increase in final demand for community services at 50 000, the highest of any sector in the economy. Hence, for any given level of aggregate demand, an increase in the proportion allocated to community services, with a corresponding reduction in the demand for the output of all other sectors, implies an increase in employment. In addition, the community services sector is among the least import-intensive sectors of th economy. Hence, an increase in the share of final demand allocated to the community services sector permits an increase in both aggregate demand and employment for any given level of imports, and hence for any given level of the current account deficit.

The basis of this analysis is the belief that overheating of the economy as a whole, and particularly current account constraints have proved the major obstacle to any expansion of employment over the past twenty years. This analysis seems to fit the experience of the Australian economy, at least since 1983.

The current account constraint has been even more clearly evident in such disparate episodes as the failure of Keynesian stimulatory policies under the Mitterand government in 1981 and the collapse of the 'Thatcher miracle' in the late 1980s. It appears that the 'New Zealand miracle' is now encountering similar difficulties, despite exemplary success in holding down real wages. The 'exception that proves the rule' is the United States, where, because of the apparently unlimited willingness of world capital markets to accept $US-dollar denominated securities printed by the United States government, the current account constraint is inoperative.

A more positive lesson may be drawn from Sweden during the 1980s, where high levels of expenditure on community services contributed to the maintenance of full employment long after its disappearance in most OECD economies. The ultimate failure of the Swedish approach was not the result of wage inflation. The proximate cause was the recession commencing in 1989, the severity of which was greatly increased by an asset price boom and bust resulting from financial deregulation. After the recession, Sweden was under great pressure to adopt 'harmonised' European Community economic standards, implicitly including high unemployment. Sweden's capacity to defend a large community services sector was weakened by the large share of transfer payments, resulting in a very high ratio of public revenue and expenditure to GDP. Largely because of its reliance on flat-rate means-tested transfer payments, Australia's ratio of public revenue and expenditure to GDP is among the lowest in the OECD. Australia is, therefore, in a position to greatly expand expenditure on community services while remaining at or below the OECD average for government revenue and expenditure shares of GDP.

Globalisation

The majority of objections to the feasibility of the Work for All program from both the Right and the Left are tied in some way to the concept of globalisation. This term refers to the expansion in world trade and particularly in capital flows that has taken place since World War II and is associated with a claim that this process has removed the power of national governments to undertake independent economic policies. On the Right, the claim is cast in terms of the need to be internationally competitive, and therefore to reduce what are seen as cost burdens on the productive private sector. On the Left, attention is focused on the capacity of international financial capital to frustrate national governments and to impose the policies they desire.

The growth of international financial markets and the collapse of regulations controlling those markets has been a negative phenomenon. It has substantially worsened the performance of domestic capital markets and has constrained the ability of governments to pursue policies aimed at macroeconomic stability.

Advocates of full employment must recognise this, without being paralysed into inaction. The displeasure of the money markets may generate a devaluation and a temporary increase in interest rates but it cannot ultimately undermine a government that adopts sustainable fiscal and monetary policies. Australia has suffered more over the past decade as a result of overvalued exchange rates, and the resulting losses to exporters, than as a result of devaluation. Policies like privatisation and competitive tendering may fit the world view associated with terms like 'globalisation', but they are not in any meaningful sense demanded by globalisation. An Australian government that pursues policies in the national interest and avoids persistent Budget deficits cannot be derailed by the displeasure of financial markets.

Political obstacles

If the policy proposals in Work for All are economically feasible, the fact that they have not been adopted must reflect the operation of the political system. Political outcomes may be explained either in terms of economic interests or in terms of ideas. In interest-based explanations, political processes reflect a struggle between economic classes or interest groups. The most prominent examples are Marxism on the Left and public choice theory on the Right.

A Marxist explanation of the political failure of Work for All is straightforward. The existence of a large 'reserve army of unemployed' is in the interests of the capitalist employer class since it facilitates labour discipline. Hence governments acting in the interests of employers will reject proposals aimed at achieving full employment.

The problem here is that there is no explanation of the long boom, from 1940 to 1973, during which unemployment rates were held below 2 per cent The long boom creates two difficulties for the Marxist approach. First, why does the capitalist class have the power to enforce high rates of unemployment now, when it did not have that power during postwar boom? Second the experience of the postwar boom shows that full employment is consistent with high and growing profits? The profit share of national income declined over the course of the postwar boom, but this was more than offset by high growth rates. Since the breakdown of the postwar boom, profit shares have recovered, but the rate of growth of aggregate profits has declined along with the growth rate of GDP.

Unlike Marxist analysis, public choice theory models political outcomes as the result of an interaction between narrowly defined interest groups. The financial sector is an important example. Although business as a whole may not benefit from policies that generate high unemployment, the financial sector clearly does. For the majority of financial assets, the most important factor affecting the real rate of return is the inflation rate. The value of a 10-year Australian government bond held to maturity is unaffected by whether the unemployment rate is 2 per cent or 20 per cent. But a shift in the inflation rate from 2 per cent to 4 per cent corresponds to a 20 per cent capital loss. Therefore, the financial sector constitutes a strong lobby against any policy that may be seen as potentially inflationary. Deregulation has increased both the power of the financial sector and its impact on the political process.

This version of the story may be taken further by observing the personal enrichment of leading politicians arising from association with the financial sector and the broader 'new money' interest group exemplified in the 1980s by 'entrepreneurs' such as Bond, Skase and Elliott. In these circumstances, the notion that politicians serve the interests of financial capital, rather than that of the public, or even that of the parties they represent, has a certain appeal.

Yet this explanation seems ultimately unsatisfactory. Politics is so uncertain, and so overcrowded, an occupation that it seems unlikely to attract individuals concerned primarily with wealth maximisation. Most politicians appear to place a substantial value on holding office, whether for its own sake, or to permit the implementation of policies they believe to be desirable. Hence, the acceptance or rejection of policies and programs by politicians and parties will be driven by beliefs about the desirability and electoral salability of those policies.

The fact that the Liberal and National parties rejected the policies proposed in Work for All is unsurprising. The official ideology of these parties is one of small government and free markets. Being in opposition, their main requirement for electoral success was to avoid controversy of any kind.

The rejection of Work for All by the Labor party requires more explanation. In the light of the disastrous economic failure symbolised by the recession, Labor should have been ready for a reconsideration of the wisdom of abandoning its traditional views during the 1980s. The political calculus also appeared favorable. Labor's primary vote had declined steadily during the 1980s. Labor received 49.5 per cent of the first preference vote in 1983, 47.5 per cent in 1984, 45.8 per cent in 1987 and 39.4 per cent in 1990. Support briefly bounced back in 1993, before falling to 38.7 per cent in 1996, the lowest since World War II, and one of the lowest since Federation. Unfortunately no lessons were drawn from this steady decline. The 1993 election victory was interpreted by Keating as a personal endorsement. Even after the crushing defeat of 1996, the remnants of the Parliamentary Labor Party are still dominated by the Hawke-Keating view of political realism.

Concluding comments

The political analysis in Work for All has been identified by sympathetic critics such as Probert (1996) and Smyth (1996) as the weakest part of the book. This judgement is fair. Work for All was successful in identifying a large potential base of support for the proposed program. But the most promising suggestion as to how this support base might be mobilised was based on an individual change of heart. It was argued that Keating might once more exhibit his notable political flexibility and become an advocate for a program that, in large measure, repudiated his own most distinctive contributions to policy in the 1980s. In retrospect, Keating could not have done worse by this course of action than by sticking to the policy status quo. But it must be said that the idea of a last-minute conversion was something of a forlorn hope. Keating's personal commitment to the policies of the past was so great that the prospecting of change was minimal.

It was predictable, if depressing, that the Keating government would reject Work for All. It is harder to explain the continued adherence of the Labor Party to policies that have been so overwhelmingly rejected by Labor's core supporters. Although there have been some recent signs of movement, much more is needed if Labor is to regain credibility. Only a genuine commitment to work for all will create a genuine renewal of Labor as a political force. The task for advocates of full employment is one of more carefully explaining and justifying their economic position, and of taking more careful account of the political context in which policies must be adopted and implemented.
References

Economic Planning Advisory Council (1996)Future Labour market issues for Australia, Commission Paper No 12, Canberra, AGPS.

Hughes, H. (1994), Achieving Full Employment, Discussion Paper 1/94, The Full Employment Project, Melbourne.

Junankar, P. and Kapuscinski, C. (1992) The Costs of Unemployment in Australia, EPAC Background Paper No. 24, Canberra, AGPS.

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

Ormerod, P. (1994), The Decline of Economics, Faber and Faber, London

Probert, B. (1996), Review of Work for All:, Just Policy.

Smyth, P. (1996), 'Reinventing full employment: Work For All in retrospect', paper presented at Academy of Social Sciences Workshop: Employment, Equality and Inequality in Australia, Canberra.

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