Date created: 28 November 1996
Last modified: 18 November 1997
Maintained by: John Quiggin
John Quiggin

Unemployment solution only modestly taxing

The Australian

Oct 13, 1994.

It is now generally accepted that the target of 5 per cent unemployment by the year 2000, announced in the White Paper Working Nation earlier this year, will not be achieved under current policies. Treasury Secretary Ted Evans has openly said as much. The Reserve Bank, by raising interest rates at a time when 800 000 people are still unemployed has showed that, in economic policy, actions speak even louder than words. The Bank's actions make sense only in the context of an economic analysis in which unemployment rates of 8 per cent are accepted as natural, inevitable and even desirable. Tha announced rationale for tightening monetary policy is that it will pre-empt the buildup of inflationary forces that would otherwise necessitate more drastic tightening and a renewed recession. Allowing for the lag of 12 to 18 months that is believed to elapse before monetary policy takes effect, this means that the policymakers in the Bank see an economy with an unemployment rate of 8 per cent as dangerously prone to overheating, and in need of restrictive policy actions. If the Bank's implied predictions are correct, we can expect to see unemployment stabilising around 8 per cent in the late nineties. If, as seems quite possible, credit is squeezed too tightly, we will see a new recession, probably with unemployment rates even higher than those of 1991 and 1992. Either way, the prospects of achieving 5 per cent unemployment seem remote.

The generally acknowledged failure of what is purported to be the central plank of the government's economic program might be expected to be a major issue of political debate. Yet our leaders appear far more eager to argue about the number of stars on the flag. One reason for this is that, despite occasional rhetorical flourishes, there is no significant disagreement between the leading members of the two major parties on any issue of economic policy. The second is that both parties have succeeded in convincing voters, and themselves that high unemployment is here to stay and that little or nothing can be done about it.

Can full employment be restored? In a recently published book written with John Langmore MHR, I have argued that a return to full employment (conservatively define to mean an unemployment rate of 3 per cent) is both feasible and desirable. The central thrust of our argument is that unemployment is ultimately the result of a decline in the demand for labour which is, in turn, the result of constraints on public expenditure on services such as health, education, police and the environment. The result is a paradoxical situation in which hundreds of thousands of workers, many with years decades of training and experience, are sitting idle, at the same time as vitally needed services are being cut back on the grounds that insufficient resources are available.

This paradox is evident throughout the OECD, but Australia is uniquely well-placed to break this cycle. Our public debt is low by international standards and our tax share of GDP is now the lowest in the OECD. Very modest increases in taxation levels would be sufficient to fund a major expansion of employment (up to 700 000 extra jobs) and the provision of desperately needed community services. For the majority of wage and salary earners there would be no need to increase taxes at all.

Although an increase in taxation would reduce private sector demand, there would still be a substantial net increase in employment with the same level of aggregate demand. This is because a much greater share of each dollar of expenditure on community services goes on employment than is the case with total private sector demand. Furthermore, a large share of marginal increases in disposable income, particularly for upper-income earners goes on increased imports and therefore has no beneficial effect on Australian employment.

Private sector employment could be boosted in several ways to offset the impact of higher taxes. If the industrial relations system gave workers more control over their own working hours, the present retrograde tendency towards increasing hours for full-time working hours could be reversed and the extensive under-employment of part-time and casual workers reduced. Reform of the company tax to eliminate the distorting 'tax on jobs' (payroll tax) could be achieved without changing the average tax burden on companies. Finally, the use of increased taxation to finance better services will reduce imports and permit the adoption of a more expansionary monetary policy, avoiding another round of high interest rates, credit contraction and bankruptcy.

The restoration of full employment would not be an easy task. But the biggest obstacle is the belief, cultivated by politicians of both parties, that the task is an impossible one.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

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