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

The case for a jobs levy instead of following the US

Australian Financial Review

Dec 15, 1993

The basic case for a jobs levy is simple. A million Australians are unemployed (according to the official ABS measure) with perhaps a million more underemployed or unwillingly out of the labor force. At the same time, our community seems less and less able to meet its basic needs. Schools are being closed, hospital beds rationed, and public facilities allowed to run down. The central object of economic policy should be to match unemployed resources with unmet needs.

A jobs levy is the most direct way of attacking these tasks. Revenue of $3 billion would be sufficient to fund both a halt to the present cuts in essential services and the provision of a major expansion in employment programs for the long term unemployed. Ideally the latter would take the form of a social contract, based on a reciprocal obligation of society to provide useful work for all and of all members of society to contribute useful work. An initial target should be a guarantee of some form of work or training for all those who have been unemployed for more than a year.

Increased spending on services would generate a permanent increase in the demand for labour. The case for such spending is based on a recognition that long-term employment growth can only come from the service sector and that community services such as health, education and R&D are an essential element of this sector. Even when such community services are not publicly provided, they are almost always publicly financed, at least in part. Dogmatic resistance to any expansion of the public sector almost certainly guarantees permanently high levels of unemployment.

The reciprocal obligation approach would help to raise the effective supply of labour by preventing the loss of skills and motivation associated with long term unemployment. It would thereby permit the achievement of lower levels of unemployment for any given level of job vacancies and labor market tightness. It would also prevent the gradual drift of the long term unemployed into permanent dependence in such forms as the invalid pension (despite general improvements in community health over the past 20 years, the proportion of the population on invalid pensions has doubled) and involuntary early retirement.

Three main objections have been raised to a jobs levy. The first, largely based on anecdotes about the Whitlam government's short-lived RED scheme, is that any jobs created would amount to 'painting rocks white.' In the crisis atmosphere of 1974, it is not surprising that some unproductive projects were funded. But after more than a decade of expenditure restraint at all levels of government, there will be no difficulty in identifying socially useful ways of employing people. In many cases, the problem is no more difficult than to defer planned cuts or reverse those of the recent past.

The second obejction is that such proposals would increase public consumption at the expense of investment. This objection is based on a failure to understand the nature of investment, which is in turn rooted in a belief that goods are 'real' while 'services' are not. Neoclassical economics has long since rejected these primitive ideas, but they remain surprisingly influential. Services such as education, R&D and law and order are not consumption items. They are essential elements of our economic infrastructure, more important in many ways than roads, bridges and harbours.

Related to this objection is the claim that large amounts could be saved by cutting waste in health, education.and other services. Efficiency gains could doubtless be made in these as in other industries. Where specific inefficiencies can be identified, they should be eliminated. However, our basic need is for more education and health services, not less. Attempting to achieve efficiency gains through across-the-board cuts, as is being done at present, leads to a misallocation of resources and a reduction in our long-term economic potential.

The third objection is that the effects of the jobs levy on domestic demand and savings would largely offset any benefits. Against this objection it should be noted that, particularly for upper-income earners, there is a high marginal propensity to consume imported items. Thus, a large proportion of the increased tax payments would be met by reducing imports. This would permit a somewhat more expansionary stance for monetary policy, thereby offsetting the effects of higher taxes on domestic demand. In any case, the labour input to services and community programs is significantly higher than for total domestic demand, so that even a pure expenditure switch would yield a net gain in jobs.

It is also claimed that, to the extent that higher taxes reduce private savings, investment will be adversely affected. This objection rests in part on the misclassification of services as consumption. More importantly, it suggests that the rate of investment is based on the level of private savings. In an open economy, the rate of investment is determined by the rate of return. There is considerable evidence to suggest that investment in physical and social infrastructure raises the rate of return to private investment.

The final argument for a jobs levy is that there is no alternative. Current projections suggest that, even with strong economic growth, unemployment is likely to be above 7 per cent for the rest of the century, with at least 300 000 long term unemployed. The suggestion that the present thrust of policy be maintained and extended is indeed a counsel of despair.

Further increases in labour market flexibility may yield some reductions in unemployment, but it would be foolish to expect any dramatic effects. Australia has already experienced a reduction in real unit labor costs to levels comparable with those of the fifties and sixties and a considerable increase in wage inequality, but this has not prevented record levels of unemployment. More radical reforms might generate some increase in wage differentials between occupations and regions, but in the absence of drastic cuts in real wages, the likely effects on employment would be slight. The example of New Zealand, where radical labour market reforms have been accompanied by a large initial increase in unemployment, followed by stagnation, is scarcely encouraging A surer way of reducing measured unemployment would be to follow the US example and eliminate unemployment benefits after six months. This policy certainly discourages long-term unemployment, but it does not guarantee that the unemployed will find work. For those who do not, the options are limited. For women with children, there is welfare. For men, there is crime. For both men and women, there is homelessness and beggary. A visit to any US city will confirm that all of these options are actively pursued. Perhaps the most striking aspect of US policy is the active subsidy it provides for family dissolution. An unemployed husband can best help his family by deserting them, thereby making them eligible for welfare. The US approach has kept measured unemployment in the 6-8 per cent range, but at the price of even greater social problems.

Ever since the recession began in 1989, proposals for large-scale intervention have been met with the claim that a recovery is just around the corner, that a combination of fiscal restraint and microeconomic reform will solve our problems. This approach has been given plenty of time and it has failed. It is now time for an alternative.

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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