Working for Australia's future: Increasing participation in the workforce

The second term of reference for this inquiry into participation in the paid workforce focuses on increasing participation for recipients of income support. There has been substantial consultation and efforts in recent years on improving and simplifying the welfare system. The three key objectives for welfare reform identified by the Reference Group on Welfare Reform chaired by Mr Patrick McClure were:

• a significant reduction in the incidence of jobless families and households;
a significant reduction in the proportion of the working-age population needing to rely heavily on income support; and
stronger communities that generate opportunities for economic and social participation.¹

Labour markets

Labour market programs may have a role in increasing the employability of disadvantaged jobseekers. However, unless there is overall job creation, this will merely displace someone else who is in a similar position.⁴ CIS claimed that labour market programs do not work:

… or that they create work for a small number of people at a very large cost. The Productivity Commission concludes that “they have variable, but usually small, effects on the employment and earnings of participants.”⁵

Community development job guarantee

CIS also questioned the use of specially created public sector jobs as stepping stones to employment:

The OECD finds that public sector job creation “has been of little success in helping unemployed people get permanent jobs in the open labour market,” and it recommends that any use of this strategy “should be short in duration and not become a disguised form of heavily subsidised permanent employment”.¹⁷ Provided as part of a ‘Workfare’ strategy, government jobs can play a role in unemployment programs, but they rarely lead to more permanent employment.¹⁸

Work for the Dole

Deregulation

The Productivity Commission commented that Australia’s improved productivity performance in the 1990s is in part attributable to better management practices and work arrangements.²⁹ However, workplace relations law remains complex and the Australian Government is working to:

… increase flexibility, reduce employment transaction costs and achieve a closer link between wages and productivity. More specifically, the proposed amendments to the Workplace Relations Act aim to reduce the degree of regulation around the termination of employment; address pattern bargaining; streamline agreement-making processes; and further simplify awards to promote workplace agreements.³⁰

Skills shortages

Increasing educational participation is an important factor in increasing labour force participation.³² There has been an increase in the proportion of higher skilled jobs as a share of employment growth in recent years.

The overall employment growth between 1997 and 2002 was 11%. Growth in associate professional jobs, was twelve percentage points greater at 23% and growth in professional jobs was 20%, while growth in jobs in labouring, production and transport, clerical, sales, services and trades was well below the average.³³

High skills levels and adequate education systems to ensure that skills can be developed after school are important to the economy.³⁷ There is a positive correlation between continuing skills upgrading and the standard achieved in prior education and training.³⁸

The rapidly changing workplace, the pace of globalisation and technological advancements mean that workers will need to be provided with opportunities to enhance their skills throughout their working lives.³⁹

In addition the indirect effects of higher education and training include:

• the contribution to personal and family well-being and the long-term effects in health and social adjustment and the intergenerational effects on the educational and economic opportunities for future generations;
a more capable and adaptable workforce and the economic and social opportunities that this provides; and
a clear progression in average earnings as educational attainment increases, although the returns for those with VET qualifications have fallen over time. ⁴³

Growth in income support

Source
Department of Family and Community Services. Australian Government, Budget 2004-05, Budget Paper No. 1, Statement 4: Maintaining Low Unemployment in Australia, The contribution of policy reforms to improved labour market performance, p. 11. (a) Unemployment benefits reflect Newstart and Youth Allowance (non-students).

Over the course of a year, around 33 per cent of the Australian population aged 15-64 years is at some stage reliant on income support payments.⁵⁴ Income support recipients fall into two main groups:

• a large number of individuals who are reliant for relatively short periods of time; and
a significant number of individuals who become reliant in the long-term, perhaps even on a permanent basis: one sixth of all recipients aged 15-64 years are continuously on income support for over five and a half years.⁵⁵

Approaches to address high levels of income support

As one way of increasing participation in paid work, IPE believes there should be a tightening of eligibility for social welfare benefits, particularly in regard to work tests.⁵⁹

Between the end of the economic expansion in the 1980s and the end of the 1990s, the proportion of the working age population receiving income support of one kind or another increased from 15 per cent to 22 per cent, covering 3.2 million people. This extension by both political parties of eligibility to receive such support in combination with the maintenance of relatively high marginal income tax rates has undoubtedly operated and continues to operate as a disincentive to work.⁶⁰

Other research and social service agencies recommend a greater focus on the supply of jobs and the role of government in improving participation. ACOSS argued that approaches to reducing reliance on income support and increasing participation in employment must acknowledge:

• the need for a sufficient supply of full-time and part-time jobs;
that some people receiving income support, such as carers and parents, are performing a desirable social activity from which the community as a whole benefits; and
that mutual obligation includes governments assisting with providing support to enable people to get a job, as well as individuals pursuing and retaining employment.⁶²

CofFEE commented that there still needs to be greater focus on job creation at a macro-economic level rather than on incentives and requirements with sanctions focussing on the individual.

The general problem with focusing on effective marginal tax rates or tax credits as the key to increasing employment is that it constructs unemployment as an individual problem rather than a problem of deficient aggregate demand and that these strategies, while worthy in themselves because of the rewards they offer for those able to make a transition from welfare to work, are unlikely to create employment opportunities for the long-term unemployed.⁶⁵

When discussing assistance, incentives and obligations, the Committee has taken a broad view of the system as a whole. Employer incentives and job creation are discussed elsewhere and therefore this chapter focuses substantially on individual support. With that in mind, the balance of assistance, incentives, and obligations has three roles:

• helping people move from welfare to work by enhancing their long-term employment and self sufficiency prospects;
as a safety net, but one that does not become a permanent destination for those who are capable of greater self-reliance, but does provide adequate support and assistance for the most disadvantaged who do need the social safety net on an ongoing or longer term basis; and
maintaining social engagement and retention of employability skills and attitudes for those in the safety net.⁶⁶

Incentives

A range of strategies can be used to change financial incentives, which include:

• social security means tests;
income support payment rates;
parameters of the tax system, including tax thresholds and rates;
wage settings; and
specific in-work benefits and earnings subsidies.

Maximum rates of payments

FaCS suggested that the difference between allowance and pension payment rates may create incentives to transfer from lower allowances such as Newstart, which have more stringent income tests and activity requirements, to higher pension rates such as the DSP.⁶⁹ Pensions are adjusted in line with movements in the Consumer Price Index and are 'topped up' to maintain the maximum rate of pension at a level of at least 25 per cent of Male Total Average Weekly Earnings. Increasing the allowance to pension level would act as a further disincentive to participate in paid work.

Greater focus on the differential between allowances and associated concessions, and employment earnings is considered to be a more productive avenue of investigation. Gulf Savannah Development Inc saw the need for the pay packet to be significantly higher than the dole to be an incentive to people to take up employment.⁷⁰

In some situations there is almost a culture of poverty that keeps people out of the workforce. There is a problem where there is second generation unemployment, and a lack of role models which can lead to a lack of motivation and interest.⁷²

… work needs to be seen as being worthwhile, dignified, valuable and achievable.⁷³

Working credit

Tax reform

Effective marginal tax rates

Treasury commented that EMTR are often cited as a disincentive to work for those on income support payments. ⁸³ For example, ACTU submitted that:

Effective marginal tax rates are an important issue. It is perverse that the highest marginal tax rates are faced by low paid workers in transition between no-work or little-work and full-time work or near full-time work. The withdrawal tapers of 50 per cent and 70 per cent on Newstart allowances are excessive and should be reduced to “make work pay”.⁸⁴

Earned income tax credits

Personal tax-free threshold

Taper rates and income test stacking

ACOSS provided to the inquiry some general comparisons on the costs possibly involved of different incentive strategies, but other agencies did not provide such detail.¹⁰⁸ In summary, it has been suggested that the most productive areas of incentive reform would be to:

• reduce the ‘stacking’ of income tests and address the different income tests for pensions compared to allowances;
review taper rates; address very high EMTR; and
increase the tax-free threshold.

NATSEM commented that some of the results are worrying:

If you subscribe to the stepping stone argument – that a low paid casual or part-time job now may lead on to a higher paid job with more hours in the future … The very people who stand to benefit from greater participation in the workforce are the ones who face the highest financial disincentives to do so. Furthermore, while in the long run it may be worth working even when the family is financially worse off now, those on low incomes are the least likely to have the financial capacity to do this.¹¹⁰

This highlights the importance of estimating the effects of changing systems. FaCS identified issues that need to be considered including:

• the effect of the measures on households outside the transfer system (as they may trigger an overall fall in participation measured in terms of aggregate hours worked amongst middle and upper income households);
uncertainty regarding how income test and tax withdrawals will affect labour supply preferences and behaviours of working-age people;
how to isolate and measure the effect of changed work incentives from the effect of changes in the labour market and the broader society.¹¹¹

Assistance

For this inquiry assistance refers to measures to increase participation including:

• improving job search by enhancing job search skills and activities;
providing timely and accessible information;
improving skills and employability through education and training programs, and the costs of training or education;
providing individualised assistance such as case managers and personal advisers to develop individual action plans to address different needs and barriers; and
assisting with costs of work such as transport or childcare costs.¹¹²

Thought needs to be given to easing the transition from social security to work such as retaining some concessions for a longer period:

In going from social security payments to work …You lose your money from welfare payments and you lose your concession cards. If you are in public housing you get your rent put up. You lose access in some circumstances to pharmaceutical benefits and you lose concessions on bills and so on … ¹²⁵

Working Credit changes were introduced to allow continuation of some concessions. People build a life around a social security system and there needs to be a transition:

There are peripheral issues that you have got to address in the short term and, from our experience, when you stop the government system and move them into an employment system they generally jump back into the system they are most comfortable with.¹²⁶

Job Seeker Accounts

For job seekers in Intensive Support, Job Network members have access to a new Job Seeker Account to purchase assistance to help eligible job seekers secure work and encourage on-going active participation. The assistance could include:

• skills training, such as a TAFE course;
help with transport costs to attend job interviews;
providing a wage subsidy to an employer; or
purchasing appropriate clothing to attend job interviews.¹²⁷

Obligations

However, DEWR suggested that there remain a number of problems in the social security system for working age people including:

• the system has become too complex and difficult to understand;
the system does not always provide clear incentives to work;
people in similar circumstances can get different levels of assistance - this is unfair and creates inappropriate incentives;
the system does not adequately support and encourage participation; and
of 2.8 million working-age income support recipients, only 1 million are on activity payments, and only half of these must look for work.¹³⁵

Many people will enter or re-enter the paid workforce through their own efforts or with some minimal assistance. However, for some people with little experience of employment or facing other barriers the transition to employment is difficult. The Reference Group on Welfare Reform identified the need for participation requirements to encourage greater social and economic involvement.

The stark reality is that those who most need assistance are often those who have few opportunities to participate and are often the least motivated to pursue them. For this reason, the new system must engage people more actively, and to be successful that engagement must be reciprocal. Consequently, the Reference Group believes that some form of requirement is necessary.¹³⁶

ACOSS cited an OECD report which strongly advocates that people receiving income support should be required to be active in their job search.¹³⁷ ACOSS also makes the point that:

… [active participation] strategies only work for the relatively small number of people who are demotivated but otherwise relatively skilled and capable. Applying those same strategies to people who are demotivated and who do not have the skills and the capabilities is actually the wrong prescription for them.¹³⁸

Achieving compliance and breaching

Participation agreements are plans that set out one or more activities agreed to by the income support recipient to continue receiving payments. To achieve compliance with this approach, if participation in an agreement that suits the recipient’s circumstances is refused, then payment may be reduced or stopped. A decision that reasonable steps have not been taken by a person to do the agreed activities is called a ‘breach’. Financial penalties for breaching include:

• first breach in a two year period: payment reduced by 18 per cent of the maximum rate for up to 26 weeks;
second breach in a two year period: payment reduced by 24 per cent of the maximum rate for up to 26 weeks;
third or more breach in a two year period: payment stopped completely for up to eight weeks.¹⁴⁰

ACOSS believes this is demonstrated by:

• the harshness of penalties;
the high numbers of people breached;
the lack of flexibility in taking into account personal circumstances in setting and adjusting compliance requirements and responding to non-compliance;¹⁴⁴
the high level of administrative (non-client) error associated with breaches;¹⁴⁵ and
the lack of appropriate supports and services generally available.¹⁴⁶

In summary

Evidence to the Committee suggested that the most productive areas of financial incentive reform would be to:

• reduce the ‘stacking’ of income tests and address the different income tests for pensions compared to allowances;
review taper rates;
address very high EMTR; and
increase the tax-free threshold.