catallaxy files

catallaxy in technical exile

From Welfare to Work

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This is not a new idea but it could be one whose time has come if only there is a strong bipartisan push for it. The idea is to stop junking people from work just because they are slow, or short of traning and experience. In short, they are not employable at the minimum wage. On top of that, even if they are employable, as soon as they move from welfare to work they are hit with a high effective tax rate (tax plus tapering of benefits), not to mention to additional costs of work like travel, which exert a strong rational incentive to stay put.

This is not just a matter of cutting down the welfare bill, desirable as that may be, it is a matter of allowing people to become contributing members of society rather than passive welfare dependents.

The idea is to coordinate welfare, wages and taxation to give people the opportunity and the incentive to work. Nicholas Gruen has been a proponent of some scheme along these lines and he has recently recycled a column on this topic. He advocates a freeze on the minimum wage, I suppose that is a sop to the unions to make the scheme feasible. I think we can do better than that, but the main thing is to move in that direction.

So, as right-of-centre labour market economist Professor Mark Wooden put it:

Ultimately, creating more competitive wage structures for low wage workers without damaging the incentive to work requires a fusion of welfare, tax and labour-market policies. Simply changing the way minimum and award wages are set will make little difference.

Over the last nine years the Government has introduced major reforms in tax, IR and labour market programs. But it’s never properly addressed the interactions between them.

It didn’t have to be that way. In 1998 five economists proposed integrating tax, IR and welfare with a compensated minimum wage freeze. As real wages fell with inflation, low-wage working families would be compensated with gradually rising tax credits (effectively cash in their pockets). Blair and Clinton used tax credits to improve working family finances and incentives to work – and of course their own popularity.

The five economists’ plan would have reduced unemployment by around one percentage point, creating around 150,000 jobs (and perhaps double that) among those who need jobs most – the young and the low skilled.

To keep fiscal costs down at a time when government revenue was scarce, those without family dependents would have gone without compensation.

The unions opposed the plan because it was premised on a piece of economic commonsense the unions deny – that relatively high minimum wages like ours don’t price people out of jobs. The Opposition did what oppositions do – endorsing the pleasure (the tax credits) without the pain (the minimum wage freeze).

Written by Admin

May 1, 2006 at 4:58 pm

Posted in Uncategorized

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