Wednesday, October 18, 2006

Improving workforce participation

A while back I took issue with Lindsay Mitchell who suggested that beneficiaries were taking it easy and avoiding work at a time when there were jobs all over the place. As evidence for her argument, she reviewed her local paper and reported that there was 100+ job ads. Mitchell's solution was to reduce the minimum wage and benefits to stimulate employment and force beneficiaries into the workforce.

There's a simple logic to Mitchell's approach, particularly if you believe beneficiaries are a lazy bunch, however her argument is in fact quite wrong. A tight labour market may actually present fewer opportunities to beneficiaries, particularly when the vacancies are for skilled labour.

There's a well researched direct correlation between skills and workforce participation and earnings. In Australia, 80% of men with degrees are in fulltime work compared with only 54% of men with no post school qualifications (reference here). Likewise, compared with those who do not complete school, a person with a Certificate III or IV earns 13% more and someone with a degree earns 43% more (reference here). However the beneficiary cohort tends to have lower skills compared with the workforce and therefore cannot easily obtain work. This problem is likely to get worse - most forecasters predict an increase in the demand for skilled workers and, at best, static demand for unskilled. The solution therefore, involves training (amongst other things, simply increasing and improving the supply of skilled labour does not automatically improve productivity, there also needs to be a focus on increasing the demand for and use of skilled labour).

In NSW, very serious consideration is being given to significantly increasing training over the next 25 years to offset the effects of the aging population and avoid declining productivity. Importantly, the focus of training is not simply on school leavers, but also on existing workers, parttime workers and those who are not in the labour force - this last group are expensive to train.

Some of the commentators on the right also propose reducing minimum wages to stimulate demand for employment but a recent report predicts that this will have less impact than alternative approaches. In Australia, a reduction in minimum wages of 5% will likely lead to around 30,000 people joining the workforce but will also lead to a pay cut for around 1.25 million workers.

Mitchell is like too many commentators, on both the right and the left, who appear pursuaded by rhetorical solutions and unwilling, or unable, to give more serious consideration to what is a complex problem requiring a sophisticated solution.


Anonymous said...

Quite right - the minimum wage argument has even been refuted by quite a few right wing and libertarian bloggers in the USA.

backin15 said...

I'm less familiar with the US literature although there's a good argument made in the UK literature about the US that suggests improvements in participation have only come from making employment resemble unemployment; in which case, why bother?

Cheezy said...

On the face of it, if you've identified dole bludgers as a problem, then reducing the minimum wage seems like the exact opposite of what you should be doing... Why on earth would you want to increase the gap between what workers and beneficiares take home every week? Another popular right-wing solution is to cut benefits (as NZ did in the early 90s), which at least doesn't have the contradiction described above - however this can cause other problems including increasing social problems/crime, and decreasing retail expenditure quite markedly, because beneficiaries tend to spend pretty much all of their money from week to week, just to maintain their existing standard of living.

backin15 said...

The logic of decreasing the minimum wage is to stimulate demand for labour; if the marginal cost of an additional labour unit is less than the marginal value, you might hire more people. My problem with this is not just that it risks making the conditions of employment barely better than those of unemployment but also that it incentivises low wage, low skill employment - how on earth is that in a nation's best interest?

Cheezy said...

"The logic of decreasing the minimum wage is to stimulate demand for labour;"

It looks like they're saying on the one hand that it's 'people who don't want to work are the problem'; and on the other hand proposing a measure which doesn't address that problem at all (just the opposite in fact), but simply incentivises the bosses to try and higher more people. Typical confusion from the right, I'd say!