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US Style Deregulation — No Worries!

The Australian Financial Review,   10/2/99

Many analysts of Australia's high unemployment point to the greater income inequality and perceived high proportion of 'working poor' in the US as reasons for rejecting labour market deregulation here. Some also dismiss US success: "the jobs are low paid, insecure and long hours". But does the US situation really justify rejecting the likely employment benefits from deregulation?

First, while the US has double the proportion of low paid employees and a greater dispersion of labour market earnings, this partly reflectssignificant differences in the composition of work forces. In a total population of 268 million the US has 64 million either black or of hispanic origin and many in such groups have literacy and numeracy levels that keep earnings low. Indeed, half the US poor come from these groups. Australia has no comparable minority groups and, even under deregulation, the dispersion of earnings would be narrower than in the US.

Second, the US poverty line for a couple with two children is a relatively high $US15,900 (equivalent to about $A25,000) and, contrary to popular perception, the proportion of 'working poor' in the US has been stable at around 8-9 per cent level since the early 1980s. The US labour market is remarkable not for its high proportion of working poor as defined but for providing so many more jobs to the young and unskilled. By contrast, our total employment is about 900,000 less on a pro rata basis and, despite having no comparable minority groups, our working poor proportion appears similar.

Third, most low wage earners in the US live in households whose incomes are well above the poverty line. Even former Labor Secretary, Robert Reich, acknowledged in 1997 that "most minimum wage earners are not poor". They are often married women or young people with a second job in the household and their low earnings are not an indication of hardship.

Fourth, a substantial proportion of those starting on low wages move up the earnings scale in the US. As obtaining a job at an early age is the most important preventer of unemployment, it is a major virtue of the US system that it offers such opportunities. Looked at over time, it also indicates lower income inequality than appears on the surface.

Fifth, those 'stuck' on low wages in the US have their incomes supplemented via a tax credit. This goes to one sixth of the workforce with incomes up to $US29,000. Analyses showing falling real wages for low earners in the US overlook both this and other income supplements and the overstatement of inflation. Measured comprehensively, living standards of families at the bottom end do not appear to be declining. If our working poor increased after deregulation here, we could also introduce tax credits. However, our more generous social security system already provides means tested assistance to low wage earners. The main need is to reduce high marginal tax rates.

Sixth, as average job tenures in the US are longer than in Australia and part time employment is about half, this suggests that deregulation would not mean less job security - to the contrary, it should encourage employers to provide full-time and non-casual jobs. Further, although US employees work more hours per year, their working lives are shortening as more time is spent in education and retirement.

Finally, the US labour market is not entirely unregulated. True, the minimum wage is a much lower proportion of average wages than Australia's. But even the two US academics who argue that modest increases in minimum wages in the US need have no adverse employment effects agree that "if the minimum wage is raised too much we will see job losses."

Of course, the US has no super-regulator like our Industrial Relations Commission. But institutions that are highly interventionist — as the IRC is — create a risk averse culture which is antipathetic to employment creation. The wage freeze proposal by five economists would continue the institutional arrangements that are the main problem. A better approach would be to privatise the IRC - allowing minimum wages to be market-determined or (less preferably) putting the responsibility on governments as the US does. Upending Marx, by loosening our (regulatory)chains we have nothing to lose but our unemployed!

I authored the report The Case for Further Deregulation of the Labour Market for the Labour Ministers Council.

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