Institute for Private Enterprise

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Labour market deregulation:
900,000 new jobs?

21 November 1998

A front-page story in the Sydney Sun-Herald of 8 November suggested that my report on The Case For Further Deregulation of the Labour Market will propose changes that would create 900,000 jobs! This report was based on the paper which I gave to a Treasury seminar a couple of months ago and which conveyed some preliminary conclusions of my research. The basis of the story was my analysis in that paper that, if Australia had the same proportion of its working age population employed as the US, we would have another 900,000 employed. This was not the first time that this point had been made by me.

In subsequent interviews I have stressed that the point is factually correct, but that a deregulated labour market in Australia would be unlikely to produce such a good outcome, mainly because our social security system is more generous than the US. I have suggested, however, that a deregulated system would offer potential to significantly increase our employment rate and reduce our unemployment rate; and that we might hope to approach the employment rates in the UK and New Zealand, which have similar social security systems. That would imply another 500,000 in employment.

Although most of the reporting has given a rather distorted picture of what my report is proposing, in some cases with apparent deliberate intent, it is encouraging that it has so far been taken reasonably seriously. This may be partly due to my proposal that consideration be given to making a tax credit available to top up the incomes of the low paid where our social security system does not already provide a socially acceptable income. This has been interpreted as my picking up Labors election proposal. In reality I proposed it last year in an article published in the Australian Bulletin of Labour after studying the US scheme.

The attached cuttings and transcripts are being circulated to you now in advance of the release of the report. That is now scheduled for 27 November. As previously mentioned, a copy of the report will be sent to subscribers as soon as possible after its release by the Minister. It will be noted that, while entering reservations on some specific points, Minister Reith has been generally supportive of the reports contribution to the debate on further deregulation. It is remarkable to hear a Minister say that he welcomes a report on that basis even though it is not fully in line with government policy.

I should also mention a seminar I attended at Victoria University on 12 November. A paper presented there concluded that a 1 per cent increase in youth wages would lead to a decrease in youth employment of between 2 and 5 per cent in industries employing a relatively high proportion of youth. This confirms research published in 1983 by the then Bureau of Labour Market Research and which, allegedly, led the Labor Government to wind up the Bureau. In discussion it was also pointed out that the effective increase in youth wages, relative to adult wages, over the past ten to fifteen years caused the banking industry to virtually abandon the employment of youth labour.

I have also received a summary of a US paper suggesting that conventional analysis, which shows that a 1 per cent increase in youth wages tends to produce a fall of ‘only about 0.1-0.2 per cent in employment, significantly understates the real response, which it puts at a fall of around 0.9 per cent. The paper points out that conventional analysis fails to measure the larger effect on low-wage youth workers and wrongly assumes that the full amount of a minimum wage increase goes to all workers in the group. The paper also confirms that the majority of those on minimum wages are in families that are not poor or near poor.

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