By Peter Dawkins

Last October I was one of five economists who wrote to the Prime Minister suggesting a plan to cut unemployment to about 5 per cent over four years. The central theme of the letter was that policies could be adopted which forge a link between industrial relations changes and reform of the tax and welfare system to complement current economic strategy, forging a link between industrial relations reform and reform of the tax and welfare systems. The plan was the subject of extensive discussion over the remaining weeks of 1998.

It is pleasing that the Treasurer's comments last weekend have put unemployment back on centre stage. The case for moving on policies to substantially reduce unemployment appears to be firming up as a matter of bipartisan agreement, bearing in mind the Opposition's proposed 5 per cent target in the federal election campaign last year. The main question now is, how can this be achieved?

The Treasurer spoke of structural reforms relating to both the labour market and the tax-transfer system. Our letter to the Prime Minister had some specific proposals, much of which fell under those headings:

To replace increases in award wages 
(safety net wage adjustments) for a four-year period with tax 
credits for low-wage earners in low-income families; these tax 
credits would compensate wage earners for the award wage 
pause.Introduce these tax credits in a way that reduces 
effective marginal tax rates for many people (and increases them 
for none) so as to increase the incentive for the unemployed to seek 
out and accept job offers.Medium- to long-term commitment 
to ongoing reform of the tax-transfer system to continue to reduce 
effective marginal tax rates.A systematic approach to labour 
market programs, integrated with such welfare reform, to include, 
for example, re-employment bonuses.Upgrading of the 
education and training system as a medium- to long-term 
ingredient in the strategy

.

The award wage pause over a four-year period would reduce growth in real wages by 3 to 4 per cent. This would lead to an increase in total labour demand, both because of its effect on wage costs and because it would facilitate more expansionary interest rates given its anti-inflationary effect.

Econometric estimates suggest that such restraint in real wages should make possible sufficient new jobs to cut unemployment to around 5 per cent (from a starting point of 7 per cent). Current unemployment suggests that such a starting point may not be far off the mark.

While the holding down of award wages would result in a widening of pre-tax earnings distribution, Michael Keating has shown how the tax credits can be designed in such a way as to be more valuable to low-wage earners in low-wage families than the kind of living wage adjustment that they would be forgoing.

Thus, after tax, low-wage earners in low-income families would be the main beneficiaries. This, combined with the substantial reduction in unemployment, would make the policy very beneficial on equity grounds, as well as leading to a greater utilisation of labour resources for the economy as whole.

The equity benefits result not only from the effect on incomes but from the effect on the self-esteem on those who would otherwise be unemployed. If Australia fails to get unemployment near 5 per cent, we will be continuing to condemn an unnecessarily high number of people to joblessness, as well as the associated losses in ill-health and self-esteem and incurring the related social costs.

We are hopeful such proposals will continue to be discussed in the debate about unemployment. We would be delighted if the Government, the Opposition, business, trade unions, welfare and community groups all endorsed such ideas. The more it becomes a consensus that such policies are required, the more likely it will be that they will be implemented.

Peter Dawkins is director of the Melbourne Institute of Applied Economic and Social Research at the University of Melbourne.

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