2. Policy failure - why a new approach is needed

2.1 The problem and its scale

Since 1975, the Australian economy has failed to generate sufficient employment opportunities to match the preferences of the labour force. In the past, the public sector acted as a counter-cyclical employer and ensured that any surplus labour would be absorbed into paid employment. However, the decline in public employment shares over the last 25 years coupled with the desire to push the public budget into surplus has removed this capacity from the Government (Mitchell, 2001a). Fluctuations in private spending now create unemployment.

The dominant economic orthodoxy has, since the mid-1970s, supported policy makers who have deliberately and persistently constrained their economies, and who claim that the role of policy is to ensure that the economy functions at the 'natural rate of unemployment'. Persistently high unemployment is then speciously ascribed to institutional arrangements in the labour market (like wage setting mechanisms and trade unions), and/or faulty government welfare policies, which are said to encourage inefficient search and to promote welfare dependence. Policy now focuses on overcoming these microeconomic constraints. However, after 28 years of harsh cutbacks and structural dislocation, unemployment remains persistently high and the incidence of hidden unemployment and underemployment is rising (Mitchell and Carlson, 2001a).

The evidence of policy failure is overwhelming. The low point unemployment rate has steadily ratcheted upwards over successive economic cycles. In the last four economic cycles the low point unemployment rates have been 4.6 per cent (June 1976), 5.5 per cent (June 1981), 5.6 per cent (November 1989) and 6.0 percent in September 2000 (Mitchell and Carlson, 2001a). In December 2002 it stood at 6.2 per cent. The average duration of unemployment, which was 3 weeks when data was first collected in 1966, is now around 50 weeks (ABS, 6203.0). Despite a sustained period of economic growth since the recession of the early 1990s, the unemployment rate remains about 6.0 per cent in Australia. In December 2002, there were 143,700 individuals who had been unemployed for 52 weeks or more (22.9 per cent of total unemployment). The youth unemployment rate stood at 17.0 per cent (ABS, 6203.0).

However, the labour wastage evident in the upward trending unemployment rate is even worse when broader measures of labour underutilisation are considered. To measure the extent of the underutilisation problem, CofFEE has developed three indicators which estimate how many hours of work are desired by (1) the unemployed; (2) the hidden unemployed (discouraged workers who want to work, are available to work, but believe search activity is futile given the poor state of the labour market); and (3) the underemployed (part-time workers who would like full-time work or additional part-time hours). In August 2002, the official unemployment rate was 5.9 per cent. However, as Summary Box 3 shows, the addition of underemployment increased the degree of labour underutilisation to 9.2 per cent, while including the hours aspirations of the hidden unemployed saw the degree of labour wastage rise to 11.2 per cent.

Summary Box 3

Labour Underutilisation in Australia

The CofFEE Labour Market Indicators (CLMI) are published regularly to provide an alternative and broader picture of the degree to which the economy wastes its willing labour resources. The measures in the Table below are in percentage terms and include: the official unemployment rate (U3) expressed in persons; the underemployment rate (UE) expressed in hours; the combined unemployment and underemployment rate (CU7) expressed in hours; and CU7 plus the hidden unemployment rate expressed in hours (CU8). Month U3 UE CU7 CU8 Aug-01 6.6 3.4 10.0 12.3 Nov-01 6.6 3.6 10.2 12.6 Feb-02 7.1 3.6 10.7 13.3 May-02 6.3 3.4 9.7 11.9 Aug-02 5.9 3.3 9.2 11.2 UE, CU7 and CU8 are part of the CLMI which were compiled using hours of labour underutilisation as a percentage of total available hours, whereas the official unemployment rate (U3) is measured in persons. As we broaden the measure of underutilisation, the significance of the failure of economic policy becomes clearer. A full description of the indicators is available at the CofFEE CLMI site. For detailed notes on the derivation of UE, CU7 and CU8 see Mitchell and Carlson (2001a), Carlson and Mitchell (2002).

2.2 Roads to nowhere

There is also strong evidence to show that active labour market programs, which aim to improve the 'employability' of young and long-term unemployed people, have been largely ineffective (Cowling and Mitchell, 2002a, 2002b). The poor employment outcomes for participants in programs like Work for the Dole and Intensive Assistance point to the futility of preparing the unemployed for jobs that are not there.

The expanding Work for the Dole program is the principle destination for unemployed youth but data on labour market assistance outcomes for the year to March 2002 show that three months after completing Work for the Dole just 11.6 per cent of participants were in full-time work. Half of the participants remained unemployed or had withdrawn from the labour force, while one-quarter were in receipt of further assistance (DEWR, 2002a). In addition, unpublished data for 2000-2001 reveal that 65 per cent of employment exits from Work for the Dole were to temporary, casual or seasonal positions (Senate Committee, 2002: Question W71).

For individuals experiencing long-term unemployment, the results of the Job Network's Intensive Assistance program are instructive. Three months after completing Intensive Assistance, just 16.3 per cent of individuals were in full-time work while 51 per cent were not employed or studying (either full-time or part-time). For the most disadvantaged job seekers (Intensive Assistance Funding Level B) just 11.2 per cent had attained full-time work while 61.3 per cent remained unemployed or had left the labour force (DEWR, 2002a: 4).

In addition, the Productivity Commission (2002a: Chapter 9) found that the payments structure to Job Network providers has led to a substantial proportion of Intensive Assistance recipients being 'parked'. Job seekers with the greater chance of achieving a payable outcome are targeted while those in greater need of assistance (with low employment probabilities) receive scant support. For example, just 20 per cent of the current cohort of Intensive Assistance recipients will undertake some training activity while participating in the program (Senate Committee, 2002: Question W105).

In September 2002, the Department of Employment and Workplace Relations (DEWR) released the findings from Stage 3 of their Job Network Evaluation, which assessed the Network's "effectiveness". The evaluation presented preliminary estimates of the 'net impact' of referral to, and participation in, Intensive Assistance on an individual's employment prospects. The Department estimated the net impact on employment of Intensive Assistance for job seekers who commenced the program in May 2000 at 0.6 of a percentage point - the difference between the actual employment rate (25.6 per cent) and the estimated employment rate of the control group (25.0 per cent). It is noted that this estimate is likely to be conservative, as it does not present a pure comparison between an intervention and no intervention, but compares an intervention to a combination of no intervention and other forms of assistance (DEWR, 2002b: 3). Cowling and Mitchell (2002a: 55) argue that this caveat aside, the Job Network has failed to deliver a reasonable return on investment.

Taken together, these results suggest that the supply-side strategy lauded by the OECD has not been effective in increasing the employability of disadvantaged workers. The OECD's Jobs Study (1994) emphasised training, more stringent benefit regimes and active measures to address the skill and attitudinal deficiencies of the unemployed. It is important to ask why we should expect other than poor results in the absence of policy measures designed to increase the quantum of jobs (Cowling and Mitchell, 2002b: 15).

In isolation, supply-side measures merely re-shuffle the jobless queue. The clear danger of this kind of zero-sum redistribution is that policies achieve tentative or short-term reattachments to the labour force at the expense of deepening employment insecurity. Labour market instability, poverty, and welfare dependency are not solved by such measures; they are simply redistributed amongst the same at risk groups (Peck and Theodore, 1999: 14).

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