4. Frequently asked questions about the Community Development Job Guarantee

In this section, we address many of the questions that are frequently asked in relation to the concept of a Job Guarantee. The responses are intended to supplement the discussion throughout the Report. More detailed technical information can be obtained from Mitchell (1998) and Mitchell and Carlson (2001b).

4.1 How would the CD-JG differ from active labour market programs?

The CD-JG proposal is a path towards full employment with price stability. It is neither a labour market program nor an Australian version of the U.S. 'Workfare' model. Unlike active labour market programs, CD-JG jobs would provide participants with the opportunity to enjoy secure and on-going employment, and wage and non-wage benefits (such as paid annual leave and superannuation) consistent with minimum awards. The CD-JG is not a time-limited program or placement, and would begin to redefine the concept of 'mutual obligation'. Under the proposal, the government accepts greater responsibility for job generation and pays CD-JG workers the Federal minimum award. In order to receive the award wage, those who are eligible would be required to accept a CD-JG job. We propose that unemployment benefits in their various forms would not be available to members of the target group who refuse a suitable CD-JG position (see Section 4.10 for a discussion of incentive effects).

This is a marked departure from the status quo in which receipt of unemployment benefits is conditional on the individual fulfilling participation requirements while the government fails to ensure that the economy generates enough jobs. Under the CD-JG, the concept of an activity test for the targeted groups becomes irrelevant. A meaningful work test is reinstated - the guarantee of a job.

4.2 What would CD-JG workers do?

CD-JG workers could perform many socially useful activities including urban renewal projects and other environmental and construction schemes (such as reforestation, sand dune stabilisation, and erosion control), the provision of personal support to people who are frail or have disabilities, and other community schemes. The stock of CD-JG jobs would fluctuate as private sector activity ebbed and flowed and, as discussed in Section 1.4, the design of these jobs and functions would have to reflect this. Projects or functions requiring critical mass might face difficulties as the private sector expanded. As such, the CD-JG should only provide essential functions or services where labour requirements could be met from the core component of the buffer stock.

The CD-JG would provide the least skilled, and most disadvantaged, workers with opportunities for paid employment. Economic circumstances may dictate that more skilled workers take up these jobs from time to time. But, in principle, CD-JG jobs are pitched to the most disadvantaged workers in the economy to ensure maximum inclusion in paid work.

4.3 Would the CD-JG create unproductive 'dead end' jobs?

The CD-JG is not about creating unproductive or 'dead end' jobs. An economy aiming to achieve full employment must ensure that there is a stock of jobs, continuously available, that can absorb the most disadvantaged workers in the community. The philosophy underpinning the CD-JG is that there are intrinsic benefits to the individual and society of the unemployed having a job rather than being dependent on the welfare system. This is our starting point and the provision of buffer jobs by the government is inherently productive for that reason. A person who can remain attached to paid employment has greater prospects for upward mobility, than if they languish for years in long-term unemployment. A teenager who is engaged in useful activity at an early age is less likely to be "lost" from the system of paid work in later life.

With some imagination and foresight, CD-JG jobs could be designed to create opportunities and career paths in a way that promotes both static and dynamic efficiency. CD-JG workers would receive on-the-job training and have the option of combining formal training and paid employment. CD-JG positions could be undertaken on a part-time or block basis to facilitate this. For example, a person who took up a CD-JG job providing meals, shopping and gardening assistance to the frail aged could undertake a TAFE certificate course leading to qualification as a Personal Care Attendant. Vacancies for this entry-level job in the aged and community care sector exist now and are projected to grow (DEWR, 2002c).

It is important to recognise that while many of those eligible for CD-JG employment have few formal qualifications, many have acquired skills outside the classroom. Assessing competencies that have been learned informally, and creating means through which unemployed people can combine work, training and learning processes, are important policy goals that promote dynamic efficiency.

A key international trend in the conduct of effective public service employment programs is the incorporation of skills training and assistance. For instance, Germany's 1997 reforms encouraged training in its Job Creation Measures program and Ireland's Community Employment Program has improved the job prospects of the long-term unemployed by providing 20 days of training. In the Netherlands, the Jobseekers Integration Act includes a training component in job contracts, while Sweden's ALU program includes a skills-training component in public sector jobs (Brodsky, 2000: 38). This integrated approach contrasts sharply with the design of employment assistance in Australia. Support provided to unemployed individuals through the Job Network provides little by way of specific skills training (Senate Committee, 2002, Question W105), while Work for the Dole is framed as a work experience program. During a Work for the Dole placement, training is restricted to 'Passport to Employment' instruction on job search methods, the preparation of job applications and managing job interviews. It is only on the completion of at least 200 hours (if aged under 21) or 240 hours (if aged 21 or over) of Work for the Dole activities that individuals become eligible for a Training Credit of between $500 and $800. This Credit can be used for a wide range of competency-based and accredited courses (DEWR, 2003).

In addition, a major review of support programs for disadvantaged young people in the US (Martin and Grubb, 2001) found that the few effective programs:

• were closely linked to the local labour market;
• targeted jobs with strong employment growth and good opportunities for advancement;
• provided a mix of occupational skill development and on-the-job training in an integrated manner; and
• Promoted pathways to further education so that the young could continue to develop their skills and competencies.

It is obvious that a focus on training and employability measures for the unemployed in a highly demand-constrained labour market is as inefficient as it is demoralising. By linking the provision of training to paid employment CD-JG jobs, the CofFEE proposal supports the development of skills and promotes future transitions to non-CD-JG jobs.

4.4 Would the CD-JG be inflationary?

Mitchell (1998) has earlier shown that the implementation of a full Job Guarantee (where all the unemployed could access a public sector job) provides a path to full employment and price stability. The modified CD-JG proposal inherits the same characteristics and would not generate inflationary pressures. Under the CD-JG model, the government would not compete for goods and services or labour "in the market" by paying "market prices" or "market wages". The CD-JG is a permanent job offer at a fixed wage rate (the minimum Federal award rate) to members of the target groups. As a result, the offer sets a wage floor and does not disturb the private sector wage structure. Further analysis of the 'inflation-proofing' provided by a Job Guarantee approach can be found in Mitchell (1998).

The introduction of a CD-JG would provide a modest boost to aggregate demand because, while a majority of unemployed persons in the targeted groups are currently receiving either Newstart or Youth Allowance, all would experience an increase in disposable income.

Importantly, the CD-JG will be attractive to employers because it will help to reduce the costs of hiring. The workers who are employed under this program will be able to maintain essential general labour market skills and to participate in on-the-job and formal training programs within the paid-employment environment.

4.5 How would the CD-JG affect the Balance of Payments?

The introduction of the CD-JG will not generate any chronic external instability. A once off, modest increase in import spending is likely to flow from the higher disposable incomes of CD-JG workers. However, any depreciation in the exchange rate is likely to improve the contribution of net exports to local employment, given estimates of import and export elasticities (Dwyer and Kent, 1993; Bullock, Grenville and Heenan, 1993). Given the prominence of capital flows in balance of payments dynamics, it is likely that an economy with higher levels of employment and price stability would be more attractive to long-term investors.

4.6 Would the CD-JG violate National Competition Policy?

Not all inefficiencies are created equal. In particular, high unemployment represents a waste of resources so colossal that no one truly interested in efficiency can be complacent about it. It is both ironic and tragic that, in searching out ways to improve economic efficiency, we seem to have ignored the biggest inefficiency of them all. Alan Blinder (1987: 33)

The CD-JG proposal would see the Federal Government provide direct funding to local governments to support the employment of CD-JG workers. CD-JG workers would, in turn, produce outputs that support community development and sustainability objectives. The administrative and funding mechanisms that would underpin the operation of the proposal are detailed in Sections 6 and 7, and in the Technical Appendix. An alternative 'competitive' model would see the Federal Government specify the outputs it wished to produce and put the provision of these outputs to competitive tender. The tender would typically be awarded to the public or private entity that claims it can provide the good or service for the least cost to the public purse. Theory would suggest that the competitive price and employment level would be lower in this competitive model than under the CD-JG.

National Competition Policy (NCP) posits the existence of a Pareto-optimal benchmark, such that any violation of Pareto-optimality imposes a cost. According to the first theorem of welfare economics, competitive equilibria are Pareto-efficient, meaning that there exists no reallocation of resources that can make someone better off without making someone else worse off. However, the mapping between this textbook benchmark and real competitive outcomes is far from clear and economists are left in the domain of nth-best analysis in which anti-competitive positions may, in fact, be welfare enhancing.

If the Pareto benchmark outcome does not hold then we cannot, through the application of economic theory, assert that a departure from the requirements of NCP is an unambiguous cost. We are instead left with the task of weighing up the costs and benefits associated with alternative arrangements for producing goods and services.

Importantly, Clause 3 of the Competition Principles Agreement (CPA) gives governments discretion in determining the nature and application of competitive neutrality policies (NCC, 1998). Governments are required to implement competitive neutrality principles to the extent that the benefits to the community of restricting competition outweigh the costs. In other words, both sides of the equation have to be examined. Given that the costs of unemployment are very high, it would take a substantial difference in the unit costs of producing CD-JG output, compared with those achieved through direct funding to local government, to justify a case against the CD-JG on these grounds. We would argue that any differences in costs would be more than offset by significant community benefits. The following public interest matters are listed in the CPA (Trembath, 2002: 15), and are relevant to the comparison of costs and benefits associated with the CD-JG:

• government policies relating to ecologically sustainable development.
• social welfare and equity considerations.
• economic and regional development, including employment and investment growth.
• the competitiveness of Australian business.

Addressing this issue from a slightly different perspective, we can compare the macroeconomic costs of unemployment, as measured by foregone output, with the costs of microeconomic inefficiency. Using conservative assumptions, CofFEE estimated that levels of labour underutilisation in excess of the full employment unemployment rate (assumed to be 2 per cent) cost the Australian economy $39 billion in 2002 in lost potential output. This is around 6 per cent of current GDP (ABS, 2002a) and dwarfs recent estimates of the costs of microeconomic inefficiency.

In 1995, the Industry Commission estimated that the implementation of 'Hilmer and related reforms' (a microeconomic reform agenda centred on competition policy) would result in a 5.5 per cent increase in the level of GDP over a medium term of four to eight years (Industry Commission, 1995). If we assume that the benefits were realised over five years, this amounts to about 1.1 percentage points in annual GDP growth. Quiggin (1997) is critical of these estimates, noting that the Commission's productivity calculations assume zero productivity growth in the absence of reform. He also argues that the dominant flow-on effects of microeconomic reform will be negative because at least some of the workers directly displaced by reform will be permanently displaced from the employed labour force. Quiggin estimated the medium-term gains from the Hilmer program of microeconomic reform at just 0.67 per cent of GDP (1997: 257, Table 1). More recently, the Productivity Commission has estimated that, in the long-term, National Competition Policy is likely to increase GDP by 2.5 per cent with much wider variability across country regions than for metropolitan areas. In 33 of the 57 regions modelled, the long-run impact of NCP on employment was negative (Productivity Commission, 1999: 298-301).

There is thus persuasive evidence that the macroeconomic costs of unemployment dominate any realistic measure of the costs of microeconomic inefficiency, even before we consider the broader social costs imposed by unemployment. Direct macroeconomic intervention is clearly justified.

4.7 Would the CD-JG be green?

While the CD-JG proposal begins with the notion that unemployment arises from deficient aggregate demand, it eschews traditional Keynesian remedies due to major concerns about inflationary biases and environmental impacts. We argue that any discussion about policies to increase employment must give regard to the debate that pits economic growth against sustainable development. Higher levels of output are required to increase employment and the composition of output is a pivotal policy issue.

The CD-JG would assist in changing the composition of output towards environmentally sustainable activities, which are unlikely to be undertaken by private sector firms due to their public good characteristics. CD-JG jobs can be designed that do not use, or make little use of, non-renewable resources, and that do not pollute or pollute as little as possible. These advantages may be gained even if the activity or service is not directly concerned with the environment (Forstater, 2002: 167). In addition, CD-JG jobs can help promote sustainability by providing environmental services such as reforestation, sand dune stabilisation and river valley erosion control. Forstater argues that a potential environmental benefit of public sector employment schemes is increasing the expertise in sustainability and sustainable practices available in private industry through the movement of CD-JG workers into the private sector (2002: 171).

The CD-JG proposal would also partition decisions about activities such as logging from the pressure to create jobs in economically depressed regions. Considered decisions could then be made with reference to broad economic, social and environmental criteria.

4.8 Are unemployed people 'work ready'?

Unemployed people possess a broad range of skills and experiences that would be utilised and extended in CD-JG jobs. Skills will have been acquired through formal and non-formal learning, paid and unpaid work, community and leisure activities, and in parenting and caring roles. In addition, the majority of people experiencing youth or long-term unemployment will have completed at least one labour market program or mutual obligation activity designed to enhance their 'employability'. In June 2002, half of the individuals participating in the Job Network's Intensive Assistance program had commenced the program at least once before, while nearly one-quarter had at least three earlier episodes of Intensive Assistance (Senate Committee: 2002, Question W104). It is argued that in a highly demand-constrained economy such as Australia's, integrating training and career planning with CD-JG employment is a more effective investment of public funds than expenditure on 'employability' measures.

4.9 Would the most disadvantaged workers be supported by the CD-JG?

For any person to be able to work at their full productive capacity, basic conditions need to hold. These include access to adequate nutrition; housing and transport; a supportive home life free from violence; and care in the case of illness or addictions. We would argue that any society and government that values work and aspires to full employment should provide the social supports and structures implied by this objective. Indeed, it would be hard to understand the logic of current labour market programs in a policy environment that did not aspire to ensuring that these basic conditions of life are guaranteed.

A number of young and long-term unemployed people face chronic labour market disadvantage due to complex issues such as homelessness or insecure housing, episodic illness or substance abuse and poor literacy, numeracy and living skills. It is proposed that CD-JG employment could be taken on a part-time or block basis to accommodate access to support for such needs. This is analogous to providing for family and carers' leave in award agreements in order to support the personal needs and circumstances of employees. It is also argued that by providing disadvantaged individuals with sustainable employment and structured training opportunities, the CD-JG would support the attainment of housing, health and personal development outcomes.

4.10 Would the CD-JG distort work incentives?

Mitchell and Watts (2002) have modelled the interaction between CD-JG employment and the welfare system in order to determine whether appropriate incentives would be provided on the supply side. The research demonstrates that a worker unable to find a private sector job and facing no income would prefer a CD-JG wage. However, if the same worker were offered the unemployment benefit or a CD-JG position, they would prefer the benefit (under reasonable assumptions about the relativity between the two income sources). The research also found, under reasonable assumptions relating to pay and conditions, that most individuals would prefer a CD-JG job to participation on the Work for the Dole program.

Most importantly, the same individual would prefer a private sector job to a CD-JG position (again under reasonable assumptions about the wage relativities) should one become available. Thus the CD-JG would not interfere with preferences motivating a worker to take a private sector job. It would not create disincentives to work. These are not surprising results, however they do justify a policy mix in which CD-JG employment will be offered to members of the target groups who would then not have access to unemployment benefits.

4.11 Have other countries tried a 'Job Guarantee' model?

Public-service employment policies continue to be important components of labor market policy in many countries. A panel of experts representing 11 OECD countries examined the effectiveness of labour market programs and concluded that direct creation of jobs through public-service employment programs may be the only way to help many of the unskilled long-term unemployed. These job creation programs have become more effective over time as they have become more flexible, more targeted to local needs, and better linked to other labor market services (Brodsky, 2000: 39). Summary Box 4 describes two employment creation initiatives in Europe, which can serve as models of public sector job creation for the young and long-term unemployed.

Summary Box 4

Two European employment creation initiatives

Norway In 1993, the Norwegian government produced a long-term program to combat high and persistent levels of youth unemployment. Priority was given to facilitating the entry of young people into the labour market through the provision of relevant work experience and training. A major element of the policy response was the introduction of a Youth Guarantee. Under the Guarantee, all young people aged between 15 and 19 years who were not in either education or work, were offered a 6-months job with or without training (Hummeluhr, 1997). In 1995 this guarantee was extended to 20 to 24 year-olds. As a result of the Youth Guarantee, and measures to assist young people to complete secondary education, long-term youth unemployment in Norway has, to all intents and purposes, ceased to exist. Long-term unemployment among 15-19 year-olds dropped from 30 per cent in 1995 to zero in 1996, where it has remained ever since (Norwegian Ministry of Education, 2000). The Netherlands In 1995, the Dutch government introduced the 'Extra Employment for the Long-term Unemployed Scheme' (known as 'Melkert I') to create 40,000 permanent public sector jobs at the bottom of the labour market. The aim of the scheme is to enlarge the availability of low-skilled and low-paid jobs, while improving the quality of public services. The jobs are funded by the national Government, organised at the municipal level, and target the long-term unemployed who are entirely or partly dependent on social assistance. By January 1999, 34,700 Melkert-1 jobs had been created in areas such as public safety, urban renewal, providing care for the disabled, the elderly and young people at risk, and managing the environment (van Berkel, 1999: 84). Nearly 70 per cent of those employed were previously receiving social assistance (Finn, 1998). On average, Melkert-1 workers are employed for 32 hours a week. The jobs are concentrated in the areas of highest unemployment and are 50 percent funded by money saved on benefit payments (Brodsky, 2000: 37). Although the Dutch Ministry of Social Affairs and Employment stresses that Melkert-1 jobs are 'regular jobs', van Berkel (1999) argues that they deviate from regular jobs in the following ways: Melkert-1 jobs are funded according to specific regulations; They are targeted at the long-term unemployed; They are subjected to the legal regulation that Melkert-1 workers can never earn more than 120 per cent of the minimum wage; and The work tasks of Melkert-1 workers are defined by legal regulations, and should only involve simple, routine tasks requiring little formal qualifications.

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