The new conservative Australian government is scaling new heights in their attack on the most disadvantaged. The May Fiscal Statement was littered with nasty cuts, which reduce spending by trivial amounts at the macroeconomic level but which will have devastating effects to the recipients of the income support. Today I briefly look at the changes in the unemployment benefit regime that have been foreshadowed. Let us hope the Senate blocks them for good.

Under the heading Stronger Participation Incentives for Job Seekers under 30 the new regime applying to unemployed citizens who are below the age of 30 was outlined in – Budget Paper No. 2 Budget Measures.

The official description of this measure in the Fiscal Statement documentation was:

From 1 January 2015, all new claimants of Newstart Allowance and Youth Allowance (Other) who are under 30 years of age must demonstrate appropriate job search and participation in employment services support for six months before receiving payments …. After six months, claimants will be required to participate in 25 hours per week Work for the Dole to receive income support, and following this may continue to access employment services for a further six month period, including access to a wage subsidy in lieu of income support …

The savings from this measure will be redirected by the Government to repair the Budget and fund policy priorities.

Someone in Treasury had an attack of the Ctrl-V’s because the statement “The savings from this measure will be redirected by the Government to repair the Budget and fund policy priorities” appeared regularly throughout the Papers. Obviously provided a decent standard of living for those without work is not a policy priority. That would be okay if the government ensured there was work, but, of-course, that is the stuff of dreams.

The “repair the Budget” concept is a nonsensical statement. The fiscal balance is not a patient that can be sick. It is what it is and reflects the state of the economy, which can be performing well or not as the case may be.

A 3 per cent fiscal deficit is not better than a 10 per cent deficit unless you also know, for example, that in the first case there is full employment and the second, there is high unemployment. If the deficit and economic states were reversed then we would conclude that the 10 per cent outcome is better.

Fiscal outcomes only have meaning when put in context of the state of the economy.

In terms of this particular fiscal initiative, the Government will be reducing its spending in this area of income support in total by $A1.2 billion.

But that hides the underlying extent of the cuts because it is a net figure. The actual amount they are taking out of social security is $A2.12 billion over four years. These sums would predominantly relates to income support payments to the unemployed. They are then adding back $A871.8 million to various agencies, presumably to oversee the new compliance program.

Given that the unemployment benefit is well below the poverty line and so the marginal propensity to consume for the recipients will be 1 (that is, they consume every dollar they get and do not save), then that $A2.12 billion will be lost to the spending stream and further undermine output and employment growth.

While the detail was not provided in the Fiscal Statement in May, more information has now been released on what these savings are about. One shudders at what is being contemplated.

The changes are as follows:

1. An unemployed person under the age of 30 now has to wait six months before they can receive unemployment benefits. Income support payments are no longer that. We now have a government that thinks it is appropriate to deprive people in a fragile state of any income, when they have infinite capacity to provide that support (being the currency-issuer). We know that mental stress peaks when someone loses their job.

2. While waiting for the income support, the person will be required to apply for at least 40 jobs a month (and keep detailed written records of this). They will receive no income support though.

3. They will have to attend a monthly meeting with a privatised employment service and produce evidence of their job search endeavour (including the documentation of applications, etc).

4. If they fail to do this they will be penalised. Their non-income period will be extended for 4 weeks for every infraction.

5. Once they reach the six month period, their pitifully low income support payment will begin but they will be required to work for 25 hours a week in return.

I have documented the treatment of unemployment benefit recipients and the fact that the payment is now well below the poverty line in a series of blogs available at HERE.

The Government forces the unemployed to live in poverty

The current Newstart Allowance is $510.50 per fortnight for a single person. This is the unemployment benefit.

At present, the Poverty line for a single, unemployed person is $A408.44 per week. So the current income support payment is only 62 per cent of the poverty line, which means that the unemployed are living in third-world conditions in one of the richest (and most expensive) nations in the world.

That alone signifies the government is committing a crime against its own citizens.

Forcing people to work below the minimum wages

Consider the work-for-dole condition, which become mandatory once the income support payment is forthcoming (after 6 months).

The requirement to work 25 hours a week or 50 hours a fortnight means they are paying the person $A10.21 per hour.

Fair Work Australia, which sets the National minimum wage says:

From 1 July 2014, the national minimum wage for a full-time employee aged 21 or over will be $640.90 per week or $16.87 per hour.

So a person aged 29, for example, will be forced to work for 60 per cent of the legal minimum wage in Australia to keep their income support payments.

This part of the policy means the Government is breaching the rule of law – it is enforcing people to work below its own Federal minimum wage. Which lawyer out there will bring together a class action to test this? If I was a lawyer I would.

Depriving people of income when there are no jobs

Now consider the environment that these changes are being imposed on. The labour market is very weak at present. Please read my blog –

Australian labour force data – weaker and slowly deteriorating – for more discussion on the latest Labour Force data.

The most recent Job Vacancies data was published for the February quarter 2014.

The most simple measure of employment demand relative to the supply of labour is the so-called UV ratio (Unemployment-to-Vacancies ratio). Please read my blog – Latest Australian vacancy data – its all down to deficient demand – for more background to this measure.

In the absence of information to the contrary, a rising ratio suggests things are getting tougher, especially if vacancies are falling while unemployment is rising.

Unemployment is driven by labour demand

The punitive measures by the Government were designed to “increase participation”, which they claim leads to employment. This is the ‘supply creates its own demand’ myth.

This myth supports the calls made by conservatives and business lobbyists for more structural reform in the labour market, which includes depriving people of welfare entitlements to make them try harder.

This diversionary tactic denies that unemployment is a demand phenomena – arising due to a deficiency in demand.

Instead the notion is that unemployment is a result of supply-side constraints that have to be eliminated through deregulation.

The reality is that unemployment is typically a demand phenomenon – that is, it reflects a systemic failure to create enough jobs as a result of deficient aggregate demand.

The Australian Government’s position is standard supply-side, which has been exposed over several decades to be a false depiction of how unemployment occurs.

It is difficult to mount a search-based explanation for mass unemployment when there are not enough jobs being generated relative to labour supply.

In the following graph, we show the unemployment rate is plotted on the right-hand scale against the sum of employment and vacancies (as a percentage of the labour force) as a measure of labour demand on the left-hand scale (inverted). The correspondence between the two series is striking and the variation in the unemployment rate is closely associated with the evolution of demand.

If unemployment rates were the result of supply-changes (such as preferences for work, or welfare benefits etc) then this close correspondence would not occur. The fact is that unemployment is the driven by insufficient demand for labour, which, in turn, is driven by aggregate demand deficiencies.

The following graph shows the unemployment rate on the left hand scale plotted against the sum of employment and vacancies (as a percentage of the labour force) as a measure of labour demand on the right hand scale (inverted) from the first-quarter 1978 to the first-quarter 2014 (that is, the data incorporates the latest vacancy information).

The correspondence between the two series is striking and a major part of the variation in the unemployment rate is clearly is associated with the evolution of demand.

You can see that labour demand is no falling again – after the effects of the fiscal stimulus through 2010-11 have started to wane upon its withdrawal.

The late Franco Modigliani presented similar graphs for France, Germany, and the United Kingdom, which shows that as job availability declines the unemployment rate rises, with the concomitant outcomes that the search process lengthens as does the average duration of unemployment. Modigliani (2000: 5) concluded:

Everywhere unemployment has risen because of a large shrinkage in the number of positions needed to satisfy existing demand.

Reference: Modigliani, Franco (2000) ‘Europe’s Economic Problems’, Carpe Oeconomiam Papers in Economics, 3rd Monetary and Finance Lecture, Freiburg, April 6.

Where data is available, you could draw similar graphs for most nations.

The next graph shows the growth in labour demand and labour supply (measured as above) from February 2008 to February 2014 (the current cycle). The impact of the fiscal stimulus in 2010 and into 2011 is clear as is the withdrawal of the same and the slowdown in investment in mining in more recent quarters.

Clearly not enough jobs

The official UV ratio for February 2014 is 3.8, meaning there are around 4 workers for every unfilled job vacancy in Australia.

Imagine the extra costs in recruitment offices around the nation as a result of being bombarded with 40 applications every month by the (current) 717.1 thousand unemployed workers (although not all are on income support payments), not to mention the employed who want to shift jobs and the hidden unemployed who are currently outside the labour force.

What happens is that most of these applications are binned immediately and the unemployed never receive notification of an interview or even a reply saying they have been unsuccessful.

But the official UV ratio is an understatement of the true problem because official unemployment is a narrow indicator of joblessness.

There are two extra calculations we can do to broaden the measure and present a more realistic impression of how bad things are at present.

1. Add the hidden unemployed to the official unemployment figure and calculated an adjusted UV ratio.

2. Further add the ‘severely underemployed’ (part-time workers who want at least 20 extra hours of work).

Adding the hidden unemployed

In September 2013, the ABS published their latest – Persons Not in the Labour Force, Australia – publication, which decomposes the ‘inactive’ population into different reasons for being not in the labour force.

In September 2013, there were 1,004,000 people with marginal attachment to the labour force, a significant increase from 918,100 in 2012, representing approximately 16% of people not in the labour force.

Of that number, 914,900 “wanted to work but were not actively looking for work and were available to start work within four weeks”.

The ABS further separate that group and identify, among other cohorts, the Discourage Job Seekers, which comprise:

… those people with marginal attachment to the labour force who wanted to work and were available to start work within the next four weeks but whose main reason for not actively looking for work was that they believed they would not find a job

In September 2013, there were 117,200 discouraged job seekers. By any reasonable definition we would consider this cohort to be hidden unemployed. They share the most significant characteristics with the official unemployed – they want to work and are available. The only difference is they have given up looking because there are no jobs to look for!

In 2010, the ABS estimated there were 102,000 discouraged job seekers.

Further, the May 2014 participation rate was 64.6 per cent and remains substantially down on the most recent peak in November 2010 of 65.9 per cent when the labour market was still recovering courtesy of the fiscal stimulus. Please read my blog – Australian labour force data – weaker and slowly deteriorating – for a detailed analysis of what that means for hidden unemployment.

Suffice to say, that the fall in participation means that people have left the labour force, probably because of the low employment growth at present. We would call them discouraged workers.

In other words, given that there were 102,000 official discouraged workers in 2010 the falling participation rate since then would add further people to that cohort.

The estimates we get of that extra number, when we make the relevant adjustments (explained in the previously linked blog) is that there are now 311.8 thousand discouraged workers in May 2014.

Given the most recent vacancy data is only available for February 2014, if we add the adjusted hidden unemployed in that quarter (324.2 thousand) to the official unemployed (716.4 thousand) and compute the UV ratio (given V was equal to 187.1 thousand), the revised UV ratio is 5.6.

1. Official UV = 3.8.

2. Adding in hidden unemployment UV = 5.6.

Adding the severely underemployed

In September 2013, there were 817.2 thousand people underemployed in Australia, meaning they were working part-time but wanted more hours (Source).

To be classified as employed by the ABS one only has to work 1 hour or more a week.

Of that group, 354.5 thousand wanted to work an extra 10-19 hours, and 213.9 thousand wanted to work 20 or more hours per week extra than their current status.

We might assume that the latter group are working less than 20 hours per week (probably much less) given a full-time week is still considered to be 25 hours. This group has been classified by the Australian Council of Social Service as being “severely underemployed”.

ACOSS define a measure they call Unemployment Plus as a “measure of unemployment plus hidden unemployment as a percentage of an adjusted labour force (labour force plus excluded jobless).”

They compute it by adding the official unemployed to the ABS count of discouraged job seeekers plus the severely underemployed and express that as a percentage of the labour force plus the discouraged job seekers. Note, the severely underemployed are already counted in the official labour force because they are officially employed.

The discouraged workers are computed annually. But if we assume they remain a constant proportion of the total underemployed then we can extrapolate the September 2013 number to the current period to compute the Unemployment Plus number.

The aim is to recompute the UV ratio as an U+V ratio to get a better idea of the problem.

For the first-quarter 2014 the following aggregates apply:

1. Official Unemployment = 716.4 thousand.

2. Discouraged workers = 324.2 thousand.

3. Severely underemployed = 217.5 thousand.

4. Unfilled Vacancies = 187.1 thousand.

Revised U+V ratio = 6.7.

If we assume that Vacancies edge off slightly to 180 thousand in the second-quarter, then this revised ratio rises to 7.

But it is safe to say that there are around 7 people who are without work (for some reason or another) per unfilled vacancy.

The following graph plots the three measures from the fourth-quarter 2010.

Other issues

It is well documented that a person has to outlay considerable expense to search for jobs. In the US, a person can deduct job search expenses from any income earned in recognition of this.

Think about the job application process:

1. Internet required or access to newspapers.

2. Neat or appropriate clothing has to be maintained.

3. Telephone account required.

4. Stationary including postage, paper, pens etc.

5. Transport costs to attend interviews etc required.

40 job applications a month means the person will be constantly sending letters, E-mail, on-line forms and perhaps attending interviews but receiving no income to make that possible.

The logic is that the individual will be supported by their parents in some way.

But how does a person who has broken off from their family cope?

What happens in families when there is domestic violence or other issues that prevent the person living at home?

How does a poor family that can barely support itself cope?

In many cases, the unemployed person with no income has no fall back – destitution is their future.


In closing, here is what the Treasurer said yesterday when he gave an address to a right-wing think tank (Sydney Institute):

Our duty is to help Australians to get to the starting line, while accepting that some will run faster than others.

In striving to achieve equality, it is not the role of government to use the taxation and welfare system as a tool to level the playing field. We must use the levers of government to help those who are vulnerable and frail.

The problem is that this particular policy change (and many others in the Fiscal Statement) are very well targetted attacks on the most vulnerable and frail. It would be hard to devise a policy that is so designed to make life for the weak and poor even more worse than it currently is.

The last time this lot were in power they got ahead of themselves towards the end of their 11 years when they foisted WorkChoices onto us. That was a step too far for even those who would claim to be relatively centrist.

This attack on the unemployed, however, is the work of sociopaths, and hopefully, their electoral support will vanish. The problem is that the major Opposition parties would do just about the same.

But for now, it is time to Bust the Budget

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

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