New welfare rules won't work for all

By Guay Lim and Michael Chua

The Australian Financial Review,
11 September 2007, p. 63

The unemployment rate is currently at a 30 year low of 4.3 per cent. Strong economic growth and an inflation rate which lies roughly in the official target band of between 2-3 per cent have boosted growth in jobs to the point where growth in employment has exceeded the rise in the participation rate. The upshot is the downward trend in the unemployment rate over recent years.

However, from July 1 2007, the Department of Employment and Workplace Relations (DEWR) estimates that 230,000 parents (whose youngest child is 7 years and over) would be added to the labour force as a result of the latest Welfare to Work Reforms. According to DEWR, 40 per cent of the estimated 230,000 have already found jobs. All of which is to say that over the coming months there will be an addition of 138,000 parents into a labour force which already includes around 460,000 unemployed persons. What will happen to the unemployment rate?

In the first instance, it depends on the job prospects for the new entrants. Are there jobs which match the skill attributes of the persons taken off welfare? According to the Australian Bureau of Statistics (ABS), in May 2007, the industries with the higher demand for labour are property and business services, retail trade, manufacturing, and health and community services. And according to DEWR, a similar scheme introduced in July last year that required parents on welfare, whose youngest child is 16 years and over, to work has resulted in 7,100 parents gaining employment in those very same industries. Job opportunities are clearly present.

Nevertheless, given the tightness in the labour market, the September issue of the Melbourne Institute Manpower Employment Report has forecasted a fall in the year-on-year employment growth from 2.7 per cent in June 2007 to 2.4 per cent in October 2007. In other words, over the coming months, the growth in labour services will probably exceed the growth in labour demand and consequently the fall in the unemployment rate may well be arrested. A rough calculation assuming that parents previously on welfare stagger their entry into the labour force over a 12-month period (about 11,000 each month since July 2007) suggests that the unemployment rate would experience a transitional bulge rising to a peak of between 4.4 per cent to 4.6 per cent by mid 2008.

Furthermore, since DEWR estimates that 80 per cent of these parents would be single mothers, the male unemployment rate is expected to remain at roughly its current level, while the female unemployment rate is estimated to reach a peak of 5.4 per cent to 5.6 per cent by June 2008. Thus, the likely effect of the welfare to work reforms is to nudge the estimated unemployment rate somewhat higher. However, the unemployment rate is only one indicator of conditions in the labour market. A broader longer term perspective on the flows into and out of employment, i.e., participation in work, would provide a more balanced picture of the welfare to work reforms.

Professor Guay Lim and Dr Michael Chua are researchers at the Melbourne Institute of Applied Economic and Social Research

Dr Michael Chua