Improving employment participation in Australia

Increasing employment participation is critical to improving living standards, individual well-being, and equality. In this post, Michael Keating (former Head of the Department of Employment and Industrial Relations) looks at concrete proposals to boost employment participation. This post originally appeared on the Pearls and Irritations blog.

The rate of employment participation and the productivity of those employees together determine the average per capita incomes of Australians, and therefore our living standards. In addition, being employed creates many of the social contacts and sense of self-esteem that are vital to our individual well-being. While arguably the best way to reduce inequality is to create the conditions where those disadvantaged people who are presently on the margin of the workforce get work, or in other cases get more work.

In short increasing employment participation is most important if governments want to improve living standards, individual well-being, and equality.

What has happened to employment participation in Australia?

In March Australia’s employment participation rate was 60.8 per cent, representing an average of a 66.9 per cent rate for males and a 54.9 per cent rate for females. Interestingly this rate of employment participation for the population is the same as fifty years ago, but the composition of employment has changed markedly. The male employment participation rate is now as much as 18 percentage points lower than in 1966, whereas the female rate is 15 percentage points higher.

The fall in male employment participation is closely associated with the decline in ‘blue collar’ employment. This decline principally reflects the impact of technological change, rather than changing trade patterns and globalisation, as the output of the relevant industries increased or was at least maintained over most of the fifty year period. In contrast, the rise in female employment participation probably reflects a combination of changing social attitudes and the rise in the number of job opportunities in the service industries.

Almost all this long-term decline in employment participation for those males in the main working ages from 25 to 55 was accounted for by those men who did not complete secondary school and have no further qualifications. Furthermore, for both men and women the employment participation rates are much lower for those who did not complete year 12 and have no further qualifications – 71.3% for men and 59.7% for women in 2011. By comparison employment participation rates for those who have completed secondary school and/or have further qualifications are 88.9% for men and 81.6% for women. That is a difference of 17.6 percentage points for men and 21.9 percentage points for women in employment participation according to levels of educational qualifications.

It is also interesting to compare Australia’s employment participation rates with other countries, especially as it is often suggested that because Australia’s female participation rate tends to be lower than in the other English speaking countries that have similar cultures and institutions, policies to assist women could help lift their participation. First, the difference between female participation in Australia and the other countries is, however, quite small (see Table 1). Second, for those women who have tertiary qualifications there is practically no difference between their employment participation and their overseas counterparts.

In short, it is people whose educational qualifications are poor and who lack skills who have the most scope to increase their employment participation. So if we want to increase employment participation, with all the benefits that would bring, then the focus should be on policies to improve the job prospects of low-skilled and disadvantaged people.

Job Creation

A common view is that unemployment reflects a lack of jobs, or employment opportunities. Right now the 6 per cent unemployment rate probably reflects some shortage of demand, due to generally sluggish economic conditions post the GFC. But full employment is generally judged to occur at around a 5 per cent unemployment rate, so that increasing demand generally would not mean a lot more than a one per cent increase in employment participation [1].

Further demand increases to try to lower unemployment below 5 per cent may well be frustrated by skill shortages, as experienced only a few years ago prior to the GFC. The reality is that ongoing structural adjustment means that unskilled people tend to have difficulty competing for the jobs that are available, and it is almost impossible for governments to create more unskilled jobs on a sustainable basis.

Accordingly the focus for improving employment participation must be on:

• improving the skills of low-skilled people so that they can compete for the jobs that will become available through sound demand management policies; and
• maintaining the currency and further improving the skills of those people further up the occupational skills ladder so that they can progress further and thereby create vacancies for newly skilled people below them to get a job. 

Education and Training

The fact is that we now have enough experience of providing education and training packages to disadvantaged people that we broadly know what is needed and what works. The key policy requirements are as follows.

First, and most important, is to provide more money, especially as the funding for these programs has been cut substantially in recent budgets. In fact these programs have never been funded to meet the need, and a lot more people should be enrolled. The former Australian Workforce and Productivity Agency (AWPA) in its 2013 National Workforce Development Strategy recommended additional funding of at least $200 million each year for Vocational Education and Training alone to train less advantage people, and this amount should probably be further increased to make up for the recent cuts and weaker labour market.

Second, the best results are obtained by increasing the funding per person. Too often in the past political pressures have required programs to maximise the number of people enrolled, but as a result the available funds are then spread too thinly to optimise the cost effectiveness in terms of sustained employment outcomes.

Third, the most disadvantaged people who have been out of work for some time usually need other supporting “wraparound” services. These services can involve personalised case management to deal with these peoples’ lack of confidence and to help them overcome personal barriers, including by coordinating other services such as housing and health. Often these most disadvantaged people need to progress through more than one training program, starting with something like Adult and Community Education to build up their confidence, re-engage with learning, and to develop their social and employability skills.

Fourth, programs need to be directed not only to those who are not presently employed, but also to those people who have lower skills and or who risk their skills becoming superseded through ongoing technological change and other structural adjustment pressures.

Fifth, the nature of the training needs to be changed to be less focussed on the specific requirements of a particular job and/or a particular employer. Job specific skills are important, and they also can help engage the trainees, many of whom have an aversion to class-room based learning, and prefer to learn as much as possible on the job. But these job specific skills do need to be accompanied by more generic skills that better equip employees to adjust to changing job requirements.

While policy action to increase participation by improving people’s skills will not be cheap, the social and economic cost of doing nothing more will be much higher. Indeed AWPA showed that the increase in qualifications and skills consistent with its recommendations could reasonably be expected to lead to a 1.7 percentage point upward adjustment to the participation rate in 2025. The consequent impact on employment and GDP would be a 2 percentage point increase, and tax revenue would be about $12.4 billion higher in 2025 compared to a continuation of policies as they were in 2013. On the other hand, by 2025 the additional cost of AWPA’s recommendations would be only about $2 billion, meaning a net gain to the Budget of $10 billion.

Clearly increasing employment participation by investing more in skills is a very good investment socially, economically and fiscally. It should be an over-riding priority.

Alternative proposals to increase participation

While as has been shown there is an over-whelming case for more investment in education and training, there are other proposals which are justified by their alleged positive impact on employment participation. These will briefly be assessed below. 

Lower wage costs

Wage costs obviously affect the demand for labour. Here the emphasis has been on upskilling the least qualified people so that their productivity is increased and they can compete, and compete for jobs further up the occupational scale where there are more jobs. The alternative would be to cut the wage rates of people with lower skills, with the two most common proposals being to lower penalty rates and/or the minimum wage rate.

There is not a lot of evidence available to enable a judgement as to what impact this might have on the demand for labour and therefore on employment of less skilled people. But it is probable that the impact would not be great – and nothing like as big as the impact from upskilling.

In particular one interesting piece of evidence comes from a comparison of the experience with the minimum wage in Australia and the United States. As is well known the minimum wage is exceptionally low in the US relative to the average, whereas in Australia minimum wage is higher relative to the average wage than in most other advanced countries. However, in 2012 the employment participation rate for Australians aged 25-64, who had less than upper secondary education was 66.2 per cent, while for equivalent Americans it was only 52.9 per cent, or a whole 13 percentage points lower [2].

As there would be a high correlation between low education levels and employment on the minimum wage, it does not seem that the lower minimum wage in the US is achieving much in terms of employment participation, and accordingly lowering the minimum wage would be equally unlikely to increase employment participation much in Australia. And of course, there are other reasons for supporting a reasonably high minimum wage.

Improving the incentives to work

The two main proposals to improve the incentives to work are to:

• Improve the accessibility and reduce the cost of child care to the family
• Lower marginal tax rates so that people gain more from extra work.

Taxpayer support for childcare is largely an issue of equity. It is a moot point how much employment participation by women would be affected by additional support to reduce the cost of child care to the family. Female employment participation by professional and other women with tertiary education is already comparable with other similar countries (Table 1). It may be that less costly child care might make more difference for women in less well paid jobs, however, as these costs would be a greater burden for lower income families.

What is reasonably certain is that reducing the cost of child care could be quite expensive. Indeed the recent Productivity Commission report on child care estimated that adoption of the recommendations would increase employment participation by mothers (primarily in low and middle income families) by 1.2 per cent, but this is only equivalent to a 0.1 per cent increase in total employment.

Cost is also the big inhibitor to reducing the marginal tax rates so as to increase the incentives to work. The present alleged disincentives arise because the interaction of the tax and income support systems can result in effective marginal tax rates (EMTRs) as high as 60 per cent, although only over a fairly limited income range. Nevertheless most pensioners and beneficiaries who want to work part-time, face an EMTR of around 30 per cent or a bit more. What is not well established is how much this acts as a disincentive, and therefore how much extra employment and extra hours worked might result from reforms to lower EMTRs.

One indication of the relative costs and benefits from policy reforms of this kind is available, however, from some work done by the Melbourne Institute of Applied Economic and Social Research. The Institute estimated that a package of changes in income tax rates, family benefit tax and pension and benefit withdrawal rates that came into effect on 1 July 2006 would increase the available labour supply by less than 50,000 workers, or less than half a per cent, at a full-year cost of $11.4 billion in each year.

Conclusion

In short what this analysis shows is that employment participation in Australia could be increased significantly. By far the most promising means would be to increase the investment in education and training to improve the skill-base of the economy, and especially the employability skills of disadvantaged people. Other proposals to reduce the cost of child care and reforms to lower effective marginal tax rates may well be useful, but they come at a considerable cost and are unlikely to have nearly the impact on employment participation that can be expected from policies to increase skills.

These education and training policies would greatly benefit the economy the government’s budget, our society, and many disadvantaged individuals.

[1] Employment participation would rise by more than the fall in unemployment because some people who do not declare themselves to be unemployed would successfully rejoin the labour force under conditions of full employment.

[2] Source: OECD Employment Outlook, 2014

Michael Keating is a former Head of the then Department of Employment and Industrial Relations, and a former member of the Boards of the Australian Workforce and Productivity Agency and the South Australian Training and Skills Commission. This post originally appeared on the Pearls and Irritations blog.