An adequate standard of living for all?: Economic inequality, payment and employment policy reform

1. An adequate standard of living for all?: Economic inequality, payment and employment policy reform Peter Whiteford Social Policy Research Centre, University of New South Wales p.whiteford@unsw.edu.au Presentation to ACOSS Policy forum and AGM, 18 November 2011

2. Outline • The challenge of poverty in a period of prosperity • Labour market and welfare receipt trends • Trends in inequality • What are the problems with benefits for people of working age?

3. Unemployment rate, Australia, 1978 to 2011

4. How does Australia’s overall employment performance compare? • Prior to the GFC, and adjusting for statistical differences (Productivity Commission, 2006), Australia’s workforce participation rate in 2005 was 65.5 per cent, with Australia’s ranking in the OECD at 5th place, behind Iceland, New Zealand, Canada and Switzerland. • In 2010 – and not adjusting for these differences - Australia was 7th highest. • Australia has the 7thlowest unemployment rate in the OECD (2011) – 5.3% compared to OECD average of 8.2% and 9% in the USA, 14% in Ireland, 18% in Greece and 23% in Spain. • Relatively low participation rates are recorded for: prime aged males (25 to 54 years); child-bearing aged women (25 to 44 years); and older men and women (55 to 64 years). • In contrast, employment for youth (15 to 24 years), Australia is ranked 4th highest among OECD countries. • The Australian workforce is characterised by a high prevalence of part-time work. • Around 29 per cent of the workforce are employed part-time . • Most part-time workers are women — around 72 per cent . • Around 46 per cent of female employees and 15 per cent of male employees participate on a part-time basis. • The level of part-time employment is the third highest in the OECD after the Netherlands and Switzerland. • Involuntary part-time employment – 7.2% of the labour force and 30% of part-time workers is the highest in the OECD (2.9% is OECD average and 17% of PT workers). • Employment rates among lone parents are among the lowest in the OECD. • Total joblessness among families with children is among the highest in the OECD – but may have improved in ranking terms.

5. Proportion of working age people receiving income support payments - 1978-2007

6. Change in working age income support recipients, 1996-97 to 2009-10% of households by age group

7. Working-age recipients of selected social security payments, Australia, 2010

8. Welfare dynamics in Australia • The proportion of working age people receiving income support at some time in the year fell from 36.7% in 2001 to 30.1% in 2008 and 65% received welfare at some time between 2001 and 2008, with 13% receiving welfare payments for all 8 years. • Those receiving 50% or more of their income from welfare fell from 12.2 to 10.3% between 2001 and 2008. Around 27% received more than half their income from welfare at some stage , but 7.7% for 5 to 7 years and 3.5% for all 8 years. • For those receiving more than 90% of their income from welfare, annual receipt fell from 7.3 to 5.3%, with 20% of the population being welfare reliant at some stage in the period and 1.6% reliant for all 8 years.

9. Trends in income inequality in Australia, 1981-82 to 2009-10 Gini coefficient

10. Trends in alternative inequality indicators for working age households, 1981-82 to 2009-10

11. Trends in real equivalised family income for deciles of working age families,Australia, 1982 to 2007 (1982=100)

12. Patterns of income growth by decile and period, Australia, 1981-82 to 2007-08 Average annual percentage change in real equivalent household income, working age

13. Trends in income inequality in different income components among working age households, Australia, 1982 to 2007-08Gini coefficient

14. Trends in income inequality in different income measures among working age households, Australia, 1982 to 2007-08

15. Assessing income inequality trends • Trends in inequality differ by time period, income components and income measures. • Market income inequality rose in period of Labor government, mainly reflecting higher joblessness and wider wage dispersion. Disposable income inequality rose significantly less (about 1/3 as great), reflecting both transfer and tax changes. • Despite increasing wage dispersion, market income inequality fell from 1996-97 to 2007-08, mainly because of increased family earnings, particularly for women. Capital income inequality rose significantly after 2003, but insufficient to offset lower inequality in earnings. • The effectiveness of the tax system in reducing inequality was stable in the 1980s and early 1990s, but reduced after 1996. • The effectiveness of the transfer system in reducing inequality increased by about 40% in the period of the Labor government, but fell back to its original level by 2007-08. This does not necessarily reflect explicit policy change, but rising earnings among lower income groups lead to a scaling back of income support. • Those “remaining” on benefits fell further behind rapidly rising community living standards.

16. Replacement rate of unemployment payments, single person, OECD countries, 2009

17. What are the problems with unemployment payments? • Indexation to prices not wages has broken the link between rapidly rising community living standards and benefit levels, and also changed relationship to pension levels. • Rent assistance is inadequate for rapidly rising rent levels and housing costs in urban areas – also reflecting the impact of greater prosperity in bidding up house prices. • The liquid assets test has been cut substantially in real terms since it was introduced and also indirectly as a result of rising real wages.

18. The importance of indexation • Since 1997 Age, Disability and Carers Pensions have been indexed to average earnings while payments for the unemployed remained indexed to the CPI. Before then single rate of Newstart was around 91% of the single pension rate. • Changes implemented after the Harmer Review have meant that the gap between in benefits for the unemployed and for people with disabilities has widened. It’s now more than $230 per fortnight, and a single unemployed person receives a payment that is only 65% of the payments for a disability pensioner. • As the system is currently configured this gap cannot narrow over time, it can only grow. Last year’s Intergenerational Report assumes that current indexation policies apply into the future so that age and disability pensions will be linked to wages, while most other payments for people of working age and families will be indexed to prices. Pensions are projected to rise by 4% a year on average, while benefits and allowances would rise by 2.6% a year. • The result – if actually continued for 40 years – would be that in 2050 a single unemployed person would be receiving a payment of about 11% of the average male wage, compared to 20% now. An unemployed person would be receiving a payment that was little more than one-third that of an age or disability pensioner.

19. Trends in earnings inequality for full-time workers, Australia, 1975 to 2008