We Can Work It Out

22 December 2022
We Can Work It Out - Featured image

Australia’s worker shortage can be addressed through no-regret policies that increase labour supply, writes IPA Research Fellow Saxon Davidson.

Australia is currently facing an unprecedented worker shortage, and the Albanese government is failing to act on sensible measures it could take right now to unlock additional labour supply within Australia. Increasing the participation rate—the proportion of potential workers who make themselves available to the labour market—is the sensible solution and therefore the policy the government should adopt now.

The government should take advantage of Australian’s inherent interest in the dignity of work, a recognition that the meaning, learning opportunities, and social interaction derived from labour has a value far beyond that which could be provided by welfare. Those who can work and want to work, should be encouraged to do so, rather than kept solely reliant on welfare as at present.

According to the most recent data available from the Australian Bureau of Statistics, there are currently more than 470,000 reported job vacancies, with over a quarter of Australian businesses reporting a labour shortage. This is almost four times higher than it was in May 2020, with the number of job vacancies rising by an average of 34,000 every quarter since.

Job vacancies across Australia

This is occurring during a time of significant economic challenges for Australia; private business investment as a share of GDP is at a record low of just 10.1%. This is lower than during the global financial crisis of 2007-08, lower than during the Keating recession of the early 1990s, and lower than during the economically hostile Whitlam-era of 1972-75.

Inflation is now at the highest it has been since the inflation target was introduced in 1993; GDP per capita, an important measure of living standards, is lower today than it was four years ago; and national gross debt sits at just below a trillion dollars, with rising interest rates set to increase debt servicing costs.

Previous analysis by the IPA has found current job vacancy levels in Australia are costing the federal government almost $7 billion in forgone income tax revenue. If there was sufficient labour supply to meet the demand, that $7 billion could be used to invest in many critical infrastructure projects such as roads, schools, and hospitals; or help pay off our ever-increasing national debt.

Only 3% of age pensioners work in Australia, compared to 25% in New Zealand.

Prime Minister Anthony Albanese proposed two policies to combat this problem in the aftermath of his Jobs and Skills Summit back in September, but neither are adequately capable of solving this crisis.

The first policy aims to address the problem that currently an age pensioner or veteran can only work one day a week ($300 a fortnight) before their benefits start to be reduced by 50 cents on the dollar. This low threshold of $7,800 per annum gives them little incentive to work beyond one day a week, if at all. Were they to do so, their earnings would also be subject to income tax, meaning pensioners could be subject to an effective marginal tax rate of up to 69%. This is because once an age pension or veteran pension recipient starts earning income outside of their benefits, their benefits become subject to income tax as well. This is a major reason why only 3% of age pensioners work in Australia, compared to 25% in New Zealand where the pension is not affected by income earnt.

The Government passed legislation to temporarily increase by $4,000 the threshold at which the pension begins to be reduced by 50 cents for every dollar they earn, from $7,800 to $11,800. This came into effect on December 1 and will only be available until the end of 2023. The Government initiative was itself a response to Opposition Leader Peter Dutton, who in one of his first policy forays following the Coalition’s election defeat in May, proposed to double the threshold to $15,600 per annum ($600 per fortnight). Whether Labor would have proposed this without the Coalition entering this policy space is hard to say.

While this reform from the federal government is a step in the right direction, it is unambitious, especially when considering there is a more impactful option available. Increasing the annual work bonus by $4,000 will only increase the amount of penalty-free workdays to a day and a half per week, and many businesses require employees who can work full-time. This policy will also only be applicable until the end of this current financial year, when the issue of job vacancies will likely continue to persist. As Peter Dutton said in the aftermath of the Summit:

What Labor offered up was less generous, less attractive, and therefore less effective at dealing with worker shortages.

Rather than addressing this real and pressing problem, the Albanese government instead used the Jobs and Skills Summit to promote the ALP’s marquee policy, multi-employer bargaining, which may actually reduce employment by eliminating individual employers from the bargaining process and making it easier for industry-wide strikes to occur.

The other policy initiative announced at the Summit was to promise increased levels of immigration, even though borders have been open since the start of this year without much effect. Managing Director of Whitehaven Coal Paul Flynn expressed this frustration earlier this year, telling the Australian Financial Review: “Even though we know the doors are open from our borders’ perspective, there is not the inflow of people we would expect”.

Governments should change policies to enable greater workforce participation.

According to data reported in the Australian Financial Review, of the almost 60,000 permanent visa applications the government is fast-tracking to address the worker shortage, only 438 are health professionals, and just 32 are registered aged-care nurses. At a time when about a quarter of aged care shifts are going unfilled, there is a clear need for a more effective solution.

Increasing immigration has failed to provide businesses with the immediate assistance they require, and its continuation will simply put further pressure on critical social infrastructure such as schools, roads, hospitals, and welfare. Rather than taking the short-sighted option of simply further increasing migration, governments should immediately change policy settings to allow for greater workforce participation.

Several ambitious yet responsible policy initiatives are available to lawmakers. These reform opportunities involve expanding the dignity of work to age pensioners and veterans, disadvantaged students, and low-risk nonviolent offenders.

First, the federal government should adopt a more ambitious policy regarding the age pensioners’ and veterans’ work bonus. A recent IPA research report which analysed Australia’s worker shortage and current work restrictions placed on age pensioners and veterans concluded that all red tape and tax restrictions on age pensioners and veterans should be abandoned. A poll conducted this year by National Seniors found a fifth of age pensioners would re-enter the workforce if restrictions were eased.

When sharing the results of their survey, National Seniors pointed out that older Australians recognised that working was not just about earning money, but for achieving a greater dignity that cannot be quantified:

However, it is important to acknowledge that money is not the only reason older Australians want to work. Many want to work to support the nation, motivated by a public spirit and a desire to serve, [and] to help with the workforce shortages caused by COVID-19.

A fifth of all age pensioners is equivalent to about 510,000 workers—a number greater than the shortage of workers—and these people want to work. It is unfair that experienced and knowledgeable Australians are being shut out of the workforce and denied the dignity of work due to red tape which actually penalises them for wanting to work.

Students on the youth allowance face similar barriers to work. Much like pensioners and veterans, once students on the youth allowance earn more than $450 a fortnight they lose 50 cents in the dollar in terms of their benefits, and they lose 60 cents in the dollar once they earn more than $540 a fortnight. A similar policy should be pursued for these disadvantaged students. The labour force participation rate of Australians aged 15 to 64 is 80%; for students it is just 55%.

Ensuring young people, no matter how disadvantaged, are able to experience the dignity of work holds many benefits. Young Australians are provided with the opportunity to attain vital skills within the workforce, allowing them to socialise and build connections with people within the workforce; and would assist employers expand their worker pool.

Lastly, our criminal justice system should be reformed to allow low-risk, nonviolent offenders to re-join the workforce. Australia’s incarceration rate has been growing rapidly since the 1980s, and if this trajectory continues we could have the developed world’s second-highest rate. This was described in a report from Professor Mirko Bagaric, published by the IPA in November 2022, ‘Australia’s Emerging Incarceration Crisis: Proposed Reforms Of The Australian Sentencing System’.

Report cover

Not only would such reforms help alleviate our immediate worker shortage, they would also provide long-term skills to inmates who can become productive members of society after their sentence is complete, and ease the tax burden on imprisoning nonviolent offenders long-term. This applies to about one-third of the current prison population.

Although criminal justice reform would only alleviate worker shortage levels by 4% of the total, the low-risk and nonviolent offenders could be directed to work in industries of most critical need. The potential net benefit to the budget is in the order of $1.8 billion, based on the aggregate marginal costs of prison reduced and income tax revenue gained, assuming released prisoners work for minimum wage.

The other significant benefit is that releasing low-risk offenders from prison in order to work would make the community safer by significantly reducing reoffending rates. Research by the Productivity Commission has made clear that people who are employed are far less likely to commit crime, because they have a stake in the future and something to live for. Having low-risk and nonviolent prisoners re-join and re-enter society as productive members, and attaining the opportunity to experience the dignity of work, would hold tangible benefits for the individuals affected and Australian society at large.

The Australian spirit of egalitarianism and the dignity of work require that equal opportunity to participate in the workforce be extended to these three demographics: age pensioners and veterans, students on the youth allowance, and low risk nonviolent offenders. Practically, these are no-regret policies. Expanding the worker pool as much as possible increases income tax revenue for the federal government, grows the economy, and ensures businesses can employ more people.

Saxon Davidson was recently appointed a Research Fellow at the IPA, and in 2023 will be a graduate entry into the IPA Future Leaders of Australia program.

This article from the Summer 2022 edition of the IPA Review is written by IPA Research Fellow Saxon Davidson.

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