Complements or Substitutes? Taxation, Social Welfare and Labour Market Regulation: An Industrial Relations Perspective on the 'Five Economists' Plan

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'Let me say, at the outset, that you should be sceptical of anyone who suggests that there are any easy solutions. Solutions which most economists would agree could enable a return to "full employment" or very low unemployment, are either socially or politically unacceptable, or we do not know how to implement them. The best solution is to achieve a large increase in the rate of economic growth.'

(Dawkins 1996: 16)

Introduction

Shortly after the re-election of the Howard government in October 1998 a group of five prominent economists proposed a plan to 'cut the jobless rate' in an open letter addressed to the Prime Minister (The Australian, October 26 1998). In the letter the five economists--Peter Dawkins, John Freebairn, Ross Garnaut, Michael Keating and Chris Richardson--offered 'some ideas for policies that could complement' the Prime Minister's 'tax reform package, to help substantially reduce unemployment over the next few years', (see also Dawkins (1998a) address to a Reserve Bank Conference). The letter was timely in that it was published in the wake of the Coalition's comprehensive tax package, which proposed radical taxation reforms and the creation of a 'new tax system'.

Central to the Plan was the perceived need to limit growth in real labour costs in order to promote employment growth and reduce unemployment. In their letter the economists argued that:

The growth in jobs necessary to substantially reduce unemployment will require higher economic growth and lower growth in wage costs. Tax reform will lead to a more robust economy and improve the chances of realising higher economic growth. Evidence suggests, however, that enhanced economic growth alone will not be sufficient to reduce unemployment much below 7 per cent in the long run. Economic growth will need to be complemented by policies directed at improving the relationship between growth and unemployment, involving a linking of your industrial relations and tax and welfare reforms. The linkage would include an attempt to achieve a lower growth in real labour costs, alongside an integrated approach to reforming the labour market programs (The Australian, October 26 1998).

In this context the Plan made specific industrial relations recommendations, focusing on the need for a reduction in the real value of award wages to promote employment growth. This was to be achieved through the Commonwealth's arguing before the Australian Industrial Relations Commission for a Living Wage freeze. Those effected would be compensated by the provision of tax credits to low income families. In this way the Plan sought to provide for labour market efficiency and equity, by shifting the institutional balance through which these objectives were pursued.

In addition to its specific industrial relations implications, the economist's proposal was interesting because it foreshadowed the emergence of a much broader reform agenda. Beginning as a specific industrial relations proposal, the economists sought to link the wage freeze to the broader taxation and social security reform agenda. The last section of their letter argued for a 'rationalisation of our complicated tax and social security system and a move towards a negative income tax'. The letter further implied that the wage freeze would be a first step towards a longer-term alignment between industrial relations arrangements and broader tax-transfer institutions, and a policy goal of 'labour market deregulation'. (1) The letter therefore added momentum to the growing interest in alternative income taxe arrangements as a possible solution to the unemployment problem (Dawkins 1996a; Dawkins et al. 1997; Dawkins and Buckingham 1999). (2)

Despite being rejected by the Minister for Workplace Relations, Peter Reith (1998), the Plan was quoted extensively in the media and fuelled the economic and political debate within Australia as to the relationship between labour market regulation and unemployment. …