Labour market programs have come a long way since the days when relief work was the only option that governments could offer the unemployed. Like most other countries, Australia has tried, discarded, modified, extended and developed a very wide range of programs with the result that there is now a bewildering array of labour market programs at the government's disposal. In the process not only the content but also the form of these programs have changed. The programs have to be labelled and packaged to be attractive to both clients and the community at large. Thus, when the Committee on Employment Opportunities suggest a Job Compact, the suggestion should not be dismissed as old wine in new bottles. It is a well developed and imaginative concept which provides a focus for the debate that is now under way.
Much has also been learned in this process. It is fairly widely accepted that the main issue is not the number of additional jobs created by job creation or any other form of assistance to the unemployed. It is the ability of labour market programs to redress the inequalities that unemployment give rise to that matters, and to ensure that the future efficiency of the market is not impaired by the virtual disappearance from the effective labour supply of those who have been unemployed for a long time.
If we accept this proposition it is almost inevitable that the cost of assistance, on a per person basis, increases with the severity of the unemployment. As the unemployment queue lengthens, the queue becomes more diverse in terms of the type of assistance required, and those at the bottom are increasingly disadvantaged by the length of their unemployment. It follows that to redress this disadvantage, a wider range of programs are required, and increasingly costly forms of assistance, like job creation, have to be used.
Generally speaking, international evidence also indicates that the mix of labour market programs shifts towards job creation during a prolonged or severe recession. The Australian program mix has also followed this principle in the past, particularly during and in the aftermath of the 1982-83 recession. However, so far job creation has played a relatively minor part in the expansion of labour market programs to deal with the current unemployment.
A major reason for this seems to be that the Australian experience with job creation is not judged to have been very successful. The Committee on Employment Opportunities is careful not to pass judgement, but they are extremely concerned about the high cost of job creation and its ability to improve the employment opportunities for participants. Therefore they favour the expansion of lower cost intervention, notably wage subsidies, as the main form of assistance to the long-term unemployed.
2. Job Creation and the Program Mix
In view of what has been said before, we believe that the Committee takes a too negative view about job creation, and that there is a case for increasing the share of job creation beyond that proposed by the Committee (the program mix proposed by the Committee is given in Table 5.1, p. 129 of the report). To develop the argument, a simple model, set out in Figure 1, is helpful. The model assumes that we wish to assist N unemployed persons and that we have two programs at out disposal; wage subsidies with a given subsidy rate, and job creation. When we use wage subsidies, those assisted are placed in 'real' jobs and the value of the output produced in those jobs are depicted by the 'real' value of marginal product curve. When the unemployed persons are placed in created jobs, the output produced has a lower value and in the diagram we have depicted two possibilities.
[FIGURE 1 OMITTED]
If we take it that created jobs have a low social value, i.e. the lower 'created job' curve applies, then job subsidies should be used up to its limit [n.sub.s] *, where the marginal value of a subsidised person is equal to the cost to the employer, the wage minus the subsidy (w-s). …