Academic journal article The Economic and Labour Relations Review : ELRR

Welfare Reform, Work and the Labour Market

Academic journal article The Economic and Labour Relations Review : ELRR

Welfare Reform, Work and the Labour Market

Article excerpt

1. Introduction

There is a certain irony in the fact that at a time when western industrial economies were in the midst of the longest post-war period of economic growth, attention focused on the limitations of the social security (or welfare) system. Governments, for long prepared to tolerate rising income inequality as the price to be paid for increased reliance on factor market flexibility and market forces, saw joblessness and the unequal distribution of (paid) work as requiring a policy response.

Although unemployment fell noticeably during the 1990s in some OECD countries, including Denmark, Ireland, the Netherlands, New Zealand, Norway the UK and the US, elsewhere it either fell only modestly or actually increased. For the OECD as a whole, the unemployment rate is projected to fall by less than one percentage point between 1997 and 2001 despite average growth over the period of around 3 per cent a year (OECD, 2000). The decline of unemployment in countries such as the UK, US and New Zealand has been accompanied by substantial rises in income inequality (Smeeding, 2000; Easton, 2000).

2. Unemployment and Inequality

Considerable attention has focused on increasing inequality (particularly in the US), yet as Nobel Prize winner Amartya Sen has pointed out, inequality in the US income distribution must be seen in the context of its low unemployment rate relative to Europe (Sen, 1999). Others have argued that the simple dichotomy underlying this position, between a flexible US labour market that delivers low unemployment and a rigid European labour market associated with high unemployment is inadequate as a general explanation (Nickell and Bell, 1996). While some labour marker rigidities associated with the welfare system can create unemployment, others do not (Nickell, 1997). In Australia, the issues raised by this debate have been promoted by release of the McClure Welfare Review. The report cites inequities in the distribution of work as an issue to be addressed, but makes no explicit reference to the need to reduce inequality in the distribution of income (Reference Group on Welfare Reform, 2000).

Has the combination of globalisation and technological change given rise to a new trade-off between inequality and unemployment? Or is it simply that an ex ante rise in inequality is the trigger for falling unemployment and declining ex post inequality? What has happened to the traditional argument that low unemployment is not only inherently desirable, but is also an effective way to reduce poverty and inequality? Is the only realistic path to lower unemployment for a country like Australia to follow the US and accept rising inequality as inevitable during the transition--and possibly also beyond it?

I think not. A recent study of the rise in US income inequality in the 1990s reveals the extent of the US distributional shift and highlights the factors that are driving it (Mishel, Bernstein and Schmitt, 1999). Across the middle and lower sections of the American income distribution, the main culprit has been declining wages. Real hourly wage rates fell for the bottom 70 per cent of US workers between 1979 and 1989, while wages were flat or falling for the bottom 80 per cent of workers between 1989 and 1997. These changes resulted in a decline in real median earnings and a rise in median family income of less than US$300. In contrast, executive salaries have soared, increasing on average from 20 times those of the average production worker in 1965 to 116 times as high by 1997. In other words, by the end of the 1990s, it took the average US executive around two days to earn what the average American production worker earns in a year.

Most of the overall rise in US inequality reflects what employers have been putting into pay packets, not what the government has taken out. However, taxation has played a major role at the top of the distribution. The wealthiest one per cent of US families experienced a decline in their annual tax bill of almost US$37,000 between 1977 and 1995 as a result of changes in US tax laws--a trend that newly-elected President Bush seems set to continue. …

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