Wednesday, July 14, 2004

Unemployment and welfare policy

A lot of pronouncements on welfare policy are targeted at unemployment - at getting people off the dole and into work. Right-wing solutions, such as those advocated by National and ACT, claim that they will achieve this by being punitive - by slashing benefits, imposing time-limits, and demanding participation in mandatory work and "job skills" schemes (which ironically may prevent people from attending interviews).

The problem with these policies is that they are based on a completely outdated view of our economy and the causes of unemployment.

Once upon a time, we ran a social democratic economy, aimed at providing full employment. When the market didn't provide jobs, the government did, either directly by hiring more people, or indirectly through policy settings designed to protect and foster local industry and encourage employment. For much of the period, unemployment was low to nonexistent, and while the anecdotes about welfare ministers knowing everyone on the dole on a first-name basis are false, it's unquestionable that unemployment was far lower than it is today.

You can see how punitive measures against the unemployed make sense in such a setting. Jobs were plentiful, and more could always be created by the government (by building another dam, cutting down some more trees, or getting more people to work on the railways). Unemployment was, for much of the period, a matter of choice.

However, we no longer live in that sort of economy. Since 1984 (and in particular since the passing of the Reserve Bank Act 1989), we've given up on the old social democratic goal of full employment in favour of pursuing low inflation. The Reserve Bank manipulates interest rates to ensure that inflation stays in the range of 0 - 3% in the medium term (it was 0 - 2%). It's like an accelerator - when they lower interest rates, they're pumping more money into the economy and allowing it to grow faster; when they raise them, they're reducing the money supply, and starving it of fuel. The relevance of this is that

  1. raising interest rates tends to increase unemployment; and
  2. the Reserve Bank views low wages (or rather, low wage growth) as an essential part of low inflation. The wage increases that would naturally occur when the labour market is tight and businesses must compete for staff are "wage inflation" that must be stamped out.
And so we had the spectacle on Agenda last month of the Governor of the Reserve Bank saying that "it concerns us... when you can't find the people or the skills at sensible prices" and that interest rates would have to rise - and people be thrown out of work - because businesses "complain they can't get staff, they're having to pay a lot more for them" and workers were "looking to negotiate at higher levels".

Under such a system, it is simply unjust to be punitive towards the unemployed. In a very real sense it is not their fault - the individuals concerned have just got the short end of the statistical stick, and if it wasn't them, it would be someone else. Punitive measures to "encourage" them not to be unemployed is like picking someone at random and beating them for being picked. The injustice - not to mention sheer pointlessness - of that ought to be apparent to all.

If we are going to run a system where 5% of the workforce must be unemployed because it makes the economy as a whole "more efficient" (i.e. low-wage), then we have an obligation to provide for them. It's as simple as that. Otherwise we are building the happiness of the many on the suffering of a few. Utilitarians may like that tradeoff, but I think it is grossly immoral.

What about those who don't want to work? Well, what about them? I have no doubt that there are some who would rather spend their lives on the dole, but they are a small fraction of the total unemployed (certainly less than the 10,000 who have been unemployed for over a year), and the best solution is simply to let them. No-one is made happier by forcing someone who doesn't want to work into employment at the expense of someone who does. There's simply not enough jobs to go around (and never will be, as long as our monetary policies continue), so they might as well go to the people who actually want them.