The best way to help the unemployed is not through top-down "welfare to work" schemes, but freeing up the labour market and economy more generally.

1. Labour market reform and
welfare system
Mikayla Novak
Senior Fellow
Institute of Public Affairs

2. Labour market problems
• Modernist (neoclassical) depiction of disequilibrium in perfectly
competitive labour market, conducive to unemployment.

3. Labour market problems
• Post-modernist (Austrian) perspective of dynamic labour market adjustments.
• Labourers, and potential labourers, are not homogenous putty clay (nor is
capital, land, finance, entrepreneurship, institutional quality).
• Non-fungibility and specialisation of labour shaped by specific human capital
investments; aptitudes toward creativity and effort; tastes for given wage
rates; and inherent talents driven by factors such as genetics.
• Adding to these considerations are spatial, age, gender, and other dimensions
of employment, and unemployment, adding to the complexity of analysis.
• Implications for policy: fiscal stimulus programs, industrial policies, specific
employment/labour market programs, etc., which spoil free adjustments, will
be ineffective in redressing unemployment in long term (‘knowledge
problems’).
• Freeing up decentralised market coordination empowers unique feeling,
thinking, acting human beings best opportunity to discover their own lucrative
economic (incl. workplace) opportunities.

4. Rationale for welfare-to-work
• Human beings interfacing in friction-laden regulated labour (and other)
markets encounter the governmental welfare state, often leading to a long
term dependency upon tax-financed income transfers from the employed
to unemployed.
• Average length of Newstart Allowance receipt for long-term (one year and
over) beneficiaries: 5.3 years (2012 data).
• One-third of long-term beneficiaries (113,417 people) receiving Newstart
for five years or more.
• It is well established that long term welfare dependency rates associated
with a wide range of adverse economic and social consequences.
– Erosion of human capital; relatively greater consumptive hardships and difficulties to
save; and social exclusion.
• Other drivers of welfare-to-work: potential welfare expenditure savings;
‘downwards envy’ by those in work of those not working.

5. Existing welfare-to-work
• Work for the Dole: Prescribed placements for young people to work on
selective community projects (now proposed to include older jobseekers).
• Remote Jobs and Communities Programme (formerly CDEP): $1.5bn
program across 60 remote regions.
• Green Army: 15,000 unemployed people directed to undertake
environmental remediation works (average cost per place $50,000 p.a.).
• Evidence of success for these programs is mixed, and remains contested,
with the contestation surrounding whether programs are cosmetic, ‘make-work’
schemes, or schemes closely relevant to labour market needs.
• Tendency for programs to be paternalistic by their nature, with
government exhibiting a habit of pre-empting which activities would be
most conducive to human capital development for unique individuals,
with diverse needs.

6. Genuine welfare-to-work
• The greatest welfare-to-work measure yet devised by humankind: greater
economic freedom inducing more market-facilitated entrepreneurial
discovery.
– ‘Economic freedom is likely to affect unemployment favourably. As it provides a framework for
voluntary exchange as well as for freedom to enter and compete in markets, it probably
reduces unemployment both directly by improving the functioning of the labor market and
indirectly by stimulating economic development.’ (Horst Feldmann, ‘Economic Freedom and
Unemployment’, Fraser Institute, Economic Freedom of the World: 2010 Annual Report)
• Feldmann’s empirical estimates of relationship between economic freedom
and unemployment (total & youth) instructive.
– Sample of 100 developed and developing countries from 1980 to 2008.
– Dependent variable: unemployment rates.
– Independent variables: GDP growth; GDP per capita; GDP growth gap; real interest rate;
inflation rate; child population shares; elderly population shares; political rights & civil
liberties; war.
– Negative, and statistically significant, relationship between unemployment rates and
economic freedom.
• Conclusion: ‘more economic freedom appears to reduce unemployment. The
magnitude of the effect seems to be substantial, especially among young
people.’

7. Labour market reform to catalyse
genuine welfare-to-work
• Preventing labour market lockout, and helping individuals forge their own
real labour market experiences, through labour market deregulation.
• Abolish minimum wage, which destroys jobs at lower-end skills levels and
prevents people on fringes of labour market (incl. welfare dependents)
from easily acquiring entry-level work.
• Repeal ‘unfair dismissal’ legislative provisions to reduce perceptions that
employees as a potential source of litigation risk and compliance cost.
• Eliminate penalty rate conditions that increase costs of conducting
business (particularly on weekends/public holidays) or, at least, accord
employers freedom to pay loadings in accordance with observed
productivity gains during busy periods.
• Complementary reform idea: allowing individuals to ‘opt out’ of Fair Work
Act provisions, enabling them to work for rates of pay, and with
conditions, deemed most suitable (Sen. Bob Day).

8. Broad-scale reforms to support
genuine welfare-to-work
• Make occupational licensure history, as it restricts labour supply and
inflates prices borne by final consumers.
• Ease restrictions against ‘sharing economy,’ allowing enterprising people
to ingeniously discover new ways of serving the general public (e.g., public
transit, accommodation).
• Much more competitive, and lower cost, education and training systems
are needed to allow unemployed to build their human capital.
– Funding support through income-contingent loans, or building ‘personal equity markets’
in people’s embodied human capital (Joseph Clark/John Humphreys).
• Tackling high effective marginal tax rates, serving as a disincentive to work,
though flatter income taxes, and with much lower taxation rates.
• Sweep away the ‘kludgeocracy’ that is welfare complexity, to help people
avoid getting trapped from one welfare payment to another over the life
cycle.

9. Concluding remarks
• Policymakers will find it increasingly difficult, in a labour market of ever-greater
complexity, to instigate ‘make work’ welfare-to-work programs that
most effectively match the heterogeneous human capital structure of
unemployed labour.
• But discouragingly, politicians and bureaucrats persist with trying to game the
labour market – and concocting fake economies detached from true markets –
with the aid of quick-fix, often highly prescriptive, welfare-to-work schemes.
• Nearly everyone agrees on the need to reduce welfare dependency, and in the
economic and social benefits of working when one can.
• However, the ‘grunt work’ of helping people secure jobs would best rest with
general-purpose, smaller-government reforms that allow people to more
easily interact with each other in market settings, including providing services
to others in labouring roles.
• Evidence tends to support benefits of real jobs creation through greater
economic freedom, and not welfare-to-work contrivances.