Arbitration In Contempt

Youth and the Unnatural Rate of Unemployment

Michael G Porter*

Introduction

The reason for agreement that something must be done to facilitate jobs for youth is that approximately one quarter of a million young Australians are recorded as unemployed. While many are unemployed only for short periods, and often in the course of search for better jobs, few can doubt the serious nature of youth unemployment. What is to be discussed in this paper, with particular reference to the youth of Australia, is the fact that many are accepting the current rates of unemployment as somehow 'natural', as if they reflect some fundamental characteristics of our economy.

On the contrary, both youth unemployment and the low quality of jobs and training offered to youth, are quite unnatural, being very much the consequence of interventions in the labour, education and training markets. These attempts at social engineering are interventions that H.R. Nicholls would have attacked, and Justice Higgins endorsed, being consistent with the well meaning interventions which characterised Higgins' Presidency of the Arbitration Court. But, it shall be argued, the same laudable objectives which were behind the attempts to improve the lot of the workers by prescribing minimum wage awards and conditions, regardless of the state of the businesses in question, should now, on the basis of the evidence, lead to a retreat from centralised arrangements.

One might add, that were Higgins alive today, caring as he did for the social conditions of the workers, he would have difficulty concluding that wage intervention had turned out to be a device for helping the common man. Rather, he could observe that the wage processes stemming from his Arbitration Court are instruments of the powerful and organised in labour and business, and a barrier to the well being of individual workers and small enterprises.

What should stand out to our 'born again' labour analysts is that we need to return to the legal processes which support symmetrically enforced contracts drawn up at the local level. Higher incomes can be generated by better incentive structures, better management and higher levels of skill, all of which are positively hindered by central imposition of wages and conditions.

Full Employment Should Be Legalised

To state it simply, the natural rate of unemployment in Australia or anywhere else will remain at zero for so long as people have un-met wants. So long as we all have needs for this service or that gadget, the actual rate of unemployment, apart from that associated with job search and relocation, will exceed zero only to the extent we use legal and other devices to prevent parties, including unions, from freely and naturally contracting for the employment of their labour, capital and other resources.

For those concerned with historical perspective, it may be instructive to recall that most of the jobs that today's adults held as youth offered wages which are now illegal. It is for these and other reasons that I once suggested that we need to mount a campaign to legalise full employment in Australia; to remove the legislative obstacles to employment. As has been most forcefully remarked in the last year or two, it is nothing short of absurd that we spend money 'remedying' the consequences of wage regulation, calling it job creation, but leave the regulatory causes of unemployment, or job destruction in place. People who offer jobs at economic wages should be treated as heroes, not threatened by the legal system for not abiding by wage awards that they were never allowed to (re)negotiate with their own (potential) workers.

Lessons From Research

Longitudinal research (e.g. Duncan [1985], Freeman and Wise [1982]) demonstrates that unemployment today correlates with low income and limited job opportunities tomorrow. While there is no evidence that youth suffers from gaining jobs at modest wages (except the zero wage and indignity often associated with unemployment), there appears to be a widespread view in Australia that the current contrived wage structure is somehow helpful to youth. Research has a contrary implication, and suggests that a sure way of hiring a person over her or his entire life cycle, is to prevent them from 'getting a foot in the door' early in life. (And of course the government must logically agree with this, as there can be little other rationale for wage subsidy schemes.) The union demand, which has been successful in some areas, to remove all recognition of age/wage differentials, is revealed by research to be a sure fire way of penalising youth. After all, if the employers are forced to pay, say $10 per hour, they will always choose the most experienced and most reliable, even though they might happily employ a youth at $6 per hour.

Wage Awards and Welfare Incentive

I shall be suggesting that perhaps the main reason there is a need for special policies towards youth is because current official wage awards operate such that it is now harder for youth without skills to compete for jobs, and because the education and welfare incentives before youth are far from those which should characterise a vigorous market economy. The factors affecting the choice between school and work, and between full and part-time work and unemployment, have been changing in quite a complex manner in recent years, as have the numbers in the respective categories (see Gregory and Duncan).

Benefit rules have discouraged post school-age youth from taking part-time jobs, with the combination of loss of benefit and taxation inducing persons not to take part-time work. And vacation jobs appear a thing of the past for most students, except in the cash economy, in large part, I suggest, because the minimum wages and associated on-costs are typically in excess of what businesses wish to pay for inexperienced short term workers. As a result, youth now gain few of the job experiences their parents once had, or that U.S.students typically gain while at college.l

Growth areas in employment will continue to include the many and varied service activities, and employment in these jobs will never be assisted by blanket rules and regulations relating to union coverage, pay, hours and training conditions. One reason part-time employment has grown dramatically is that it offers a way around some of the more restrictive award conditions.2

Basic to any return to full employment must be increased recognition of the linkage between labour costs, of which wages are only a part, and employment. The embarrassing fact in Australia is that as unemployment of youth has grown, notably during the 1970s, it has been after, or in association with, increases in youth wages, and following a quite sharp rise in average youth wages relative to adult wages. While there have been periods in the 1980s when average earnings of youth fell in relative terms (notably in 1981) and which did appear to reduce the unemployment rate of youth, there has basically been no mechanism allowing wage relativities to respond to the employment situation.

In the context of a faltering and less than fully employed economy, and in which wage relativities are divorced from market pressures, it is a natural outcome that the least experienced workers be last hired and first fired, given the wage constraints. It is also a characteristic feature of a regulated economy that young people choose less than ideal education and training options, including doing nothing by way of training, both because the choices are artificially constrained by the heavy regulation of education and training, and because there is little offering by way of rewarding employment. It follows that more centralised wage fixing (at whatever level), more detailed centralised direction of education and training, and increased funding of existing institutions are unlikely to help youth, they being the strategies which started the mess. Rather, we need to remove impediments to the efficient employment and training of young Australians. We need to break the barriers to the main event and not raise the prize money on the sideshows.

A thesis of this paper, then, is that the main losers from Australian labour market rigidities and educational regulation are the young, the unskilled and the educationally disadvantaged. We find that uniform treatment of individuals who are far from uniform, penalises the less advantaged. Not only do some groups miss out on subsidised tertiary education and training, these same people are precluded by wage awards from what would amount to 'bidding' for on-the-job training. The way a disadvantaged or young and inexperienced person can gain entry to the job-learning process is by being willing to work at what might best be labelled 'training wages'. Such wages have been illegal in Australia, and only recently has there been pressure for reform (reflected in the Kirby Report [1984] yet strangely absent from the thrust of the Hancock Report [1985]).

Implicit in the reviews conducted by both the Hancock and Kirby Committees must have been the notion that our interventions in the labour market have grown in an ad hoc fashion, characteristic of any democratic process, and that there would be large potential gains from removing those policies which fail to achieve their objectives. There was a need to take an inventory. However, in looking at the subsequent statements by Mr Willis in response to these Reports, it would appear that virtually all the existing schemes are to be left in place; the basic wage determination structure is to be left unscathed, and there are to be yet further schemes in which government makes detailed decisions regarding who gets what training, where, and at what price. There appears to be little recognition, in either the Reports or in government policy, of the extent to which youth will be a major beneficiary of any moves to remove penalty rates, restrictions on shopping hours and indeed of any change which enables youth to exploit their greater flexibility in hours and conditions of work.

While the government in its policy announcements appears to support the notion of a training wage, there is an inconsistent rejection of the need for genuine flexibility in wages and a decision to persist with wage subsidy programs which are neither efficient nor fair. Wage subsidy programs are a classic example of one government distortion (youth wage rigidity) calling forth another (youth wage subsidy), and with the tax bill being paid by the wages of others. What we need is neither rigidity nor subsidy, but simply the legal power to employ any worker to the mutual benefit of both parties.

Wage subsidy schemes encourage wasteful 'musical chairs' amongst the unemployed, since employers can reorganise their hiring practices so as to hire less of the more expensive workers (although the bureaucratic costs and worries regarding the quality of the new worker may suggest it is cheaper overall to hire the high wage worker). To the extent, however, it can be demonstrated that wage subsidy programs do increase employment, that makes a case for wage flexibility, since the same result can be shown to be obtained but at no cost to other taxpayers (quite the reverse, since the newly employed person will pay taxes). Wage subsidies only work if incentives to employers matter, and since these incentives are, by these very schemes, revealed to matter, then logic demands we strike off those constraints which prevent automatic wage adjustments and scrap the subsidy schemes.

There are many who argue that while the many rigidities are a serious impediment to youth employment, it is 'pipe-dreaming' to believe the unions will allow such liberalisations. However, the legitimacy, and support for union positions on these and related matters, stems from the belief that the union position was somehow in the interests of all workers. Once it becomes more widely appreciated that the union position on these issues in the 1980s is merely a device for raising the incomes of one well-to-do group of workers at the expense of less well off and unemployed persons, then the credibility of the union position, particularly to Labor supporters, should evaporate.

Labour Market Programs

The government, over the period 1979/86, will have spent a total of $3,147 million on labour market programs and assistance (Dept. of Employment and Industrial Relations, Aug. 1985. The breakup of the figure has 74% of this money, or over $2.3 billion, to be spent over the three year period 1983/86). To put that figure in perspective, suppose that 200,000 young Australians were the victims of artificial wage awards in that jobs were precluded to that extent. They could each have been given a capital grant of over $15,500 dollars instead of having the existing regulatory obstacles to overcome . However I do not suggest such a scheme. But I do suggest that it would have been far cheaper to have taken this money, plus the $3 billion per year or more spent by government on tertiary education, and underwrite an education and training scheme offering all youth a mixture of loans and grants to be spent, where they choose, on fees imposed by the respective and competitive institutions.

The fiscal soundness of a loan scheme stems from the fact that over their lifetimes, recipients of loans (like other taxpayers) will no longer be paying taxes to fund such a large chunk of education and training. What is more, because people will think more carefully about where they spend their loan money, educational programs will be more efficient and more finely tuned to the needs of individuals rather than the well meaning, but often misplaced, judgements of officials in education and training departments. My modelling of a loan/scholarship scheme finds that students or trainees accepting, say, a mix of $6,000 scholarships and $25,000 loans to fund a three year education program (including fees) would be able to fully repay their loans with payments starting 5 years after graduation at around $1,000 and amounting to less than their tax savings from not having to finance other people's education and training. What the loan scheme and the discipline it brings both demonstrate is that 'free' education is far costlier to individuals and the society than higher quality and fairer alternatives.

It is also stressed that even though Australian policies appear heavily to favour those with higher scholastic aptitude, the lack of adequate incentive and pricing schemes for the scarce and highly skilled educational resources means that the more able are obtaining a much lower quality education than our resources permit. And as a few more courageous Vice-Chancellors and heads of other tertiary institutions are starting to point out, educational institutions will perform better if largely free of regulation and if they have to attract students with competitively designed courses in areas in which the institution has demonstrable strengths.

Government Measures

While it may be agreed that some of the recent government measures are in the right direction, since they involve a relaxation of wage award constraints, and a decentralisation of aspects of (on-the-Job) training, there remains an urgent need for a consistent liberalisation of the whole gamut of education and training schemes and associated labour market contracting arrangements. The extension to virtually all young people of free education, and often a guaranteed income, while they train or engage in some activity other than work, raises dangers not just of fiscal blow-up, which is already huge, but of further chronic mis-matches of skills and jobs, given that what is proposed is a far cry from a market process. All young people now face a uniform set of incentives not to work.

While commenting in passing on government funding of education and training, I do not address the question of the extent of government funding. Rather, it is argued that at whatever level government should choose to fund education and training, greater efficiency and equity will obtain if government involvement excludes detailed direction and management. Institutions should have to compete for the student and trainee dollar, regardless of whether it comes from government or more directly from the family's pocket or bank, and they should face more external evaluation of performance. People in the universities often criticise those in the textiles and steel industries, for example, for their protected inefficiency, yet I would venture to suggest that relative to tertiary education, textiles and steel look like models of efficiency.

Vanilla and Toppings

While the focus of the paper is on the disadvantaged, those with special advantages by way of educational aptitude will also benefit in many ways from liberalisation of education, training and labour markets, since they will be able to register preferences for educational flavours other than the government's' ''vanilla', together with an enlarged variety of toppings.

Alternatives In Education

Finally, on the supply side of education, our proposed revisions of policy offer distinct gains relative to the cosmetic, though expensive, changes proposed in the recent review of youth policies. It is perhaps ironic that the major short term beneficiaries of heavily subsidised tertiary education may be losers in the long run, owing to their inability to receive tailor-made education that would flow from less regulation. It is perhaps not widely appreciated that those of us who would like to design and offer quite different and self-financing educational offerings are actually prevented from so doing in Australia because fees are largely prohibited and because there are all manner of government impediments to setting up private institutions. The dynamism of North American educational institutions is something we will not ever be able to match if we restrict ourselves to the 'free governmental vanilla' flavour. And, while Australia has a significant advantage over her Asian neighbours in education this too may disappear as they move to design truly competitive and efficient educational structures.

As a result of these limitations on educational creativity, the taxpayer foots the bill for courses which are inappropriate for the potential trainee. What is needed, I suggest, is a move away from funding institutions towards funding individuals, who may present their educational and training voucher at a government or private educational institution in a year which best suits the individual. It is suggested that the educational vouchers be indexed to education costs so that those who postpone using their voucher, and who wish to work now, will have similarly valuable options in later years . And if we are to continue to subsidise tertiary education, why preclude the less able, given that all manner of different skills require forms of training? If we wish to help needy and able individuals this does not suggest that we continue to make grants to institutions; it says we should make grants which individuals can spend at eligible institutions that they choose. Institutions which would fail to attract students without the current subsidies should fail to attract funds, and should not complacently hide behind the queues of students that arise because of quotas and the absence of a sensible price structure for their courses.

Free Education Too Costly

Finally, we should repeat the point that we are deluding ourselves if we think that the absence of fees is an efficient way to help needy students. 'Free education' is of course expensive education, since it means that many who are scholastically able (as measured by HSC) but attach a small value to further education, incur costs to taxpayers of up to say $30,000 over their degree, even though they might prefer to be working. Others who are working but would willingly borrow or who would like a tertiary education may be excluded for a variety of reasons. And those fields which might freely and gradually expand or contract owing to the interaction of fees, grants and student preferences, are shielded by quotas from experiencing the gradual adjustment in numbers and funds.

Free education becomes undisciplined and uncompetitive education, since there is no direct monitoring by those who pay. Those who receive but not pay simply want as much as possible, almost regardless of flavour. To persist with the ice-cream analogy, Australian tertiary education is much like a governmental Baskin-Robbins ice-cream shop offering only two flavours, vanilla and chocolate, and both for free. Not surprisingly queues develop and the shop goes 'broke', but for the taxpayer, despite the preference for fudge ripple and a capacity to pay.

A defense of the policy of 'free' education is often that it would be unfair to turn off the tap just as one group of honest taxpayers line up at the trough. Why should fees be introduced now, given that they were not yesterday? This intertemporal inequity is real, and given the broad involvement in tertiary education constitutes a powerful political reason for leaving fees at zero. However a politically feasible compromise is to replace free tertiary education with vouchers of similar value, so that the redistributional element is largely unchanged, but with the introduction of fees, which can vary across institutions, introducing a large measure of efficiency gains.

Choices and Incentives for Youth

The opportunities facing youth include schooling at secondary or tertiary levels, employment, training, leisure, unemployment and other forms of assistance should they, for example, be a single parent or have some illness or disability. While the bulk of young people at any point in time will have a single preference, e.g. to stay at school or find a job, in the context of widespread unemployment of youth and sizeable welfare benefits, an increasing number of persons regard these non-work non-school categories as real alternatives.

The recently announced government policies adjust the relative benefits of these alternatives, and also add new incentives to train and be trained. But what the new policies do not address is why 'training wage' adjustment and new training and education choices and incentives do not emerge naturally in response to new demands. The reason is, I believe, that our education and labour 'markets' are regulated to death, with many on-the-job training and self education options being precluded by our wage structure. Similarly, innovation in 'off-the-job training is hindered by the rigid allocations to educational institutions (rather than individuals), institutions which are shielded from competition by the strange mixture of subsidies and quotas, not to mention the unusual employment contracts which characterise our education system.

In the view of many economic analysts, it is not a question of market failure calling forth government intervention, but of government intervention preventing market adjustment. In what follows I shall attempt to address these arguments and issues, and also look at the classes of gainers and losers from the current interventions in the education, training and labour markets.

The current spate of measures has grown out of concern at the high unemployment rate of youth. While the increase in unemployment of youth is considerable, it must be noted that the relatively high rate of measured unemployment also reflects the desire of youth to search and change around until the job fits. As a result, there is more frequent exit from, and entry to the work force, since the teenage separation rate from jobs in any given month is about 5 times as high as for the 'prime age' male.group (25-54). (This is also observed in the EEC and the U.S.A.; see OECD [1984] and Freeman and Wise [1982]). Furthermore, as Gregory and Duncan [1980] have argued, unemployment and employment rates for youth can have as much to do with schooling and part-time work decisions as with general demand pressures in the economy, and thus there is a need to analyse a variety of factors on both the supply and demand sides.

Given the dynamics of youth participation in work, leisure and the welfare system, there is a clear need to focus on the flexibility of the wage/benefit system, given that education and employment should be the key options facing youth. History does not suggest there is much virtue in simply providing more money for the existing .institutions while leaving untouched the regulatory structures, which are, arguably the real culprits. While the proposed 'training wages' have the scope for evolving into a much more flexible wage structure, the initial version seems long on bureaucratic determination and short on decentralised decision-making by the employees and employers directly concerned.

Barriers to Employment

The uniform imposition of wage-minima and other rigid employment hours and conditions on individuals who are far from uniform, penalises most severely those who diverge from the mean, but also hurts those at the mean, since they face an inflated number of competitors. (For those who find this hard to swallow, consider restaurant prices; if all are constrained to be the same the whole industry and its consumers suffer.) But as we have noted, it is those at the bottom of the education spectrum who suffer most. For not only do these groups trip over the educational hurdles and they miss out on subsidised tertiary education and training, they are precluded by wage awards from what would amount to a second chance, for example by making a 'bid' for on-the-job training at a modest wage. In many respects, then, the operation of our tax/transfer system within education is a winners' paradise, albeit a paradise in which the winners are often led into the distorted choices.

To the economist, then, the 'barrier' to youth employment which usually stands out as most eligible for challenge is the imposition of minimum wages, and, particularly minima which significantly exceed the initial net productivity of young workers. But this economic opposition to minimum wages for youth is a somewhat different, and I suggest, less controversial argument than that for wage Cuts as a means for restoring full employment, since the argument in the case of jobs facilitated by 'youth wages', is that young people are not merely working in the (potential) new job; they are gaining training and experience which increases their own productivity in this and other jobs. In other words part of their job is training (regardless of whether they have the blessing or certification of a new scheme), and the 'effective wage' should be viewed as the sum of the wage received and the training obtained. Given that the value of an apprenticeship or on-the-job training position is inherently subjective, and that unskilled workers can impose considerable costs on firms, the case for deregulation of training wages is powerful, and certainly less controversial than the case for general move away from minimum wages in the work force. But note that this deregulation would not lead to the currently proposed scheme, with all detailed provisions for external review interference.

Cogant [981] argues that technological progress in agriculture in the South over the period 1950-1970 led to the virtual demise of the demand for unskilled labour, and that the enforcement of the minimum wage prevented the re-employment in non-agricultural jobs. It should be stressed that the evidence does not say that all unemployment is caused by wage minima (see Mincer [1976]); what it does say is that wage minima are an extremely unhelpful barrier. to employment, particularly at times of structural change, or when there is a cyclical downturn. Structural change creates demands for different and often new skills, and many of these can be acquired on the job by youth if they are allowed to compete. The wage minima often preclude that competition from taking place.

While opposing imposition of wage minima does not often draw great applause from some quarters, the paradox is that by relaxing minima, the wage income of youth would rise, both initially, due to the new wage earners employed, and subsequently because of earnings growth as these new workers gained skills they would otherwise not obtain. While economists will argue somewhat about the percentage of unemployment explained by minimum wages, they virtually all agree that such imposed minima are not a useful means of helping the poor or underprivileged.

Notice that it is not questioned that we ought to design policies that are of most benefit to the least fortunate; it is just that minimum wages are part of the problem. When the wage minima matter, they prevent jobs. When they don't matter, because they are less than the market wage, they might as well be abolished. Wage minima don't help people who are out of work and they don't help people in poverty. In short, minimum wages have no real intellectual credibility as a way of helping low income workers or potential workers. Those who feel wage minima are a good idea must ask themselves why, if we can impose minima, do we not impose $50 an hour? All can see that such a wage would create lots of potential employees but virtually no employers; yet we see widespread belief that the minima are a good idea.

Replacing The Barriers With Choices And Incentives

Having 'removed the wage barriers', the question remains as to the need for supplementary strategies for compensating youth for the previous policies which effectively discouraged them from becoming useful members of the work force. It has to be agreed that simply removing wage barriers will not convert youth with years of depressing idleness into hot prospects for a job. The evidence, as I read it, all points to changes in education and training policies which will have profound and beneficial implications for youth. My candidates are the introduction of:

(1) a training/education voucher worth roughly the current cost of post-secondary education, and earning an interest rate equal to the rate of increase of costs, such that those choosing to work now and train later, would not be penalised; and

(2) a loan scheme whereby individuals wishing to invest in their own training essentially have the option of borrowing now in exchange for either future repayment, as with a deferred interest loan, or of incurring future tax liabilities, so as to supplement any education they may desire over and above that obtainable with the voucher.

Under these proposed arrangements, the government funding of much of tertiary training would continue, but would be channelled through individuals rather than institutions, with the respective tertiary institutions charging fees and designing courses best able to make use of their resources. (It might be noted that this reform is one of the few moves which can both help the needy and reduce the deficit tendencies of government.) Universities, CAE's and TAFE institutions would be indirectly funded by government, although they would now be setting and collecting fees. The representative student might now pay $5,.000 fees to the New College of Technology, with $4.000 coming from his government voucher, and his living expenses would come from a variety of sources, including scholarships, part time work (including vacation work) and the government educational loan scheme. Any group would be potentially able to set up educational institutions in competition, and there would be some assessment procedure whereby eligibility for reimbursement of vouchers would be determined.

Education, Training, Work and The Life Cycle

The positive interaction of education with opportunities to work and capacity to enhance skills on the job, means that the fortunate stay ahead. The interaction of limited education, absence of on-the-job training, and unemployment means that the losers stay behind. In the extensive review of youth unemployment in the U.S., a National Bureau of Economic Research conference volume edited by Freeman and Wise [1982] found that there was a strong negative correlation between unemployment of youth and their subsequent income, but not between the initial wage and the subsequent income. The interpretation here is that getting a job, any job, is far more important than the particular wage. This U.S. research is convincing to me that obstacles such as minimum wages and the resulting unemployment have severe life-cycle consequences, whereas a slightly lower wage for someone who would retain a job in any case is of marginal significance.4

This vicious circle between unemployment and inadequate job training is rarely broken by 'job creation' schemes, as evidence both in Australia and overseas demonstrates. Such schemes, by focusing on symptoms rather than causes of unemployment can actually perpetuate the process by distracting the community from the real problem. Furthermore, having worked in a 'job scheme' brings in less status to the worker than having found a summer vacation job on their own; indeed there may well be a sigma attached to some contrived training qualifications. Employers look for signs of initiative and self motivation, not of having been singled out by some well meaning social security or CES employee.

We need to start thinking of our labour market, education, tax and social security systems in terms of a lifetime of individual choices and outcomes, and simultaneously to challenge the myopia that is fostered by static wage and income comparisons. We need critically to examine income data to separate the real poor from those who are simply at the early stage of a lifetime income profile that should be highly attractive (see the important work in this area summarised in Duncan [1984|). The fact that twice in my life I have had an income below the poverty line in no way demonstrates that I have been poor; it is just that the statistics are capable of being abused to make it look that way.

When a person takes a job, starts a course or whatever, she or he rarely has an income that bears any relation to lifetime outcomes. Who is to know where many work experiences will lead? Why do so many people accept voluntary work? (Many voluntary workers are seeking a gradual easing back in to the work force.) But most importantly, who has the right to interpose their authority between an innovative employer and a willing worker/trainee or even a volunteer? I think the evidence overwhelmingly suggests that the government or the Arbitration Tribunals should only enter if there are broad macro-economic dimensions where it is clear they can help, or if there is evidence of monopoly power being exercised (whether from the employer or union side). While there is often evidence of fly-by-night operators employing workers on low or zero wages, plus commissions, perhaps with misleading advertising, there are obvious remedies within the law for dealing with false advertising and fraud. It makes little sense to penalise workers who want to try a commission-based job (say by erecting regulatory obstacles to such low wage/variable commission jobs). The 'death of a salesman' should await the sales data or the fraud hearing and not be precluded before she even gets her samples.

Problems With Monopolistic Power

The imposition of wage regulations on employer and potential trainee workers may have made sense when firms were in powerful monopoly situations. But with the competitive world economy of the 1980's the employer in Australia can hardly be described as monopolistic, except for those few (but large) employers living in a protected regulatory monopoly. The most obvious and obnoxious monopolistic practices today are probably those that preclude workers from working on construction sites, both because of the level of wages and benefits and the need for a union ticket. Similar monopolistic practices are found in the professions not least my own, with job security for those appointed some time ago, and virtually no capacity for new potential academics to break in. Again we see barriers as the problem, not government funds or the desire to work.

Age and Training Costs

The paper suggests that we start to think of the earnings of young people in a much broader light, with the total 'wage' as valued by the recipient being equal to the sum of the monetary wage payment plus the net value of the training given. The cost to the employer of employing a worker is the sum of the wage and training costs plus some discounted value of the possible impact of the employee on group morale and efficiency. This way of viewing labour costs and income can reveal quite a wedge between what a worker costs and the value to him or the job in the short run. It is thus not surprising that in some occupations where new workers are capable of upsetting clients and the production process, there may be considerable reluctance to employ inexperienced labour without quite a sizeable initial discount.5

Finally I note that, for many, direct work experience can serve as a superior alternative to formal education, yet our current policies in effect tax the losers from the high school certification process. What is more, the losers who somehow gain jobs, pay taxes to fund the education of the gainers.

The 'gainers' from our educational system do not however have it all their way;6 they receive a far lower quality education than they might because of the constraints on competition within and between educational institutions. Crucial, then, to an overall strategy for the training, education and employment of young people is that we start to remove obstacles both to employment and to the competition for the employment and training of our work force.

Is There A Shortage Of Jobs?

Many an expressed fear regarding 'training wages' is that any increased employment of youth will simply be at the expense of existing adult workers. Put simply, this view assumes there is a fixed supply of jobs which is invariant to the wage and regulatory structure. The key point in this context is that virtually all in our communities, including, no doubt the odd millionaire, can think of all manner of services and goods they would like to be able to afford. Given that people have these wants, and that there are people who wish to work in what can also be highly rewarding and interesting jobs, there is obvious scope for bringing these latent supplies and demands together.

Put bluntly, there is no known limit in any country to the new services and commodities people would like to buy, if only they had the money. Certainly the services sector in Australia could expand enormously, judging by the variety and quality of services available in the U.S. and Europe that don't seem to be commercially viable in Australia. But so, too, all manner of small enterprises not known (and not knowable!) to outside observers would pop up in a less regulated Australian labour market. And those large firms whose employment potential has hinged on favours from government, such as tariffs and quotas, would find life far more predictable and profitable in a regime in which the labour market was freer of regulatory control, as well as freer of monopolistic behaviour on the part of some powerful unions (although I must agree that tackling the monopoly problem is rather more difficult than even the wage rigidity issue).

In the context of discussion of jobs in the services sector, one irony of our current tax system is that a great many Australians have become almost self-contained service sectors, offering, gardening, painting, carpentry, electrical and all manner of renovation and tax free services to themselves, and preventing the emergence of regular jobs in these areas. For someone on a 61% marginal tax rate it takes extra income of $2,564 to be able to pay, say, a carpenter, gardener or painter $1,000. For someone owning a small business and having to pay 46% company tax, the combined marginal tax rate is 79%, which means the honest small family company would have to earn $4,748 to be able to pay a painter $1,000. Now of course it is widely agreed that tax evasion and avoidance are also resulting from these high marginal tax rates. My point here is that these same problematical tax rates are also preventing efficient job specialisation,and creating a nation of Mr and Ms. Fixit (and Dodgit).

In the context of fostering greater employment in the services sector, notably the hospitality sector, it follows that penalty wage rates of all kinds should be abolished, although there is a firm expectation that Australians will continue to demand premia for working at inconvenient times and at unpleasant locations, and these premia will be reflected in market-oriented wage outcomes. Those who wish to 'moonlight' or hold two jobs, should not be discouraged by arbitrary dicta on penalty rates. It should be noted that moonlighting; as a cook or waitress is a standard way of accumulating capital fast, and perhaps laying the basis for a family business. By making it harder for people to find the second job, or supplement their student income, we undermine the dynamic processes that have for a long time in a great many countries allowed migrants and, others in temporarily low income states to gain incomes by working in two jobs, or working and studying.

Labour Contracts And The Arbitration Process

The central point of most efficient and fair economic systems is that while different individuals face the same set of options, and in this crucial sense are treated equally under the market, actual. outcomes reflect differing tastes, possibilities and perceptions. The key, but by no means sole, mechanism for signalling a willingness to provide a commodity or service in open and fair competition with others is price. Thus it is almost automatic, or at least it ought to be to the economist, that suppression of price, including wage, signals will penalise those producing a new product or concept and hurt those willing to have a go at a new job at which they have little experience. Quite simply, suppressing opportunities for differential pricing can not validly be described as fair, since its main effect is to stop unknown individuals getting a crack at the opportunities going in the market place.

However, while it is taken for granted that there should be no constraint on the relative prices of most goods, there is, in Australia, a belief that it will generally be fair to place limits, particularly lower limits on rates of pay and conditions of employment. Consistent with a vast literature on the impact of minimum wage laws in the U.S.A., these limits not only directly constrain the employment opportunities of the young and the unskilled, they prevent the emergence of services and goods which are intensive in the use of relatively unskilled labour. Another feature, already discussed above, of these wage constraints is that they unwittingly prevent the on-the-job training of young people. When any worker starts to perform a new job there is inevitably a strong element of training involved. Supervision is required, cautious strategies need to be adopted, and there are many other fixed costs involved. Why pay these fixed costs when experienced staff can be raided from elsewhere? And note that the same process that hurts the inexperienced and youthful bids up the price of the more skilled. Evidently relativities are hindered not helped by biasing the selection system towards the experienced through suppressing skill margins.

What also needs to be recognised in Australia is that there are strong life-cycle elements to participation in the work force, the education system and the tax/social security system. Studies of labour market responsiveness to wage and other changes need to be placed within a lifetime perspective and when this is done, it turns out that we are probably understating the welfare losses through minimum wages, and 'progressive' tax rates for example. A related point is that we are certainly overstating the inequalities in the Australian community when we simply list proportions of the population by income class, failing to allow for the difference between living costs of young and 'prime-age' working people. While it is true that a great number of young people show up at the bottom end of the income distribution, most of those on very low incomes 25 years ago are now persons of considerable means. Individuals accumulate 'human capital' early in life, whether through on the job training or formal and informal education, and this will usually show up as zero or low income, dis-saving, or in increased transfers to 'low income' people.

Just because Australia is only now starting to accumulate longitudinal data and just because we do not even have survey of how age groups have fared over recent decades, does not mean that we should assume that the conclusions from the Survey Research Center at the University of Michigan, and other U.S. longitudinal surveys, will be inapplicable in Australia. These surveys show that the vast majority of poor people in any one year are not poor in other years. There is enormous turnover revealed in statistical measures of income, as the position of individuals in the income distribution changes greatly over the life cycle (see Duncan, [1984], p 13). For example, in the U.S. more than half those found to be in the bottom income quintile in 1971 were in a higher quintile in 1978. These data confirm what must also be true in Australia; that low income categories, while they contain persons in long term poverty, also contain many in transition, and for whom the best policies are those which increase mobility and incentives to adjust. This reasoning and evidence overwhelmingly suggest that Australian labour market policies, to the extent they support existing and powerful working groups, are a source of poverty, not equality.

Australia, unlike the U.S. and Japan, accentuates the problem of employing youth when we price some education at zero (or less when account is taken of tertiary educational allowances), and make on-the-job training expensive to the employer. While some recent suggestions of a 'training wage' (see the Kirby Report [1984]), are now being proposed by the government, there has been little recognition of the fact that the real wage of any youth in a new job embodies both the wages paid and the costs of training. Many in Australia tend to pretend the latter component is not present, and thus understate the real wage paid to a young person in employment.

Workers As Lemons

It may seem unduly controversial to compare human beings with used cars, or to liken groups of workers to castes, but when it comes to analysis of the problems of losers in the market place, and the stigma of welfare benefits and training wages, George Akerlof's imaginative papers on the market for 'lemons' and on 'The Economics of Caste, and the Rat Race and Other World Taxes' (Akerlof [1970, 1976 and 1980]) do come to mind. One point of these papers is that people selling their cars know more about them than those who might buy, and indeed the very fact that the person is selling the car creates a presumption of its inferiority, even if the car has a trivial mileage and near zero age. Thus we see that owners of good used cars tend to be locked in because of their incapacity to differentiate their car from a 'lemon'. As with used cars, workers looking for jobs, particularly 'workers' who have never had jobs, are often judged to be inferior to persons in jobs precisely because they are looking for work. And showing up for work with a 'training wage' badge on may quite falsely suggest to the employer that the individual is a certified loser.

What this literature suggests, I believe, is that special schemes to announce the cheapest car, the deepest discount computer, or the lowest wage worker, as a way of promoting demand, will not work if these very low prices are themselves taken as an indicator of low quality (see a variety of papers by Stiglitz [e.g. 1984, 1985]). We need to avoid wage mechanisms which tend to create a pool of unemployed (as a wage in excess of productivity must do), but rather design systems which encourage firms to make offers of wage and salary packages contingent on performance, and which sharply differentiate the initial net wage from the likely income path. To have government commissions impose a minimum wage and then a scheme for dealing with those who are left unemployed is to respond to symptoms not causes; and the literature on 'signalling' and 'lemons' suggests the strategy won't work anyway.

The costs to the employer of sorting, which for the highly educated are reduced by the education system, are seen to be substantial for the relatively unskilled There can be heavy and uncertain cost elements in evaluating a new worker; particularly if the business is small and vulnerable. A poor employee can readily undermine worker morale, can damage equipment and upset customers. The firms' insurance, and notably workmen's compensation rating, can deteriorate with the introduction of a slack or irresponsible worker or group of workers, and these considerations may often make employers unwilling to take on any but the most (apparently) reliable workers.

It is accepted that people are more varied than, say land (to put it at its crudest). Yet while we do not price a block of land in Collins St. at the same price as a block in the Northern Territory, we do tend to price wide categories of labour uniformly in Australia, with the result, I believe, that there are a great many losers. These losers are people who are rejected for employment that they would accept, largely because there is an enforced award rate of pay for the job, and because at that rate some people are preferred to others This situation is pervasive, and thus it tends to create a group of discouraged workers.

Labour Contracts Made Enforceable

It should almost go without saying in a democracy subject to the rule of law, that wage contracts should be legally enforceable, and the Arbitration and Conciliation Acts, and all related law, amended to facilitate enforcement of agreed contracts. The effect of not having legally enforceable contracts is to penalise those workers who wish to go along with the normal legal standards of our community, since the fact that they are willing to stand by agreements would enable their employers to be more generous in making wage offers. The effect of non-enforceability of wage contracts in Australia has been to penalise the standard law-abiding citizen and union member and to reward those with a propensity to break laws and agreements. Again, this environment is one promoting conservative employment policies which harm the young and inexperienced.

Pressure Groups, Wages and Job Security

One of the most frustrating elements in the unemployment debate is that government is spending considerable money in an effort to undo the consequences of labour market rigidities, blocked from tackling these rigidities directly by the power of various interest groups which include builders labourers, academics and metal workers, to name but a few. These same groups (passively or actively) support 'job creation schemes' but ironically their own activities, when they include across-the-board benefits which are unrelated to their productivity, are best labelled 'job destruction schemes', since they often preclude further employment and often place existing employment at risk.

As an example, my own industry, tertiary education, is one in which the consequences of rigid income relativities are generating both inequities and inefficiencies on a large scale, and in particular a mis-match of people and jobs. Income signals, and to a large degree 'security signals' have been largely suppressed in Australia relative to the U.S. and Canada. As a result, the sorting function of the labour market is not allowed to work properly. (By security signals I mean that security of employment becomes one of the bargaining elements in all packages, with the 'price' of security serving as a valuable signal to those who might gain by either dropping their tenure or indeed by leaving.)

Because of the lack of sensible signalling systems, within tertiary education, there are sizeable inefficiencies which create pressure for more money for more academics and new institutions, when a more basic requirement is that we start to use our already considerable resources more efficiently. But attempts to add a U.S. or Canadian element of flexibility to incomes and incentives for superior performance in academia, have been, and will be, opposed by the associations of those who choose to be represented by a union. (Those who choose not to be represented by a union are accorded no status in salary negotiations, even though many of them probably account for much of the standing of the tertiary education sector.) The victims of the resulting lack of competition are both the students who are taught by those who are artificially secure, as well as those who would like to compete for the existing jobs but can't, owing to the rationing of academic positions.

It needs to be stressed that there is no presumption that all salaries are too high or too low; the point is that they are all set by bureaucratic/political procedures which indirectly discourage the best to leave and the worst to have a vested interest in the system. Imagine agriculture if all farmers were paid the same regardless of their harvest, their product quality and their farm's value! While I do not wish to trivialise the differences between growing wheat and 'knowledge', I do think the 'knowledge business', to coin a vulgar term, could do with a little more of what makes agriculture tick!

International Examples; A Basis For Recommendations?

In this section I touch briefly on some foreign labour market examples in the belief that they are instructive to Australians. However, I would stress that the above list of 'things to do' in the Australian labour market, is, I believe, capable of being defended vigorously in terms both of first principles and Australian experience. To many, outside what has been labelled the 'industrial relations club', it seems common sense that there should simply be a reduction of obstacles to employment, including wage obstacles. The man in the street knows that if it really is possible to have minimum wages why not have whoppers, say $500 a week! The reason we can't impose such a minimum wage is that few would ever get to receive it. So if we know, along with the man in the street, that it is a fiction that a body such as an Arbitration Commission can usefully set minimum wages and allow full employment, then why do we persist? I think we persist because of a desire to have a mechanism to prevent relativities getting out of line across sectors and job classifications. The trouble is that the way we do it in Australia puts the cart before the horse.. . we want the higher wage in activity A to attract people from B. But the effect of having imposed the higher wage on B as well prevents the very adjustment we are after.

But now for some external examples. In California at present the minimum wage is less than young people will work for in my neighbourhood, and thus it could be abolished without affecting anybody very much. Unemployment is very low. But in less prosperous areas in the U.S. the minimum wage has been found to prevent people, particularly young and relatively disadvantaged people, from gaining work.7 There is almost universal agreement amongst U.S. economists that abolishing the minimum wage some decades ago would have made for much higher employment and on-the-job training. (Incidentally, while not abolishing the minimum wage, the Reagan government has allowed it to remain fixed in nominal terms, and thereby diminish in real value over time. There has simultaneously been very great expansion of both incomes and employment, although the record is far from uniformly good).

The dramatic increase in employment in the US. in the last five years has arguably been greatly assisted by flexibility of wages and this has shown up most markedly in the rapid growth of the less regulated sectors. For example, the 1982-85 U.S. upturn has seen employment grow by over 7 million, 3.2 million in 1982 alone. The retail sector, with its minimal regulation of hours, has expanded by 1.5 million jobs in over the last three years. Indeed, two thirds of the new U.S. jobs have been in the services sector, and of all the 10.5 million new jobs created over the last decade, 9.3 million were in small or medium sized businesses, with 5.6 million of these in enterprises employing less than 50 people. It is in these small enterprises that labour market regulation market regulation matters least, or is least enforceable, and it is in these firms where most growth has taken place.

Evidence abounds in the U.S. to support the views that:

  • employment grows more rapidly under a decentralised wage decision-making, with enforceability of contracts.
  • the willingness to accept absolute wage cuts in the areas such as aviation, motor vehicles, steel and elsewhere has helped restore U.S. employment.
  • the decision to allow real incomes and real wages to rise through lower prices, rather than higher wages has strengthened the U.S. economy.
  • the Keynesian element in job creation has also been there, with sharp increases in spending and tax cuts. But the crucial point here, as Keynes is no doubt remarking from his grave, is that there has been far less nominal, relative and real wage rigidity in the U.S. than in Australia. Supporters of Keynesian policies tend to forget that the Keynesian logic hangs importantly on the flexibility of real wages!

In other words, the absence of the Australian form of regulation has almost certainly facilitated increases in employment and real income in the United States. Many United States workers appear not to suffer the same delusions characteristic of Australian unions, in that they appear to realise, at times of wage negotiation, that to post wage increases before increases in profits is to put the cart before the horse.

Labour Market Lessons From Japan?

In what follows, I draw on a recent and most informative paper by Alan Henderson, of A.N.U. and the Australian Treasury, in which he analyses and compares the Japanese and Australian labour market arrangements. This paper makes a number of points which I now summarise.

1. The difference in unemployment between Australia and Japan is largely accounted for by the dramatic increase in unemployment of youth in Australia. While overall unemployment is much lower in Japan, averaging 2.6 per cent in Japan in 1983 compared with 10 per cent in Australia, virtually all this differential is due to the growth in juvenile unemployment in Australia, which had reached 12.9 per cent by 1982 in contrast to 4.4 per cent in Japan. What explains this difference in unemployment performance, particularly of juveniles, in Japan relative to Australia? 2. One key point that Henderson is concerned to make, is that Bob Gregory's emphasis that output deficiency is the main or approximate cause of unemployment in Australia quite misses the point. The output shocks of the last decade have been more serious in Japan, largely due to the severity of the OPEC price shocks on a country so dependent on importing energy. Thus if output shocks were the problem, then Australia should have fared better in employment terms than Japan.

3. The essence of Henderson's argument regarding juvenile unemployment is that in Japan a response to the more difficult situation faced by youth in times of an output decline, which inevitably tended to displace the least skilled and least mature workers, was to allow youth wages to fall relative to adults, thereby maintaining the competitiveness of Japanese youth and Japanese products. On the other hand, in Australia we saw an increase in the wages of young people relative to adults over this same period. Thus a simple cross-country comparison suggests that the minimum award wages applied to juveniles in Australia have been the principal reason why youth in Australia have lagged their counterparts in Japan in gaining jobs. But there is more to the story.

4. In Japan there is no overall minimum wage for juveniles or for any other persons, and what minimum wages there are tend to be negotiated on a regional or company-by-company basis. When demand is weak in particular industries there is a tendency for wages to fall in relative terms and for bonuses to diminish, thereby facilitating the possibility of retaining workers while the firm adjusts to the new competitive situation.

5. To summarise one of the pieces of evidence presented by Henderson, in the crisis years 1973-75, the real wages of youth in Australia increased by 22.3 per cent in contrast to 4.5 per cent in Japan.

There should be little wonder then, given this relative price differential, that Australian youth unemployment has increased. What is remarkable, given the furore over youth unemployment in Australia, is that reports such as the recent Kirby Report barely mentioned wages in their discussions (although Kirby astutely enters the 'real-wage-cut' stage by the back door in advocating special 'training wages').

Unemployment Benefits In Japan

In Japan unemployment benefits have been relatively stable over the last decade or so, at least relative to the sharp upward shift in benefits in Australia in 1973. Furthermore there is a qualitative difference between the benefit structure in Australia, and Japan, since in Japan unemployment benefits are equivalent to 60-80 per cent of a beneficiary's previous earnings. Furthermore, and quite crucially, Henderson notes that there is a six month work entitlement in Japan, that is, an individual cannot gain the benefit unless he has worked for six months, whereas in Australia youth may gain benefits without any evidence of having worked. One interesting effect of making unemployment benefits conditional on six month's work experience is that this inclines Japanese youth to take more of an interest in post-secondary education. While there are many reasons for Japanese youth taking an interest in education (not least the competitiveness within education and the involvement of the private sector in promoting high levels of efficiency), it is instructive indeed that there is this conditional element attached to unemployment benefits for young people.

Job Creation

In the U.S. as in Japan, job creation schemes of the sort currently discussed in Australia have been found to be of virtually no help in restoring full employment. Indeed, the evidence from the United States and Canada is that the job subsidy, job training, job promotion schemes trumped up by governments, usually prior to elections, are costly ways of distracting the community from the real source of unemployment. It is quite amazing how any minister of the Commonwealth government, given his or her access to analyses and studies of job creation schemes in North America, can any longer persist with the suggestion that job creation schemes are in any way a significant means of restoring full employment. I suggest these schemes are actually ways of fostering sustained unemployment, because they create an expectation in the community that it is governments that create jobs, rather than an understanding that government regulations have created obstacles to employment.

As I have argued elsewhere, 'The Labour of Liberalisation' [1984], Australian labour law has deteriorated into a situation in which full employment has ceased to be legal, given our excessive and rigorously enforced minimum wages, and in this context it is simply a fiscal outrage that taxpayers' money should be spent creating solutions to unemployment created by other government regulations.

It is frequently suggested that there are too many unions in Australia, and that matters would be improved if we had fewer unions which coordinated their negotiations. It is interesting, in this context to note that in Japan, while unionisation is lower (only 30 per cent of employees are unionised, c.f. 55 per cent in Australia), these employees are in unions which average 170 members, and of which there are 74,000. In Australia, on the other hand, we have an average size of 9,350 persons in 322 unions (December 1982). Henderson's analysis makes the predictable point that in Australia there is little opportunity, because of the union structure, to negotiate award wages which reflect profitability and capacity to pay whereas in Japan there is every capacity to tailor wage negotiations to the profitability of firms, with very obvious and desirable incentive effects.

A particular feature of the Japanese system, of course, is the use of bonuses, which may be awarded at six months intervals (in the summer, June or July, and/or in the winter, in December). In contrast to an Australian situation in which wages flow merrily from one sector to another, despite profitability, in Japan unions are obliged to pay attention to factors such as profitability, export competitiveness and so forth, since their bonuses are very much at stake.

Cradle-To-Grave Employment

A common myth regarding Japanese employment is that workers in Japanese firms are secure from the day they start in the firm to the day they leave. Henderson notes the research of Levine (1983) which reports that only one fifth of Japanese workers are in firms likely to offer lifetime employment. Four fifths of the Japanese workforce are in smaller firms where career change and greater volatility of employment are the norm.

Growth In Employment

As a useful summary statistic regarding the role of labour market regulation, in particular in relation to minimum wages, is that for the period 1975-80 the self-employed sector in Australia (not subject to wage and salary regulation), grew by 23.5 per cent, cf 4.2 per cent in the regulated sector. While different tax treatments of self-employed and wage and salary earners is also an important point, it nevertheless is instructive that employment has grown less where wage regulation has been greatest.

In Australia, U.S. and Japan it is also notable that protection is highly correlated with decline in employment. In Japan, for example, the greatest diminution in employment has been in the agricultural sector, where protection is the highest. In Australia, the manufacturing sector has witnessed serious and sustained loss of jobs, and this too is associated with very high levels of protection. If one thing is clear emerging from analysis of employment and wage growth in recent years, it is that minimum wages, tariffs and all manner of protective devices, are nooses that no government or well-meaning interest group should tie around the necks of the workforce. Eventually the trap door gives way. It would be far simpler and cheaper to burn down the worker's house or do all manner of otherwise destructive things rather than destroy the basis by which individuals gain work experience and accumulate 'human capital'.

To determine the whole life possibilities of a worker by preventing them from joining the work force on wages and conditions he or she accepts is a social crime; but to compensate via subsequent 'job creation' and training schemes is a costly insult to the intelligence of both the potential worker and the taxpayer. Finally, lest I be misunderstood as not favouring more education and training, I believe we need far more and better training and educational opportunities---but we want individuals to regain control from government, via an across-the-board voucher scheme discussed above.

Recommendations For Restoring Employment And Opportunities To Train

In order to help focus the debate I have summarised below some suggestions (boldly labelled recommendations) that reflect the thinking of a good many economists both in Australia and overseas; the proposals are suggested as means of restoring vitality into the training and work experience of Australians. I have taken the liberty of putting quite specific proposals, since critics of the current labour market arrangements have been asked, by our Minister for Employment and Industrial Relations, 'to put up or shut up', in relation to the issues addressed in the Kirby and Hancock Reports.

Implicit in the recommendations below is the notion that if government wishes to redistribute the gains from education it should interfere in the financial terms on which individuals may gain education and training, leaving the organisation and management of education to autonomous non-government organisations led by individuals with incentives to perform to the highest standard. The lack of adequate incentive structures in educational institutions, like other government departments and enterprises, tends to guarantee that the efficiency and well being of the consumer of education and training play second fiddle to bureaucratic and academic peace.

Recommendations

1. All jobs with a training component be freed from award wage constraint, perhaps for an initial trial period of 12 months in participating States. Government regulations and agreements preventing wage differentials by age be relaxed.

2. All individuals from age 17 be eligible for:

  • an education/training voucher valued at roughly the current student subsidy of tertiary education, good for, say, three years training at tertiary education institutions, and;
  • loan guarantees to assist those who choose to supplement the education/training voucher or choose other training programs not eligible for the voucher, with the possibility of repayments being connected to the income tax payable in later years.

3. All tertiary education institutions be allowed to design fee structures reflecting their costs and educational offerings and initiatives.

4. All barriers to competition between tertiary education institutions be removed, and that in particular, new non-governmental tertiary institutions be allowed to form and compete for students and vouchers. Those with ideas on how better to educate and train our young people should not have barriers placed in their way.

5. In order to generate mobility and dynamism in the educational marketplace, tertiary institutions be encouraged to devise 'twin-track' employment contracts, whereby individuals and institutions may opt out of tenured contracts in exchange for fixed term contracts at different rates of pay and conditions.

6. The Tertiary Education Commission monitor the new initiatives as they evolve and report to the government. The primary source for judging the performance of institutional performance should be independent external review.


Footnotes:

1. As one who recently lived in an area in the U.S. with essentially inoperative minimum wages (in California the $3.50 rate is below the wage capable of allowing full employment), I noticed casual employment at rates of $5 an hour for young people to teach others (including some of us oldies) how to use computers. As I recall, last time we attempted to pay wages of that kind at Monash the wrath of the Monash staff office was upon us How dare we employ people at rates at which the parties are better off! More to the point, how dare we threaten ever so slightly the well-being of those with jobs, just to employ the unemployed, or to help the student finance a first class education.

2. A negative side effect is that a generation is emerging with first hand experience of tax evasion, payment by unrecorded cash transactions, and of all manner of ways of 'beating the system'.

3. What is even more embarrassing, at least to me, is that we collect masses of statistics on attitudes to employment for categories of potential workers, but far less on the structure of rewards for work and the costs of hiring labour. It is almost as if we have had whole generations in Australia who believed that there was little by way of connection between the cost of labour and demand for labour. This is despite the central role of real wage flexibility in the Keynesian model in which fiscal stimulus generates higher employment. Those who advocate, even at the State level, increased government deficits to stimulate demand, are usually disinclined to support the associated requirement that real wages be allowed to adjust downwards in the process.

4. It is also noted by Freeman and Wise that the distinction between being in or out of the work force is less than clear for many youths, and that many can appear to be in both camps at once. They also report that there is a positive correlation between high school employment and subsequent employment and income, suggesting again that if wage barriers to youth are removed, teenagers will take more part time jobs while at school and this will have a positive feedback effect on subsequent employment experiences.

5. I should stress that in many job situations it misses the point to talk as if price, i.e. wage flexibility is all that is required; clearly there is no wage cut large enough for me to be taken on as a surgeon's assistant and (I hope) no wage cut large enough for the surgeon's assistant to be allowed to profess to be a pilot. Labour markets take into account a whole lot of information as well as wages and income. Put bluntly, we must not oversell the gains likely to flow from simply removing wage floors; but so too we must note that there are rarely any advantages and usually great mischief, from imposing wage levels. Wages are but one element in what may be a subtle and quite individualised contract and it rarely does any good to have an externally imposed constraint on the bargain.

6. The fact that 'vanilla' education is in receipt of large subsidies often means that those who would choose other flavours have to bear full cost plus the tax burden of the vanilla offering, Not surprisingly many people who would choose to spend more on education without certain government provision, now opt for the government's vanilla offering on grounds of its subsidised price. As a result, we have the paradox that the community as a whole may spend less on education than it would without the subsidy, because it is subsidised in an 'all or nothing' fashion.

7. Sowell [1983] notes a powerful example of how minimum wage laws were introduced by a new South African government in 1921, in order to discourage the use of black workers. 'The new government enacted a stronger color bar, replaced black workers with white workers on the government-owned railroad, subsidized a similar replacement in municipal governments and enacted a minimum wage law to reduce employers' incentives to use black workers' (page 113, my emphasis). Willlams [1982] notes that white unions in South Africa support both minimum wages and equal-pay-for-equal-work laws.

8. Wachter [1984, page 45] notes that prior to 1957 there was no binding minimum wage in the U.S., since industries could claim exemption through the Congress if they could successfully argue that unemployment would result from wage minima. 'By 1937 the influx of young workers threatened the employment and relative wage status of the older workers in the low-paying secondary markets. Congress responded by extending minimum wage coverage to those labor markets . . . At the same time, Congress increased welfare payments. In the 1960s Aid to Families with Dependent Children (AFDC) payments grew relative to the market wage'. The striking feature of the U.S. situation is that there has been a marked rise in the youth share of total unemployment since these changes; as an example, the unemployment rate of black 18-19 year olds was 13.4% in 1954, but had risen to 23.1% in 1964 and 36.1% by 1977, with cyclical variations in between.


Note

*This paper draws on a paper 'Breaking the Barriers', presented to The Committee for Development of Youth Employment Conference, Hilton Hotel, Melbourne, October 25th 1985, and was written while the author was Visiting Scholar, Domestic Studies Program, the Hoover Institution, Stanford University; and Director, Centre of Policy Studies, Monash University. The comments and suggestions of Mikhail Berstam and Colin Cameron are gratefully acknowledged, without implication.


References

Akerlof, G.A., (1970), 'The Market for Lemons; Qualitative Uncertainty and the Market Mechanism', Quarterly Journal of Economics 84:488-500.

Akerlof, G.A., (1976), 'The Economics of Cast and Other World Taxes', Quarterly Journal of Economics, 90:599-617.

Akerlof, G.A., (1980), 'The Economics of Social Customs, of Which Unemployment May Be One Consequence', Quarterly Journal of Economics, 94:749-76.

Bell, L.A. and R.A. Freeman, (1985), 'Does a Flexible Industry Wage Structure Increase Employment?: the U.S. Experience', N.B.E.R. Discussion Paper 1604, Cambridge, Mass, (April).

Cogan, John (1981), 'The Decline in Black Teenage Employment 1959-1970', Working Papers in Economics, E-80-3, Domestic Studies Program, Hoover Institution, Stanford University, (March) pp 40.

Committee of Review Into Australian Industrial Relations Law and Systems, (1985) ('Hancock Report'), A.G.P.S., Canberra.

Committee of Inquiry into Labour Market programs, (1985), ('Kirby Report'), A.G.P.S, Canberra.

Duncan, G., Years of Poverty, Years of Plenty, (1984), Survey Research Center, Ann Arbor, Michigan.

Foster, W. and R.G. Gregory, (1982), 'The Contribution of Employment Separation to Teenage Unemployment', Economic Record, 58,161 (June), 13-72.

Freeman, R.B. and D.A. Wise (Eds.), 'The Youth Labor Market Problem: Its Nature, Causes, and Consequences', University of Chicago Press, Chicago, 1982.

Gregory, R.G. and R.C. Duncan, (1980), 'High Teenage Unemployment: The Role of Atypical Labour Supply Behaviour', Economic Record, 56,155 (December), 316-330.

Grubb, D., R. Jackman and R. Layard (1983), 'Wage Rigidity and Unemployment in OECD Countries', European Economic Review, 21, 11-39.

Henderson, Alan (1985), Japanese and Australian Labour Markets: 'A Comparison of their institutions, structure and performances' Australia-Japan Research Centre, Pacific Economic Papers, No. 119.

Devine, S.B. (1983), 'Careers and Mobility in Japan's Labor Markets' in David W. Plaith (ed.), Work and Lifecourse in Japan, Albany: State University of New York Press, pp 18-33.

O.E.C.D. (1984), 'The Nature of Youth Unemployment; an Analysis for Policy Makers', Paris, pp 1-224.

Mincer, Jacob, (1976) 'Unemployment Effects of Minimum Wages, Journal of Political Economy, 84,4 (August).

Porter, M.G. (1984), 'The Labour of Liberalisation', paper presented to the Australian Institute of Political Science conference, 'Australia-Poor Nation of the Pacific', Pharmacy College, Parkville May.

Sowell, Thomas, (1983), 'The Economics of Politics and Race', Morrow, New York, pp 323.

Stiglitz , J.E., (1985), 'The Causes and Consequences of the Dependence of Quality on Price', Working Papers in Economics No. E.-85-27, The Hoover Institution, Stanford University (Sept.)

Stiglitz, J.E. (1984), 'Theories of Wage Rigidity', NBER Working Paper No. 1442, Cambridge.

Wachter, M.L., (1980) 'The Dimensions and Complexities of the Youth Unemployment Problem', in B.E. Anderson and I.V. Sawhill, Youth Employment and Public Policy, Prentice Hall, New Jersey.

Welch, Finis, (1978), 'The Rising Impact of the Minimum Wage', Regulation, (Nov.-Dec.) pp 28-37.

Williams, W.E., (1977) 'Government Sanctioned Constraints That Reduce Economic Opportunities For Minorities', Policy Review, Fall, pp 7-30.

Williams, W.E., (1982) 'The State Against Blacks', New Press McGraw Hill, New York.

Why HR Nicholls?

More...