The 'Prepare - trial - hire' initiative aims to reduce youth unemployment

An important measure in the Australian Federal Budget is the so called PaTH initiative. It replaces 'Work for the dole' for young people (although that is available after a year of unemployment).

The PaTH initiative (it stands for Prepare, Trial and Hire) is a supply-side policy initiative to try to tackle the problem of structural unemployment among young workers.

Structural unemployment arises because of a mismatch between the skills workers have and the skills needed to fill job vacancies. Young workers have the disadvantages of no experience and no in-work skills. Training workers is expensive and is therefore a cost of employment. If the cost of employing workers can be reduced somehow then firms will hire more of them.

The chart clearly shows unemployment among young workers is higher than over 25's

The ultimate goal of this policy is to shift the Aggregate Supply curve to the right. The policy does this by increasing the supply of skilled workers. It does not assume that all young unemployed workers have no skills, but does assume that the lack of current skills means that some unemployed are not really employable and so not truly part of the workforce (or labourforce/labour supply) available to the economy.

The scheme works by paying the young unemployed  $100 a week extra on their benefits to take part in the early stages of the scheme. This is important because they need an incentive. If there was no additional payment the disadvantages of travel to work costs and getting up early each day etc. would mean many would prefer to stay out of work.

After the first two stages of the scheme employers receive help for six months to pay the wages of the young workers they hire - anothVCEer incentive. This is in addition to $1000 paid to firms at the early stage of the scheme. This payment, of between $6,500 and $10,000 helps offset the training costs of the new workers. With hope after six months of employment the new worker is adding more than the value of their wages to the firms revenue and will keep their job.

Will this work? We don't know until we try it. The incentives on both sides of the market have to be enough to fill the 30,000 places a year. It is clear not all 30,000 will go on to full time permanent jobs, but some should. Overall this measure should help to contribute to Australia's economic growth and lower unemployment. However it will do so only slowly.

The Age explains the scheme in detail here

This article relates to an important measure in the Australian Federal Budget 2016. VCE students need to know the details (plenty in The Age article). IB students can use it as an example of supply-side policy and should be able to analyse the effects in the AD/AS model.

A lower minimum wage?

The Commission of Audit, despite a poor overall analysis, suggests many sensible individual policy measures. One is the need to lower the relative level of the minimum wage.

The Commission suggest that the minimum wage should fall to 44% of the average full time wage, from the current 56%. They argue that it is currently too high to encourage employment and growth. 

The standard argument is shown below.

The minimum wage is set above the market clearing rate. This encourages Q1-Q2 additional workers to seek work when they wouldn't at the market wage rate of 0W1. Also Q2-Q3  workers are not employed who would be at the market wage rate. Unemployment is reported at Q1-Q3.

Of course the argument for a minimum wage is that without it workers would receive a lower wage than 0W1 due to the relatively greater negotiating power of employers compared to employees. (The free market is failing due to market power.)

The Guardian article below outlines the case of the Audit Commission. They believe that it will help achieve full employment and future growth. However will lowering the minimum wage help the goal of equity?

Although Australia does have an absolutely high and relatively high minimum wage rate it is falling as a percentage of full time income compared to other OECD nations. When PPP is used it also looks more reasonable in comparison.

 

 

The Guardian article is here

Massive Holden subsidies harm consumers

It was revealed that Holden had received over $2billion in subsidies in the last 12 years, far more than previously thought.

The Australian government has long argued that subsidising industries is good for jobs in Australia. But most economists would disagree with this as both shortsighted and damaging to the economy.

The argument for subsidy relies on the idea that if it was absent then all the jobs in the industry would be lost, leading to higher unemployment and a lower standard of living in Australia.

The argument against this was first put forward by Adam Smith a then David Ricardo and has been backed up by a further 200 years of economics research. Simon Cowan of The Centre for Independent Studies has argued that if the subsidies were removed then consumers would benefit from lower car prices and the standard of living would rise as resources were redeployed to efficient industries instead.

The argument works like this:

* The car industry in Australia is uncompetitive and inefficient.

* Removing the subsidy means the industry loses money and shuts down.

* Those currently employed in car manufacturing and its supporting industries move to other sectors.

* The resources currently used up by the car industry are released for use by efficient Australian industries.

* All cars sold in Australia are imported from abroad (up from 75%) - these cost less to produce and will become cheaper as firstly the import taxes needed to protect Australian producers are scrapped and foreign producers gain economies of scale.

* Therefore consumers gain by getting their cars more cheaply (approx 1.1 million new cars are sold each year)

* Government can use the money used for subsidies to help reduce taxes or pay for other programmes such as Gonski.

Smith pointed out that competition leads to productive efficiency. Smith and Ricardo showed that with free international trade the most efficient suppliers produce the goods people want with each country specialising in the sectors they are comparatively best at. AS A RESULT EVERYONE IS BETTER OFF.

Australia has never been keen on this argument and despite reforms going back to Hawke/Keating Australia remains the most protectionist country in the G20.

The ABC covers the subsidy story here

The Standard of Living

VCE Economics really has one aim. To explain what influences the Standard of Living of Australians. All that you learn can be related to this.

Unfortunately it is not at all clear what 'standard of living' means and you will profit from gaining a good understanding of this early.

There are two ways of looking at the standard of living:

Material standards of living - judged by how many goods and services the population can consume

Non-material standard of living - which relates to the wider quality of life. For example living in the UK means coping with the awful weather month in month out, while the pleasures of Melbourne's climate, whatever you may think of it, means you have a better quality of life. Leisure time and the quality of activities, levels of pollution, stress levels and so on all contribute to non-material living standards.

But how can we measure Standard of Living? As non-material living standards are important GDP alone is not enough. Indeed GDP has many shortcomings and at the very least needs to be converted to Real disposable GDP per capita.

There have been several attempts to measure the standard of living, the Human Development Index is the best known, but Australia has made its own attempt with the Genuine Progress Indicator.

Stiglitz on the problems with GDP here

The Standard of Living vs Quality of Life here

OECD Better  Life Index here

Email me at mark.russell43@hotmail.com for some notes in word format

The year ahead

In the slow news weeks of Christmas and New Year newspapers look back and look forward to fill the space. It provides some useful insights, although rarely are there any predictions which stand the test of time.

The attached article looks at the prospects for the economy for 2013. The analysis is the interesting part - what are the forces at work and how are they expected to affect the performance of the Australian economy and so the standard of living?

Edited highlights:
Growth will continue, but will be slow.
Growth won't be high enough to deliver a Budget surplus.
Monetary policy will react to changes in the real economy, but budgetary policy probably won't.
The Terms of Trade, exchange rate, business and consumer confidence are key factors in determining performance.
World economic activity is key to driving exports, surprisingly only the US and China are mentioned in the article.

Inflation is well under control. A blow to the idiot Abbot who continues to forecast a melt down on this front.

Read carefully, its a great primer for Year 11 or 12, as it summarizes the issues nicely.

The Age article is here