Woroninomics - “Welfare Reform: The Young and the Jobless?”

At the end of this year the ANU will wave goodbye to another cohort of bright-eyed, bushy-tailed graduates. Most of these students – having sent the right market signals or made the right human capital investments – will enter the Australian labour market and transition into a life of full-time employment. But it is important to realise that these are the lucky ones. For a growing number of youth, the future involves learning how to navigate the country’s increasingly stringent welfare system.

 

In the 2014-15 Federal Budget, the government announced a comprehensive set of welfare changes to make Australia “a nation of lifters, not leaners”.  The Coalition government claims that our current system of welfare is unsustainable and needs reform. However, not only is this rationale statistically dubious, the solution may be incredibly harmful for young people.

 

For one thing, Australia’s golden age of welfare consumption has definitely peaked. A 2014 Household, Income and Labour Dynamics in Australia (HILDA) Survey of 12,000 working age individuals showed that the percentage of people who had received benefits had fallen from 23% in 2001 to 18.5% in 2011. Of course, you can argue that while the original system reduced the amount of people on welfare, what it does now is simply entrench the percentage and duration of those in long-term unemployment.

 

But even if this were true, by forcing people under 30 to apply for 40 jobs a month whilst still being  unable to receive Newstart for six months, this legislation, if passed, will force youths to enter the labour market without the necessary resources.  Job seeking incurs numerous transaction costs such as purchasing appropriate attire for a job interview, buying transport to reach interviews, or even simply having enough money to subsist off throughout the entire process. By placing youths at such a disadvantage, we will potentially be extending their dependence on government and charity:   all the while their stock of human capital depreciates over time, making it even harder for them to find employment and contribute productively to the economy.

 

The grim reality is that when the economy begins to falter, it is young people who feel the economic pain first.  For example, while the national unemployment rate rose from 4% in February 2008 to 6.1% in August 2014, the unemployment rate for 15-24 year olds hit a 13 year high of 14.1% in July 2014, almost doubling from the 7.7% it was in August 2008.

 

These welfare reforms also deprive various youth communities of income transfers which are then spent in the local economy, which is especially salient considering that those on welfare tend spend a higher proportion of their budget on goods such as rent and food than those who are on full-time or part-time employment.. In Tasmania alone, the Tasmanian Council of Social Services fears that these welfare changes will deprive their economy of $78 million due to the $85 million in lost income.  To make matters worse, there are claims by organisations such as from Tasmania’s Mental Health Council that these announced reforms have already created a spike in youth suicide due to fears of welfare loss.   Extrapolating all this onto a national level, we see that these reforms could have a substantial negative shock on the entire economy. A more detailed case must be presented by the Treasury to justify these changes. Unless they can be defended by the dismal science, these dismal welfare reforms should not be pursued.