Real NSA payment rate

When the Hawke Government came to power in March 1983, the unemployment benefit for a single adult was worth $192 in today’s dollars. By the time Labor left office in 1996, it had lifted the real (inflation-adjusted) benefit, renamed Newstart Allowance, to $245 a week. Over the course of those 13 years in office, the Hawke and Keating Governments raised the real value of the unemployment benefit by $53 per week, a 27.4% rise. Contrary to the recollections of some, increases in unemployment benefits were part of the “Keating model”.

Since Keating left office, the unemployed haven’t fared as well.  It’s worth $252.70 a week now, including the Clean Energy Supplement, a $7.70 or 3.2% increase over 17 years.

While Newstart has been more or less flat in real terms, living standards for most Australians have risen quite strongly.  Over the past 20 years, the real average full-time wage has risen by 1.7% a year, the minimum wage has grown by 0.5% per year, and Newstart has risen by 0.2% per year.

Real gross incomes

As a result, Newstart has fallen from nearly a quarter of the full-time average wage to about 18% of the average. It’s also fallen as a proportion of the minimum wage, although the decline in this ratio hasn’t been quite as severe.

gross NSA ratios to min and awote

Although Newstart has only declined from about 46% of the minimum wage in the mid-90s to around 41% today, the decline in relative living standards for the unemployed has been more severe when you take taxes into account. I estimate that Newstart has fallen from about 53% of the after-tax minimum wage to around 45% today.

gross and net NSA NMW ratios

You might think that it doesn’t matter if Newstart is falling relative to wages, as long as its purchasing power stays the same over time. I disagree. I think Adam Smith was right when he observed that poverty is a relative concept.

Like almost all other developed countries, we measure poverty using relative measures. A key poverty line is set at 50% of median income. When Keating left office, Newstart was almost exactly equal to this poverty line. In 2009-10, it was around 30% below this poverty line. Similarly, Newstart has fallen from around 90% of the (somewhat outdated) Henderson poverty line in the mid-1990s, to less than two-thirds of the Henderson line today.

nsa dsp poverty lines

NSA PL ratios

Newstart hasn’t just fallen relative to wages, but pensions as well. Back in the mid-90s, Newstart was worth 90% of the Disability Support Pension. Now, it’s around 63% of DSP. The gap has widened because Newstart rises only in line with the CPI, while the DSP grows in line with average male wages. Pensioners also received a large increase in 2009, which wasn’t extended to the unemployed.

If the current arrangements continue, with Newstart staying flat in real terms and DSP rising with wages, then the unemployment benefit will be worth less than half of the pension by the middle of next decade. This isn’t just bad for equity reasons. When there are big gaps between payments, there’s an incentive to try and get the higher-paying benefit, particularly when Newstart means instant poverty. This means that some people with disability might be afraid of going into the workforce, for fear of going onto Newstart if they lose their job. The Government has made some good changes to DSP that mean people can work more and retain their pension, but this large and growing gap is still a big worry.

nsa dsp

nsa dsp ratio

An Australian full-time worker on average wages who loses her job will suffer a bigger fall in income than her counterpart in any other advanced economy (when you take housing and other benefits into account). The ‘replacement rate’, the unemployment benefit as a proportion of the post-tax average wage, is just 29%. Our replacement rate is lower than America’s and Korea’s, not typically thought of as bastions of generous welfare.

OECD replacement rates

Our replacement rate has pretty much always been lower than those in most other advanced countries, because we pay a flat rate benefit to unemployed people, whereas some other countries have ‘contributory’ schemes that mean you get a higher benefit if you were on a higher income before you lost your job. Plus, our scheme isn’t time limited, so you don’t lose the dole once you’ve been unemployed for a year or two years, as is the case in some other countries. Still, for someone who becomes unemployed and is suddenly forced to get by on $35 or $36 a day, I think it’s cold comfort to be told that that $36 will still be available in a year or two.

So why not increase Newstart? The cost is one reason. But the reason that tends to be emphasised is that a higher unemployment benefit would mean that more people would choose a life on the dole rather than working. In the gloriously bureaucratic words of the government departments that made a submission to last year’s review of Newstart, “an increase would not assist in maintaining the fundamental character of Newstart Allowance as a payment that predominantly supports work re-engagement”.

From the tone of the public servants’ submission to the inquiry, it seems that they think a lower benefit means more effective job search and higher workforce participation; a higher payment would lead to the opposite. Reading between the lines of the submission, there seems to be a view that this relationship between the level of the unemployment benefit and the effectiveness of job search always moves in one direction – a higher payment means less job search. I think they have a relationship like this in mind:

DEEWR's theoretical RR curve

I think it’s right that beyond a certain point, higher benefits reduce the effectiveness of job search and discourage workforce participation. If you offered to pay me the same salary whether I sat at home and played FIFA all day or got out of bed and went to the office, I’d seriously consider a life of glorious victories in the virtual Champions League.

But I don’t think it’s right to think that a lower payment, relative to wages, will always mean more workforce participation and more effective job search. Instead, I think that beyond a certain point, the benefit can get so low that it starts to impair the ability for unemployed people to get back into the workforce. Unemployed people suffer such a big income shock when they lose their job, and they could suddenly find themselves unable to pay their rent or mortgage, and reliant on high-interest credit to bridge the gap. Over the longer run, eking out a meagre existence on $36 a day leaves little for work clothes, transport to job interviews, haircuts, and all the other little things those of us with a steady job take for granted.

As the Business Council put it,

The rate of the Newstart Allowance for jobseekers no longer meets a reasonable community standard of adequacy and may now be so low as to represent a barrier to employment.

For that reason, I think the relationship between the effectiveness of job search and the level of the unemployment benefit probably looks something more like the graph below. I have no evidence for this proposition, or for the particular shape in the chart, it just reflects my hypothesis that there is a replacement rate that maximises the effectiveness of job search, below which people spiral into poverty which locks them out of the labour market.

My theoretical RR curve

Even if you don’t buy my idea that lower benefits start to undermine participation below a certain level, I still don’t think it logically follows that you should maintain the status quo. The government agencies’ view seems clear – a lower benefit means higher participation. Why, then, maintain the current real Newstart rate? There’s nothing magical about the current rate. It’s not tied to any particular assessment of people’s needs. It’s just the rate we’ve ended up with through historical happenstance. The agencies’ argument seems to be that our current arrangements strike the perfect balance between poverty alleviation and the encouragement of work, which would be pretty miraculous if it were true.

The Rudd and Gillard Governments have done many good things for low-income people. They raised pensions, cut income taxes, and lifted many thousands out of the personal tax system entirely by raising the tax-free threshold. They’ve managed to find cash for some extremely important policies, like the NDIS and education. But Newstart is not just low, it’s catastrophically low – it means instant, quite deep poverty for those who are forced to rely on it. We can and should do better.

Sources:

Benefit rates from FaHCSIA. Minimum wages from the Fair Work Commission and predecessor bodies. Average wages from ABS 6302; median wage from ABS 6310. Nominal figures deflated using the CPI.  Median household income figures from ABS 6523. Henderson poverty lines from the Melbourne Institute. International replacement rates from the OECD.

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