The Welfare State:
Depreciating Australia's Social Capital
by Andrew Norton

Everyone is in favour of ‘social capital.’ Conservatives, liberals, social democrats and socialists all claim it for themselves. The temptation is to behave like Humpty Dumpty in Alice Through the Looking Glass, and declare that words mean whatever we say they mean. If ‘social capital’ is to avoid this fate, it is best to stick close to the normal meanings of the words themselves, and the implicit contrasts being made.

First, the social element. What is meant here is relations between people. We can draw a contrast with human capital, where the capital resides within an individual. So when, for example, we discuss a person’s education or skills we are referring to their human capital; something they possess themselves, and can continue to possess in the absence of any relations with others.

Second, the capital element. The meaning being captured here is that the social relations have an on-going productive capacity; they can be used to help produce something else of value. You can see the analogy with human or financial capital, each of which is regarded as an asset, and which people accumulate to make provision for the future.

So my definition of social capital would be ‘relations between persons with on-going productive capacity.’ This definition makes no assumptions about how social capital is created or destroyed, or even whether or not it is a good thing. It is intended to be as neutral as possible, so as to provide some common ground for debating more substantive issues.

Among the most important of these issues is what effect government has on social capital. My task here is to provide an account of some damaging effects of government on social capital. My intention is to provide warnings about rather than knockdown arguments against the policies in question. Most government policies involve trade-offs, and it may be that some social capital is worth sacrificing to achieve another goal. My point is that these trade-offs should be made in awareness of the social capital losses they involve.

Voluntary Organisations

Many of those who benefit from the welfare activities of voluntary organisations will be taking advantage of social capital that is qualitatively different to that provided by government. Large-scale bureaucracies such as the Department of Social Security have difficulty providing highly personalised services; not just for reasons of their size but also because governments are obliged to treat their citizens equally. Smaller welfare organisations are much better placed to provide individualised care and attention.

There are a couple of ways in which government is thought to undermine voluntary welfare organisations. The first of these is by ‘crowding out.’ As government has stepped in to provide welfare benefits, there has been that much less need for private provision of welfare, whether this be through the family, networks of friends, or formally organised charitable bodies. The incentive to invest in these social relationships declines, and so social capital is lost. David Green, among others, has documented the decline of the mutual aid societies that provided many welfare services in Australia and elsewhere prior to the rise of the welfare state (Green and Cromwell 1984; Green 1993). And volunteer work does tend to be lower in countries with large welfare states (Frey 1997:79-80).

The volunteer base of these organisations can also be affected. There is a literature on the importance of a sense of autonomy, of being in control, on people’s enjoyment of work (cited in Murray 1988:319-320). A similar finding came of out the Department of Social Security’s Community Research Project, which found that one of the characteristics of successful community projects was that there be ‘user input into and ownership of management and planning processes’ (Smith and Herbert 1997:11). Ensuring this sense of involvement may be even more important to the running of voluntary organisations than it is in the workplace, as volunteer organisations lack a major incentive provided by employers, i.e. money. There are of course a range of other reasons behind volunteering, especially a desire to help others (ABS 1996:19), which explains why people persist with organisations that do not offer this sense of control, but there are risks in over-regulating any organisation.

Job Searching

Another area in which social capital is important is job searching. A high proportion of jobs are found via informal means. In 1991-92 Australian Bureau of Statistics data indicates that about 24% of jobs were found via friends, relatives and acquaintances. A further 25% were found as a result of an approach by an employer (Carson 1995:15). We don’t know from the ABS data how employers find out about potential employees, but I expect that they too use informal networks, since this is a relatively efficient way of discovering people with the right personal and professional qualifications for the job.

Of all the forms of social capital in job hunting, the one of most value is almost certainly connections to people who currently have jobs. For this reason, not only the high rates of unemployment, but their patterns, are particularly concerning. We now have a situation in which there are many families in which neither the husband nor the wife has a job. In 1979, less than 9% of unemployment experienced by couple families was in couple families in which both husband and wife were unemployed. By 1994 this figure had risen to nearly 24% (Miller 1997:19). Worse still, this burden is falling disproportionately on families with dependants. One in 80 of these families has both partners unemployed, compared to one in 120 in families without dependants (Miller 1997:23).

To these gloomy statistics have to be added sole parent families, of which nearly half do not have the parent in the labour force, and of those that have there is an unemployment rate of about 16% (ABS 1997a:36). Compounding these trends, and probably closely related to them, is the regionalisation of unemployment in Australia. The research of Boyd Hunter and Bob Gregory suggests that in neighbourhoods in the bottom income decile the employment-population ratio fell by 28% between 1976 and 1991, but fell only marginally in the top socioeconomic areas (Gregory and Hunter 1996:310). The effect of these trends is to create serious disruption in the social networks that might otherwise be used to find work.

Benefit Levels and Means Testing

The welfare system, and the interaction between the tax and welfare systems are, I believe, contributing to a social capital problem by encouraging some people to stay out of the labour market. The National Commission of Audit’s report in 1996 noted the rise, in real terms, of benefits to unemployed families under the previous government. In 1995-96 dollars these went from just under $18,000 a year to just under $22,000 a year (NCA 1996:165). If you compare this to the base pay in, for example, retail trade, then the financial incentives to work are not great. In retail the average base pay in 1994 was about $24,000 (ABS 1997b:128). If you had any kind of serious preference for leisure you would have to think very carefully about taking a job which even at gross income levels offers the most marginal direct financial advantage.

The situation becomes significantly worse when you take into account the interaction between the tax and welfare systems, which is a real problem for families on paid incomes only a few thousand dollars below average weekly earnings. A study by the Institute of Chartered Accountants showed that a family renting its home with a single income earner and two children is actually worse off earning $30,000 a year than it is earning $20,000 a year because they pay extra tax and lose a range of welfare benefits (Hudson 1997).

The effects of means testing (see Ingles 1997) are such that we could readily explain the decision of wives of men on low incomes to stay out of the workforce so as not to affect the family’s welfare entitlements. Figures from the early 1990s show that the wives of men who are long-term unemployed are also the women most likely to be not in the labour force. In fact they are more than twice as likely as the wives of employed men to have been out of the labour force for more than two years (Bradbury 1995:51). While this will substantially reflect their lower levels of employability, in all probability it also reflects a rational decision not to jeopardise the family’s material standard of living.

The absence of these people from the workforce represents a serious social capital problem, one which is a part of a wider social capital problem afflicting low income groups. The workplace is an important place of social connection in itself, and absence from it, if it is not made up for through greater participation in other organisations, can be expected to lead to low levels of social capital.

Some Implications

There are warnings for both sides of politics in this analysis of social capital. For the Left, replacing community-based welfare services with government-provided welfare services can undermine vital social relationships. By providing money for nothing, policies for income equality can create perverse incentives not to work, and so take people out of an institution – the workplace – that provides much social capital. For the Right, community-based welfare services are threatened not by being replaced, but by being over-used. When government ‘contracts out’ to these organisations they need to be held accountable for their public funds, but accountability mechanisms can undermine the very relationships which made the organisations attractive deliverers of welfare services. They become outposts of the bureaucracy, endangering their attraction to beneficiaries and volunteers. Policies for fiscal responsibility lead to means testing, which, like the attempt to increase equality, creates perverse incentives not to work.

In the end, we may decide that social capital costs are worth enduring to achieve other policy goals. It is much more difficult to argue that these costs should be overlooked. If the idea of social capital highlights some of these costs it will have contributed something, and will not just have been another briefly fashionable concept.

References

ABS (Australian Bureau of Statistics) 1996, Voluntary Work: Australia, Canberra.

ABS 1997a, Australian Social Trends 1997, Canberra.

ABS 1997b, Year Book Australia 1997, Canberra.

Bradbury, Bruce 1995, ‘Added, Subtracted or Just Different: Why do the Wives of Unemployed Men have Such Low Employment Rates?’, Australian Bulletin of Labour 21(1):48-70.

Carson, Edgar 1995, Social Networks and Job Acquisition in Ethnic Communities in South Australia, AGPS, Canberra.

Frey, Bruno 1997, Not Just for the Money: An Economic Theory of Personal Motivation, Edward Elgar, Cheltenham (UK).

Green, David 1993, Reinventing Civil Society: The Rediscovery of Welfare Without Politics, Institute of Economic Affairs, London.

Green, David and L. Cromwell 1984, Mutual Aid or Welfare State: Australia’s Friendly Societies, George Allen & Unwin, Sydney.

Gregory, Bob and Boyd Hunter 1996, ‘Increasing Regional Inequality and the Decline of Manufacturing,’ in P. Sheehan et al. (eds), Dialogues on Australia’s Future, Centre for Strategic Economic Studies, Melbourne.

Hudson, Phillip 1997, ‘When welfare makes more economic sense than working,’ The Courier-Mail 28 July:1.

Ingles, David 1997, Low Income Traps for Working Families, Centre for Economic Policy Research Discussion Paper No. 363, Australian National University, Canberra.

Miller, Paul 1997, ‘The Burden of Unemployment on Family Units: An Overview,’ Australian Economic Review 30(1):16-30.

Murray, Charles 1988, In Pursuit of Happiness and Good Government, Simon and Schuster, New York.

NCA (National Commission of Audit) 1996, Report to the Commonwealth Government, AGPS, Canberra.

Smith, Barry and Jeff Herbert 1997, ‘Moving Beyond "Welfare Dependency" – Opportunities Through Local Community-based
Initiatives,’ Urban Futures 23 (November):1-14.

Andrew Norton is a former Editor of Policy, and now works for the federal government. A longer version of this paper was presented to a seminar on social capital at the Department of Social Security on 21 August 1997. The views presented here are his own.

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