To combat joblessness and welfare dependency, the ‘Five Economists’ in October 1998 proposed a temporary minimum wage freeze and the introduction of ‘in-work benefits’. The rationale is that, while a minimum wage freeze boosts employment opportunities for the jobless, in-work benefits – a tax break for low-income families of which one or more members are in paid work – provide the jobless with incentives to take those opportunities.
The proposed in-work benefit programme has since been developed into an ‘earnings credit’ scheme. This is supposed to encourage an increasing number of the jobless into employment, thereby reducing joblessness and welfare dependency significantly.
But evidence from the United States and Britain, where in-work benefit programmes have been in operation, shows that the employment effects of the earnings credit may not be necessarily positive.
First, responses to in-work benefits appear to differ from one demographic group to another. Employment among jobless lone parents has markedly improved. But married men have hardly changed their labour market behaviour, and furthermore, there has been a significant decline in labour supply from married women whose spouses are employed.
Second, in-work benefits are eventually phased out. Their claimants, in response, appear to stop making additional work effort. This is considered to be an important reason for the lack of response among married men and the negative response among married women whose spouses are employed.
The earnings credit may somewhat decrease joblessness insofar as it boosts employment among lone parents. But welfare dependency might as well increase.
The earnings credit, though disguised as a tax credit, is just another welfare benefit. The growth in the number of its claimants at once means the growth in welfare dependency. The unavoidable phasing out of in-work benefits, furthermore, acts as a work disincentive and discourages personal initiative – a quality so desired of individuals in a free society.
There is a better way for Australia to tackle joblessness and welfare dependency: to raise the tax-free threshold. Under a higher tax threshold, individuals would end up with more of the money that they earn through their own effort. This way, personal initiative would be encouraged rather than eroded.
Kayoko Tsumori is a Policy Analyst at The Centre for Independent Studies. An earlier version of this paper was presented at the 8th Australian Institute of Family Studies Conference in Melbourne on 12–14 February 2003.