Lowering the overall level of unemployment benefits that job seekers are going to receive in the middle of a recession is likely to cost jobs.
The extra $25 a week to the JobSeeker rate from April puts the unemployment payment right back where it was in 2007, some 14 years ago, at 41 per cent of the minimum wage.
The payment rate remains substantially below the poverty line and is also the second-stingiest payment for newly unemployed people out of all 37 members of the OECD, behind only Greece.
At about 27 per cent of the average wage, the payment is less than half the average unemployment rate of 58 per cent across the OECD countries. An unemployed Canadian would get 62 per cent of the average wage.
JobSeeker, formerly known as Newstart, usually only rises in line with the cost of living. Other than small adjustments– such as at the time the GST was introduced in 2000 — this will be the first time the benefit has been increased in real terms since the early 1990s.
JobSeeker has fallen so low because allowance payments such as JobSeeker (and Youth Allowance) are adjusted only in line with changes in the cost of living, as measured by the Consumer Price Index (CPI). This means that a person on the unemployment benefit falls further and further behind other Australians, including age pensioners. This problem will continue.
For people on JobSeeker, the $25 announcement will feel like a cut in payments, not a rise, because since COVID-19 arrived in Australia, people who are unemployed have been receiving the Coronavirus Supplement. Initially worth $275 a week on top of the basic JobKeeper, it was cut back to $125 in September, and now it’s down to $75 per week. People on JobSeeker on 1 April will therefore get a $50 per week cut in their payments.
An especially bad time to cut the Coronavirus Supplement
Prime Minister Scott Morrison said he was concerned that leaving the current JobSeeker rate in place (including the Coronavirus Supplement) would dull job seekers’ incentives to search for work.
Yet there is little evidence that the current level creates a big disincentive to work: even after the JobSeeker rate was doubled last year, there was little change in the proportion of unemployed Australians who found work each month, or in the rate of advertised job vacancies.
After all, searching for jobs takes time and costs money. Set the rate too low and unemployment Australians will struggle to afford to search for work, a concern noted recently by the OECD among many others.
We already require unemployed people to jump through lots of hoops – applying for jobs, doing ‘mutual obligation’ – that make JobSeeker far from a comfortable existence. And more measures have now been added to further tighten those requirements.
Lowering the overall level of unemployment benefits in the middle of a recession is likely to cost jobs. Australia’s economy has made a stronger-than-expected recovery from COVID so far. But, as the Governor of the Reserve Bank recently noted, ‘we still have a fair way to go’. Unemployment remains high at 6.4 per cent. On current forecasts, it won’t return to pre-crisis levels until at least 2023.
JobSeeker is one of the best forms of fiscal stimulus: people who are unemployed are likely to spend most of what they receive. Cutting the $75 a week supplement and replacing it with a lower but permanent $25 a week rise is a missed opportunity. It also means unemployed Australians will continue to languish well below the poverty line.
Below the poverty line
Australia doesn’t have an official poverty line, but at least two measures are commonly used by researchers — the relative line, which is half of median household income, and the Henderson line, which was set by an inquiry in the 1970s and is updated by the Melbourne Institute. The relative line is used most often, including by international organisations like the OECD.
The relative poverty line is $450 per week — according to the latest data released in 2018. That means an adult, living alone, would need at least that amount to be considered out of poverty. After the $25 increase, JobSeeker (including the Energy Supplement) will be $312 per week — $138 below the relative poverty line.
The gap between the payment and the Henderson poverty line is even bigger.
The gap wasn’t always so big. As the chart below shows, in the early years of the Howard Government, the unemployment benefit was nearly at the relative poverty line.
By the time John Howard left office in 2007, the Newstart Allowance was $214.90 per week. The minimum wage for a full-time worker was $522.12 per week, so the unemployment benefit was worth 41 per cent of the minimum wage.
Since then, the minimum wage has grown a little faster than inflation, while Newstart/JobSeeker has only kept pace with inflation. As a result, the gap between the unemployment benefit and the minimum wage has widened.
In 2000, when the Howard Government introduced the GST, the unemployment benefit was 43 per cent of the minimum wage — today’s increase will leave it well below that mark.
And this week’s announcement barely puts a dent in the large and growing gap between payments to unemployment people and payments to pensioners. Back in 2000, Newstart was worth 89 per cent of the single pension; after the $25 increase, it will be worth just 66 per cent of the pension.