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January 08th 2013 print

Peter Smith

Dunderheads and the dole

Raise the dole and minimum wages and what will you have? More of the same, but at a higher price. That shouldn't be a difficult concept to grasp, especially for  economists of a purportedly conservative bent


“The dole” is a doleful expression which reminds people that they are bereft of gainful employment. “Newstart allowance”, on the other hand, is much more auspicious. Presumably it was coined by Winston Smith to convince those thrown out of work that the end is really the beginning. Whatever we call it, will it keep body and soul together is the question.


Thrifty Jenny Macklin claims she could live on the Newstart allowance of $35 a day. Tanya Plibersek was a little less bullish. She thought “it wouldn’t be easy”. Julia Gillard was more circumspect. She thought “it would be incredibly tough”. But tellingly she didn’t rule it out.

I don’t know what comes out of this for you (man or woman) but the sexism in me (get thee behind me) thinks these ladies are kidding. No woman I have ever known could even contemplate the remote possibility of living on such meagre rations. Some part of me wishes I had met women like Jenny, or Tanya, or Julia in my younger years; particularly Jenny. Such economy. I might be rich now! Of course some might consider the price too high in non-monetary terms and, while not wishing to be ungallant, I admit to them having a point.

But let’s leave this illusory world occupied by parsimonious women aside and go to the real world of hard-edged economics. This is occupied by conservative economists (so-called) like Ian Harper and Judith Sloane; former chairman and member respectively of the Fair Pay Commission. They are both on the record as supporting an increase in the Newstart allowance. Speaking for himself and Ms Slone, Mr Harper was also reported as saying that they were both eager to keep the minimum wage high enough above the dole to provide a strong incentive to work and to keep the maximum number of people in jobs.

Here is why the economics profession in Australia is so hopeless. Leave aside the complete write-offs on the left. Too many apparently on the conservative side too often give, and too convincingly, an impression of being Keynesian demand-oriented dunderheads.

Just how in the world, under any circumstances, do higher minimum wages translate into more jobs? The answer is that they don’t. Higher minimum wages make people unemployed. Mon Dieu! That’s hard to grasp. Are employers really more likely to hire people when they pay them less than when they pay them more? Surprisingly; yes they are.

Let’s explore the Harper-Sloane model. We increase the dole and minimum wages. Higher minimum wages put people out of work and for longer. Now, more people become reliant on dole, which despite any increase inevitably remains relatively miserly in the scheme of things. This results in renewed political pressure to increase the dole again. Hello, we now have to increase minimum wages to maintain the gap. More people lose their jobs. And so on to increasing destitution and misery.

The problem with the Harper-Sloane model is that it assumes that employment is generated from the demand side instead of the supply side and, moreover, it assumes people will just as eagerly accept a dollar donation as a dollar earned.

Conservative economists have (or should have) faith in the market and in individuals. Low wages are a stepping stone to a job and, just maybe, to higher wages later on. And just maybe the taste of earning money spurs people to aspirations and efforts that would remain dormant in the hand-out world that minimum wages force them into.

Without minimum wages and other onerous job-killing regulations and policies (e.g., unfair dismissal rules, penalty rates, union preference and the restrictive practices that come with it, red tape, green tape, government overspending) unemployment would mostly, in most times, be a choice.

Unfortunately there is a moral argument for an increase in the dole when voters elect governments that deliberately implement regulations and policies that keep people out of work. That is exactly where we are.

One improvement would be to gear dole payments to previous employment history. A number of European countries gear unemployment benefits to remuneration over a previous period. Usually, it is a tiered scheme with basic state benefits supplemented by some kind of employer/employees insurance arrangement. The details are less important than the principle that the more you pay in the more you get out.

Beyond that, we are caught in a vicious circle. We have to increase the dole because it is intolerable to keep people out of work and pay them only enough to keep Ms Macklin alive and kicking. Do we then have to increase minimum wages? Why not? Let’s embrace the whole road to perdition and forget about the economics that would have been in course 101 before Keynes infected the textbooks and the profession.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics