7.11 Unemployment benefits and the minimum wage

Unemployment benefits and services play an important role in assisting unemployed people back into paid employment. Newstart Allowance is the primary form of income support for the unemployed.

Newstart is designed to provide a minimum adequate standard of living for people who are temporarily out of work and unable to support themselves through their savings, or other means. The rate of payment attempts to balance adequacy of support for people who are unemployed with incentives for them to seek work as well as the cost to taxpayers.

A wide range of employment assistance is currently provided to unemployed Australians. With the aid of Job Services Australia, most young people find employment relatively quickly.

The Commission considers Australia’s current unemployment benefit arrangements should be retained as a major pillar of the social safety net. However, building on recent reforms, changes should be made to improve incentives to work and job opportunities for the unemployed.

It is particularly important young people do not fall into long-term unemployment.

Given the significant support available and the relatively large numbers of younger unemployed, the Commission considers it reasonable to expect young long-term unemployed people to improve their job prospects by requiring those aged 22 to 30 to relocate to a high employment area, once they have been unemployed for more than 12 months.

Currently, people who are out of work lose access to unemployment benefits if they relocate to low employment areas without a good reason. This policy extends a similar logic to failure to relocate to areas of high employment.

The Commission considers special exemptions to this change should be available for people with dependent children or who have similar commitments or responsibilities. More than half of Newstart Allowance recipients are single and have no dependents.

Support now exists to assist young long-term unemployed people to move. Based on existing policies, relocation assistance of $6,000 is available if an unemployed person moves to a regional area to take up a job or $3,000 if they move to a metropolitan area. A Job Commitment Bonus of $2,500, and up to $4,000, is available for people who, having found a job, remain off welfare for a sustained period of time.

As shown in Chart 7.15 in relation to Newstart means testing arrangements, unemployed people with private income of around $25,000 per year can still access some income support. This is almost twice the maximum payment of Newstart and is a relatively high amount of private income while still entitling a person to a safety net payment.

Chart 7.15: Newstart Allowance payment rates and income tests

This chart shows Newstart Allowance payment rates and income tests. Under the  current income test a person on Newstart can earn around $25,000 a year before they become ineligible for Newstart. Under the proposed income test recipients will only be able to earn around $19,000 per year.

Source: Department of Human Services.

The Commission recommends the income test withdrawal (taper) rate should be increased to 75 per cent for Newstart and other related allowances. This represents a more appropriate targeting of safety net payments.

Recommendation 27: Unemployment benefits

Unemployment benefits play an important role in assisting people back into work. Building on recent reforms, the Commission recommends a number of changes be made to improve incentives to work including by:

  1. requiring young single people aged 22 to 30 without dependants or special exemptions to relocate to higher employment areas or lose access to benefits after a period of 12 months on benefit; and
  2. increasing the income test withdrawal (taper) rate to 75 per cent for Newstart recipients and other related allowances.

Another important dimension to government programmes designed to get people back to work is the relationship between the rate of income support and the minimum wage.

If the level of income support is too close to the minimum wage then some recipients have little incentive to obtain work. Alternatively, if the minimum wage is too high relative to income support then many unemployed people — particularly the low skilled and inexperienced — will be priced out of the labour market and struggle to find employment.

A minimum wage that is too high prevents groups, such as young job seekers, from entering the labour market, inhibiting the development of workplace skills and experience that could increase their wages over time. An excessively high minimum wage is also likely to act as an impediment to the effectiveness of government programmes to get people back to work.

At present Australia's youth unemployment rate is around 12 per cent compared with just under 6 per cent for the overall national unemployment rate.

As shown in Chart 7.16, Australia's minimum wage is high by international standards. Containing growth in the minimum wage would improve job opportunities and the effectiveness of the Government's employment policy programmes.

Chart 7.16: Minimum wage, selected OECD countries, 2011-12 $US in purchasing power parity terms

This chart shows Australia's relative minimum wage in purchasing parity terms compared to a range of other OECD countries. The chart shows that Australia has one of the highest minimum wage rates in the OECD.

Source: OECD.

In transitioning to new arrangements that contain growth in the minimum wage, it is important to consider its objectives. It should have regard to community standards but also maintain the incentive to work in terms of the relativity between unemployment benefits and financial benefits of working.

The Commission proposes that growth in the minimum wage be slowed by applying an indexation factor of CPI less 1 percentage point for a period of 10 years (growth of around 1.5 per cent per year) until it reaches 44 per cent of National Average Weekly Earnings.

As shown in Chart 7.17, under this arrangement the minimum wage would continue to grow over time in nominal terms but at a slower rate than under current arrangements. After this decade has elapsed the minimum wage would be indexed in line with growth in National Average Weekly Earnings.

Chart 7.17: Proposed transition to a new Minimum Wage Benchmark

This chart shows the expected 10 year transition path for each State and Territory to align with the 44% minimum wage benchmark.

Source: National Commission of Audit.

This method would establish a ‘Minimum Wage Benchmark’ from which a degree of variation across the nation could be introduced. Having a uniform national minimum wage ignores substantial differences in local job markets. The demand for labour and the price employers are willing to pay for unskilled or inexperienced labour varies markedly across the country.

Having a single national minimum wage disadvantages workers attempting to gain a job in states like Tasmania and South Australia where wages and the costs of living are generally lower than in other States.

There are wide differences in wage rates between States. While the minimum wage is around 45 per cent of the Australian Capital Territory Average Weekly Earnings, it is around 65 per cent of Average Weekly Earnings in Tasmania.

The Commission recommends that a different minimum wage apply in each jurisdiction, with a transition period over the next 10 years. In particular, the Commission proposes the minimum wage in each jurisdiction be equal to the lower of the Minimum Wage Benchmark described above, or 44 per cent of Average Weekly Earnings in that jurisdiction by 2023. The wage would then increase in line with growth in that jurisdiction’s Average Weekly Earnings.

The Commission considers that the Government should introduce these new arrangements to the extent it has constitutional power, or work with the States to ensure implementation.

Recommendation 28: The minimum wage

Australia's minimum wage is high by international standards. The Commission recommends that future growth in the minimum wage be contained to improve job opportunities. A degree of variation in the minimum wage should also be introduced across the States to better reflect local labour market conditions and the cost of living. This should be achieved by:

  1. establishing a 'Minimum Wage Benchmark', set at 44 per cent of Average Weekly Earnings;
  2. transitioning to this new benchmark by indexing the current national minimum wage to grow in line with the Consumer Price Index less 1 percentage point for a period of 10 years; and
  3. transitioning the minimum wage in each State and Territory to the lower of the 'Minimum Wage Benchmark' or 44 per cent of Average Weekly Earnings in that jurisdiction by 2023, noting that should this imply a reduction in the nominal minimum wage, the wage would instead be kept constant until aligned with 44 per cent of Average Weekly Earnings in that jurisdiction.