One of the major problems with the current system of setting awards is that there is no lobby group for the jobless, with most welfare groups arguing for higher wages. The focus of policy should be to raise the incomes of low-income households rather than of low-wage workers. There is substantial evidence that many low-wage workers are in relatively high-income households and that poor households are usually poor because members of the households are out of work (McGuiness et al. 2006; Lloyd et al. 2004; Tsumori 2004). Thus, facilitating jobs growth should take preference over raising wages of those in work.

Unfortunately, the inflexibility resulting from awards is compounded by the social security system. Table 2 presents some interesting comparisons between the maximum disposable income for those whose income is only derived from social-security benefits entitlements and the disposable income for those working full time on the minimum wage and receiving the (reduced) welfare payments they are entitled to. The disposable-income figures take no account of non-cash benefits to which many recipients are entitled. Non-cash benefits include concessions for health and welfare services, housing, transport, education and other goods and services.

Table 2 shows that for single people, in particular, there are significant increases in disposable income by moving from social security to a job at the minimum wage but that this diminishes for those with children. It is not obvious without further analysis whether the increase in disposable income would be sufficient compensation for the move from no work to full-time work. Nevertheless, for many contemplating moving from joblessness there are high effective marginal-tax rates (AMP/NATSEM 2006) which are a major disincentive to work.

Source: Poverty Lines: Australia, Melbourne Institute of Applied Economics and Social Research, http://melbourneinstitute.com/ and Australian Fair Pay Commission, Wage Setting Decisions 2/2007, 3/2007, 4/2007 and Reasons for Decisions, p.69, http://www.fairpay.gov.au/fairpay/MinWageDecisionJul2007/.

When income tax on wages and the other benefits and discounts available are included, together with the loss of leisure time and disutility of working in low-skilled jobs, the incentives to work may be low or negative for many. Clearly, changes to the demand side of the labour market, such as greater wage flexibility, must be accompanied by supply-side policies such as major reform of the social security and tax systems. The Coalition government did introduce stricter conditions for eligibility for welfare benefits but it is too early to tell what the full impact of these measures will be.

According to Lewis (2002) most unemployment is due to lack of ‘effective supply’. These are jobless people for whom, given the current wage and institutional structures, there are no jobs for which they are willing to work or profitable activities which employers can find for them to do. What is required is a raft of policies which increase effective supply. These policies would involve long-run commitment to raising education participation and achievement among the most disadvantaged Australians. This is no small task, which involves improving the efficiency of the education system and widespread reform of social security, taxation and income-support systems for low-income households (Lewis 2002).

However, supply-side policies can only work if there are flexible wages. Supply-side policies shift the effective supply. People who were previously unemployable or unwilling to work now enter employment as the real wage falls for people at the margin. However, new jobs can only be created if there is an increase in demand for low-skilled labour which requires downward flexibility in wages. People willing to supply their labour can only make this effective if employers can find profitable work for them to do.