Gavin R. Putland,  BE PhD

Sunday, October 05, 2014 (Comment)

Rewarding employers for taking workers off the dole: A self-funding tax cut

The dole — known in Australia as Newstart Allowance — is what the government pays unemployed people to look for full-time work but not find it: if you find enough work to earn more than a certain “cutoff” amount, the income test reduces your allowance to zero.

From all points of view, paying employers to hire job-seekers would be better than paying job-seekers to seek in vain — better for employers, because they could hire labour at a lower net cost; better for job-seekers, because they would immediately have more disposable income and would subsequently gain in experience, discipline, and self-reliance; better for the government, because more economic activity means more tax revenue and more votes; and better for the economy, because the government's action would reward success rather than failure, and because the reduction in the net cost of labour would be disinflationary, allowing lower unemployment without accelerating inflation.

But of course we wouldn't need to pay the employers. We would only need to give them a tax credit (or “offset”) against the various federal taxes that employers are required to pay or collect, for being so inconsiderate as to create jobs. The credit could be claimed against company tax, FBT, or remissions of excise or PAYG personal income tax, but not GST/VAT (to ensure that border-adjustment remains legal). It would be a tax cut, not a handout.

Suppose that any private employer who pays a worker at a certain threshold rate receives a tax credit equal to a large fraction (e.g. 2/3) of the dole. The threshold is just high enough to take the worker off the dole if he/she has no dependents. If the worker is paid less than the threshold, the employer gets no credit because this is no gimmick; we want employers to take workers off the dole, not just dip their toes in the water. As the worker's income rises above the threshold, suppose that the tax credit is tapered at a rapid rate until it falls to zero. It is tapered because the more you earn, the more likely it is that you would be off the dole anyway — in which case, from the government's point of view, the tax credit is wasted on you. To minimize the “waste”, suppose that the government imposes three further conditions. First, an employer can claim credits only in respect of workers who never worked for that employer before the credits were introduced; thus incumbent workers do not yield credits even if their pay is within the taper range, and employers cannot milk the system by cutting full-time workers' hours so as to bring their pay within the taper range. Second, an employer can claim credits only in respect of workers who claim the tax-free threshold from that employer; this rule makes it more attractive to give someone a “first job” than to give someone else a “second job”. Third, an employer can claim credits only in respect of persons who are otherwise eligible for social security; presumably that excludes holders of temporary work visas.

To the extent that the tax credit takes workers off the dole, it yields a saving to the government, because the credit for one worker is less than the reduction in welfare expenditure — especially if the dole comes with further benefits such as rent assistance. By itself, more employment means more tax revenue for the same tax rates (the “growth dividend”). The hope is that the savings and the growth dividend are sufficient to cover the “waste”, so that the whole package is, at worst, budget-neutral.

Would employers game the rules by sacking full-time workers and hiring new part-timers, or reducing full-timers to part-timers and hiring other part-timers? They could try, but their success would be limited. The tax credits would make it more profitable to hire workers in the taper range, but not less profitable to hire them in other income ranges. Overall, the quantity of labour hired would increase, so that any reduction in full-time staff would need to be overcompensated in terms of additional hours worked by part-timers, and overcompensated by a greater margin in terms of the additional number of part-timers. Thus any attempt to game the rules in this way would further deplete the pool of unemployed, making it harder for the gamers to find enough workers. Moreover, depleting the pool of unemployed is precisely what we want!

Would employers game the rules by sacking incumbent part-timers and hiring new part-timers? They could try; but there are fewer part-timers than full-timers, and fewer still who can be sacked with legal impunity, let alone commercial impunity, especially as the general fall in unemployment would make workers harder to replace.

In Australia, at the time of writing,* a single person with no dependents loses all Newstart allowance if he/she earns about $500/week. Let the threshold therefore be $500/week, and suppose that the tax credit is worth $180/week, tapered at 60 cents per dollar above the threshold (the maximum Newstart taper rate), falling to zero when the worker earns $800/week. From the employer's point of view, the full credit is equivalent to a cut of 36 percent in the minimum wage. If the minimum-wage elasticity of labour demand is 0.29, that's enough to increase employment by about 10.5 percent, which is much higher than the ABS unemployment rate, and almost as high as the Roy Morgan unemployment rate. That doesn't leave much scope for gaming the system.


* Last modified 18 April 2014. You can comment at

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