Budget 2016: Youth Jobs PaTH - paving the way for employment growth

In the Federal Budget the Government announced its Youth Jobs PaTH internship scheme. The details have yet to be fully worked out but the essence of the scheme is that firms will be paid $1000 to take on young, unemployed people as interns for up to 12 weeks and a further payment of between $6500 and $10,000 if they hire them full-time. Interns will receive $100 a week on top of their welfare payments. This is an innovative measure and deserves to be given a fair go.

In CEDA’s recent publication Australia’s future workforce I examined the major changes in the Australian workforce and the reasons for chronic unemployment, particularly among young people. I argued that a combination of external shocks, globalisation and technical change has significantly changed the nature of demand for labour while certain inflexibilities in the labour market have prevented adjustment to these demand changes. This has been mostly manifested in the relative growth in service sector employment, the growth of part-time and casual work, the relative decline in demand for manual skills, and the growth in demand for knowledge-based and people skills.

For most Australians the labour market and its education and training system have facilitated the adjustment of labour supply to meet those changes in demand.  The increased participation of women (particularly women with children) and students in the workforce has greatly facilitated the increased demand for part-time workers and those with interactive skills.  In addition the education system has significantly increased the average cognitive and education levels.  Labour supply has, generally, adjusted well to changes in labour demand due to structural and technological change.

Poor labour market outcomes are not experienced by the large majority of Australians but by particular groups of people who are particularly disadvantaged. The disadvantaged group is, however, quite large, perhaps as high as 1.3 million in Australia, and is a major challenge for labour market and education reform. The biggest single factor determining a person’s chances of being unemployed, particularly long-term unemployed, is their level of education.  This suggests where policy should concentrate. However, for many having left school it is too late.

Unemployment is not a problem for most young people. The higher the level of education the greater the career prospects, including lower probability of unemployment.  Young people pursuing education opportunities improve national productivity and reduce total unemployment in later years.  The problem of youth unemployment is concentrated among the most disadvantaged. This group has little or no skills or work experience. Australian economic studies have also found that the chances of being unemployed are much higher if a person lives in a lower socioeconomic area and if a person’s parents have a lower level of education. Clearly unemployment is a contributing factor to inequity in society.

So how can youth unemployment be reduced? What would make firms take on unemployed youths?  Businesses determine the demand for labour. The demand for labour is generally thought to depend on the wage rate, or more correctly, the costs of employing labour which typically includes many other costs apart from the wage. A firm’s decisions about how much output to produce and how much labour to hire are made simultaneously. Firms hire extra labour when the value of the extra output produced is greater than the wage. Firms will only increase output and employment if activities which were not previously profitable are made profitable.  Businesses will employ more people (or increase hours of employment) as long as the extra revenue generated exceeds the extra cost of employing them. Therefore, extra output and extra employment requires a fall in labour costs.

Young people are unemployed because, given their lack of skills and/or training firms can’t find anything profitable for them to do at the institutionally set wage firms must legally pay. It may also be the case that the wage that firms would be willing to pay (in the absence of minimum wages) in order to profitably employ them would not be attractive enough for the unemployed given the level of unemployment benefit they would get if they didn’t work. The beauty of Youth Jobs PaTH is that it addresses both the demand side by reducing labour costs significantly and the supply side by providing an incentive for young people to work.

Already critics are pointing out potential problems. There is a danger employers will simply take advantage of cheap labour without real jobs resulting at the end of the subsidy period. This would certainly weaken the impact of the scheme but the scheme will still provide opportunities for young people to be exposed to work experience, to develop networks, self-confidence and skills on the job that could lead to a job with this, or even another employer.

The ACTU has branded Youth Jobs PaTH as "$4-per-hour jobs for young people" scheme providing subsidised labour to employers at taxpayers’ expense. However, the young employees are hardly exploited since they receive $100 a week more than they would on the dole. The taxpayer has to pay for the dole anyway and extra output will be produced by the otherwise unemployed young people.