Nevile, J W --- "Human Rights: Issues in the Welfare State" [1998] AUJlHRights 6; (1998) 4(2) Australian Journal of Human Rights 95

Human Rights Issues in the Welfare State

• Introduction
• The meaning of the term welfare state
• Full employment issues
• Safety net issues
• Conclusion

Introduction

This paper is concerned with a restricted range of human rights, those that are affected by the nature of the economic system. Most of the things that are usually accepted as human rights in the second half of the twentieth century take the same form irrespective of the structure of the economy. Rights such as freedom of religion or freedom from arbitrary imprisonment do not depend on what sort of economic system is prevalent in the society in which one lives. Other rights, like freedom from hunger, take quite different forms depending on the nature of the economy, and may not exist at all in some economic systems. Given its title, it is the second sort on which this paper focuses; but statements like "the fundamental human right in the welfare state is such and such", does not mean that the right to practise one's religion is any less fundamental, just that it is not something that distinguishes the welfare state from some other economic system.

Human rights are about features in people's lives that everyone should enjoy just because they are humans and not because of anything they do or possess. Statements about human rights, therefore, reflect a philosophy (a vision if you like (of what it means to be human. This is true of human rights in the economic sphere, just as much as in any other area of life. The main rival of the welfare state in OECD countries is the liberal market economy, and it is fascinating to speculate on the implications about the nature of humanity made by those whose writings form the intellectual basis of market liberalism. For example what does the following statement by Milton Friedman imply about the essential nature of human beings?

The ethical principle that would directly justify the distribution of income in a free market society is, "To each according to what he and the instruments he owns produces".[2]

This quotation was not introduced to make a debating point about a vision of society, which is not sympathetic to the welfare state, but to make a substantial point. This is that although the welfare state still seems the natural form of society to most Australians, there is a revival of support for a different way of organizing the economy.[3] The issues discussed in this paper will only be of interest to those who share the vision of the essential nature of being human that underlies the welfare state. Since the welfare state developed in countries dominated by the Judeo-Christian world view it is not surprising that it rests on two major parts of that world view. The first is the assertion of the dignity and worth of every individual human being. The second is that the nature and ethos of society is important as well as the moral codes of individuals and that societies in which humans live should reflect the first principle and ensure that everyone has the economic resources necessary to live in dignity.

The meaning of the term welfare state

Various definitions of the welfare state exist in the literature. One is given in the next paragraph.[4] However, more important than this definition, are the principles that follow the definition. These give more insight into the nature of the Australian welfare state than can any definition.

A welfare state can be defined as one in which the economy is basically a capitalist economy, but the government intervenes extensively in order to ensure that the economic welfare of all citizens is at least at a minimum standard, and, if possible, to increase the economic welfare of all. In the Australian version the cornerstone of the welfare state was that in every family income unit at least one person had the right to full time employment at a wage which was at least big enough to enable the breadwinner and his family to live in frugal comfort. (It was tacitly assumed that the breadwinner was a male, so "his" is the correct pronoun.) However, despite this commitment to full employment, it was recognised that there would always be frictional unemployment as people changed jobs, that there would still be occasional small recessions, and that some people could not work due to illness, disability or old age (though interestingly not until the time of the Whitlam Government was being a single parent with young children recognised as a reason for not being able to work). Because of these things, the commitment to maintain full employment was supported by a further principle: that money raised through the taxation system should be used to provide a very modest income to those who otherwise would be destitute, to provide a safety net in the shorthand of the time.

In its heyday, say from 1945 to 1975, the cornerstone of the welfare state in Australia was not the safety net but full employment. For example, the 1945 White Paper on Full Employment in Australia states quite categorically that "the maintenance of conditions which will make full employment possible is an obligation owed to the people of Australia by Commonwealth and State Governments" (p 3). The safety net was necessary, partly because we do not live in an ideal world and partly because it was thought appropriate that the whole community should take on some functions, such as provision for the elderly, which were previously a family responsibility. The following sections look first at issues arising from the commitment to full employment and then to those raised by the safety net.

Full employment issues

Full employment can be defined as a situation in which everyone who wants a job is able to find one within a reasonable length of time. The first issue that arises is what do we mean by everyone. Although the 1945 White Paper talked about full employment, in practice, it was assumed that the norm would be one breadwinner per family. The question that arises is whether the right to a job should be a right for each family to have a breadwinner or the right for everyone who wants it to have a full-time job (or a part-time one is that is what they prefer). Perhaps some would like to make it a right to one equivalent full-time job in each family, whether that be one full-time job or two part-time jobs. This issue is linked to the general issue of the desirability of distributing employment more equitably by, in some manner, rationing employment. In the last 10 to 15 years the average number of hours worked per week (and per year) by full-time employees has been increasing and now \t40 per cent of full-time male employees work more than 40 hours a week. Even more startling is the fact that 25 per cent work 49 hours a week or more. For females the percentages are 15 and 8 respectively. Not surprisingly, the trend of an increasing number of hours worked per week by full-time workers coupled with high levels of unemployment has led to calls for a shorter working week (with corresponding reductions in weekly wages).[5] Moves to encourage a voluntary reduction of the number of hours worked per week are beneficial to both individuals and society. Much can be done to facilitate permanent part-time work and job sharing, to change community attitudes so that they are against overly long hours of work and directly to discourage excessive overtime. But any compulsory reduction in the number of hours worked (and the corresponding weekly wage rate) raises a host of equity issues.[6] These are very much more acute if rationing employment is extended, implicitly or explicitly to a rationing by families rather than individuals. Any suggestion that the unemployment problem should be solved by allowing only one (equivalent full-time) worker per family would mean in practice forbidding married women to engage in paid employment and would be immediately condemned by most Australians. But even those willing to consider the proposition would soon find that it raises more problems than it solves. Is the level of income earned by the husband relevant? What if the husband's wage is not enough to provide a standard of living above the poverty line? If full-time workers are allowed to work overtime can a family have two part-time workers who together work 50 hours a week? Or 60 hours a week? And so on. In contemporary Australian society any commitment to full employment must be a commitment to universal full employment so that anyone who wants a job can find one.[7]

This raises the issue: is full employment still possible? The question is made more pointed once it is remembered that in the welfare state the right to a job is not to a job at any wage however low, but to one which pays enough to support the breadwinner and his family "in a state of health and reasonable comfort" to quote the first bill providing for a minimum wage introduced in an Australian Parliament.[8]

The concept of a minimum wage predates the welfare state in Australia. It was firmly in place in Commonwealth legislation within a decade of Federation. The Commonwealth Parliament imposed an excise from which employers would be exempted if they were paying "fair and reasonable" wages in the view of the Commonwealth Court of Conciliation and Arbitration. This led to the famous Sunshine Harvester case and the institution of the basic wage. As this and the subsequent development of the concept is well known, there is no need to dwell on it. Those who would like a full account can find it in Plowman D (1995), "Protecting the Low Income Earner: Minimum Wage Determination in Australia", Economic and Labour Relations Review, December. However, the point is that up to the early seventies, there was very widespread agreement in Australia that full employment means employment at a wage sufficient to keep a family in at least frugal comfort and even since then it is assumed to mean full employment at a minimum wage that is high compared to that which might be set by the unfettered workings of the market. The imposition of a relatively high minimum wage is the cornerstone of the income distribution aspect of welfare in Australia.[9]

However, it has been argued that full employment and a relatively high minimum wage are incompatible. Conventional wisdom is that OECD countries have gone one of two ways. At one end are countries like America whose unemployment (at least as measured statistically) has not got out of hand, but where wages at the bottom end are so low that many people who have full-time jobs live in severe poverty. At the other end are countries like Germany where the minimum wage is high but so is unemployment. Nevertheless, this conventional wisdom can, and should, be challenged. There is increasing evidence that measured low unemployment rates in the US are not the result of low minimum wages leading to much less unemployment among unskilled workers.

The argument is not really about total employment, or non-employment, but about whether low wage rates at the bottom end of the distribution cause more unskilled workers to be employed. Although it focuses on relative wage rates and relative employment rates, it is important since the less skilled are the workers most vulnerable to unemployment.[10]

Nickell and Bell[11] point out that, although there was not a large fall in the relative wages of the unskilled in continental Europe, there was in the United Kingdom, but the "unemployment record of the unskilled [there] has been worse than in countries like Germany and the Netherlands" (p 303). Moreover, in continental Europe high wages and rising relative wages at the bottom end of the distribution do not appear to have affected the employment of low skilled workers. In the Netherlands relative wages at the bottom end have risen substantially, but unemployment of unskilled workers has fallen. In Germany real wages (for males) in the bottom decile are rising rapidly whereas in the US they are falling both absolutely and relatively. Yet the unemployment rate for unskilled male workers is higher in the US than it is for Germany. This is true although "the real wage of an individual in the bottom decile of the male earnings distribution in Germany is over twice that of his equivalent in the US on a purchasing-power-parity basis" (Nickell and Bell, 1996, p 305).

In a more elaborate study, Card, Kramuz and Lemieux[12] compared changes in wage and employment rates over the 1980s for different age and education groups in France, Canada and the US. They found that, in response to changes in relative demand, relative wages of less-skilled workers fell substantially in the US, somewhat less in Canada and not at all in France. However, in the last two mentioned countries "the patterns of relative employment growth over the 1980s are virtually identical to those in the US" (p 29). The big fall in wages at the bottom end of the distribution appeared to have no effect in increasing employment among the unskilled in the US.

These studies make more convincing an alternative explanation of low recorded unemployment rates in the US compared to Europe. Mishra[13] focuses attention on non-employment, which includes hidden unemployment, rather than on recorded unemployment, which does not. The non-employment percentage is just 100 minus the percentage employed, that is it is a percentage of the population in the age group, not a percentage of the labour force. When the focus is on non-employment rather than unemployment, it becomes clear that the big difference between the US and Europe is not that low minimum wages lead American firms to hire more unskilled workers, so much as poor and short-lived social security benefits lead more of the unemployed in America to drop out of the labour force altogether. If we look at males only (to avoid any possible cultural differences in the desire for paid work by married women) and look at males between the ages of 25 and 54 (to avoid any possible difference in things like school and university retention rates, retirement patterns and so on), then in continental European Community Europe 15 per cent of prime age males are not employed, compared to 14 per cent in the US. Incidentally in the United Kingdom, whose labour market is more like that in the US than are those in continental Europe, the figure is 18 per cent. In Australia the figure is 14 per cent, the same as in the US despite very different labour markets.

Thus, at the very least a strong case can be made that it is not high minimum wages that are preventing a movement towards full employment in Australia but something else. The most plausible candidate is that successful measures to reduce unemployment require raising the level of taxation. The Australian community appears to be very resistant to increases in taxes and certainly Australian politicians are unwilling to ask the community to pay higher taxes as part of a program to reduce unemployment. This may be because even a well-designed program to reduce unemployment will not have any noticeable effect overnight, or even over the first year that it is introduced. Yet unemployment could be very substantially reduced over a five to ten year period if the community is prepared to pay the cost in higher taxes.

There are two reasons why increased taxation is necessary to restore full employment in Australia. The first is that a great deal will have to be spent on labour market programs if the majority of the long-term unemployed are ever to get a job again. The measures outlined in the White Paper Working Nation were along the right lines, but even the Labor Government was not prepared to spend an adequate amount on labour market programs. The Coalition Government has cut expenditure on labour market programs so that they are now very inadequate.

However, labour market programs do not themselves create additional jobs. What they do is fit unemployed to fill jobs that are created by other means, and help unemployed find appropriate jobs when they exist. While this gives the long-term unemployed a much larger chance of obtaining a job and reduces the inflationary pressures caused by falling unemployment, it does not cause unemployment to fall. Additional jobs are created by raising the rate of economic growth and a sustained rise on the rate of economic growth large enough to significantly reduce unemployment will itself require a rise in the level of taxation.

The major constraint in Australia on a rate of economic growth large enough to reduce unemployment substantially is the current account deficit of the balance of payments. The current account deficit arises because we import too much compared to our exports. The ultimate reason for imports is consumption. If unemployed people become employed their incomes will go up, they will spend more on consumption and this will increase the demand for imports in Australia. With the increase in imports the current account will get worse. The rest of us will have to spend just a little bit less on consumption so that our demand for imports goes down a little. The sure way to reduce our consumption is to increase taxes, and, after all, Australia is one of the three OECD countries with levels of taxation much below that of the others. Also, as I previously suggested, if we want to help the unemployed, especially the long-term unemployed, find jobs, through labour market programs, these will have to be financed through additional taxation. Such programs will be needed for years to come. Raising taxes to pay for these is a smaller "ask" than raising taxes enough to remove the current account deficit (as the constraint preventing an adequate growth rate) but the two "asks" are cumulative. We need extra tax revenue for one and additional extra tax revenue for the other.

Many may accept the argument so far, but would argue that any increase in taxation will reduce economic growth and instead government expenditure should be cut. However, generally this proposition is asserted, not argued, and no convincing evidence has been proffered to support it. It is true that there seems to be a widespread feeling in the community that taxes should not be increased, and, of course, there is constant self-interested comment along these lines in the media by some of those who are very well off. But Australia is a very lightly taxed country. We could increase our tax revenue as a proportion of GDP by 30 per cent (about a third) and still be only taxed at around the same level as Canada and well below countries like France, Germany and the Netherlands, let alone the Scandinavian economies. Yet an increase of this size is more than is required.

Moreover, by international standards, just as Australia is a low tax country it is a low government expenditure country. Among the OECD countries, for which we have reliable statistics, only in Japan is government expenditure a smaller proportion of GDP. There may be some small pockets of fat in government spending where cuts could be made without widespread cost to our society and electoral backlash. But only very minor expenditure cuts are possible without doing great damage to the fabric of our society.

To sum up this section: if we believe that the right to employment is very important we have to be advocates of higher taxation, at least in the transition period while we move from where we are now to full employment. The biggest single issue arising out of human rights in the welfare state is how much are we prepared to increase taxation in order to achieve full employment.

Safety net issues

It is convenient to start with a safety net issue that relates directly to full employment, namely to what extent the government should supplement incomes of those, perhaps full-time, workers whose wages are not sufficient to support themselves and their families in "frugal comfort". We have gone a little way towards this in Australia with family assistance payments. There are both equity and economic growth issues involved. The equity question is well summed up in the following quotation from Julia Perry:

extending eligibility for income support to those in paid work is important in terms of equity and incentives to take up paid work, but may require a strong mechanism to maintain wage levels to ensure that employers do not cost-shift to taxpayers.[14]

The problem with what may be in effect substantial wage subsidies is not just the employers can "cost-shift" to tax payers, but also that subsidising the wages of low income workers not only subsidises the workers it also subsidises their employers. Firms that pay very low wages are often inefficient firms or firms that use largely obsolete capital equipment. Subsidies that keep such firms in business will reduce the rate of economic growth.

Perhaps the most discussed safety net issue is the question of targeted versus universal social welfare systems. The arguments for and against each have been well surveyed in an article by Mitchell, Harding and Gruen.[15] A very brief summary will be given here.

Australia traditionally has had a social welfare system that is both targeted on the basis of need (ie, income and means tested) and targeted to categories of people (ie, to have the right to cash social welfare payments you have to belong to this or that category). The major argument for targeting is the problem of economic and budget constraints. (These are not two words for the same thing, as budget constraints may be political as well as economic) Indeed some in favour of targeting argue that universal systems will not be viable in the long run. Other arguments for targeting include the fact that transfers have transaction costs, giving money to people and then getting it back through the tax system does involve real costs. Also the characteristics of those targeted on a needs basis may reveal information that is very helpful in designing programs to combat the causes of poverty.

The major arguments against targeting revolve around what Mitchell et al call "intrusion, stigma and social cohesion". Targeting involves inquiring into people's lives, often even their very intimate lives such as who is sleeping with whom. Targeting may stigmatise people; in Australia this seems often to be the case with unemployment benefits but not with old age pensions. On the other hand, universal systems are claimed to promote social cohesion and widespread support for the welfare system making it more generous and less vulnerable to cost-cutting politicians. Other universalists' arguments include the problem of high effective marginal tax rates and poverty traps. Since benefits are withdrawn as income rises in an income range where income is subject to tax, the effective marginal tax rate can even be over 100 per cent in Australia, and rates of 70 or 80 per cent are common. There is also the problem of take up in the targeted approach. Some people in need and eligible for benefits do not claim them.

While all the above arguments for and against targeting are important, the first one seems to be the winning one. A move towards anything like a universal system would require a very large increase in taxation. Increasing taxation as part of a program to reduce unemployment has a higher priority. It may be feasible, in economic terms, for taxation to be at a level that would finance a universal social security system and adequate labour market programs as well as reducing consumption per head among the employed to allow the unemployed to become employed and increase their consumption without creating balance of payments problems. Nevertheless the required increase in taxation is very large and politically out of the question.

If we accept that the present targeted system will continue in Australia, another major issue is whether entitlements should be on an individual basis or a family basis. Again Julia Perry (1995) has summed up well what is involved.

Individual entitlement for members of couples would be fairer to individuals but does not redistribute between couples on the basis of need (its desirability depends on whether it is valid to assume that couples share income and whether it is appropriate to expect them to do so).[16]

To that must be added the fact that it is not just the position of a low income spouse, which is of concern, but also the position of dependent young adults. Should the children of millionaires be entitled to Austudy when they attend university?

A final targeting issue is whether targeting should be by categories of people or just by low income and assets. The arguments for and against distinguishing between the deserving and undeserving poor can be quickly stated. On the other hand there is the argument that paying benefits to those whom the majority of taxpayers feel are undeserving destroys respect and support for the welfare system as a whole. On the other hand, there is the difficulty of distinguishing between the deserving and the undeserving.

Finally, two brief comments on other issues. The first arises with the provision of services in kind, for example through Medicare or relatively free education. Should, as some argue, all support be given in the form of untied cash payments. The argument in favour of doing this is simple. The recipient knows far better than any legislature or government department what are his or her needs and wants. Giving support in cash enables the recipient to use the support where it will do the most to reduce the perceived deficiencies in living standards. This is often called the consumer sovereignty argument. The argument against is equally simple and more convincing to most people. Although giving all support in the form of cash payments may enable recipients to tailor their expenditure patterns to meet their individual needs and desires, we should also pay heed to donor (or taxpayers) sovereignty just as much as to consumer sovereignty. For example, if tax payers are happy to pay extra taxes to house the poor but not to give them more cash incomes, why should this desire not to be respected?

If it is accepted that it is valid to earmark support for particular purposes is it better to give vouchers, rather than support in kind, to maximise the choice of the recipient within the type of service in question? In most cases the answer is clearly no, largely because of the expensive transaction costs of a voucher schemes if they are truly providing support for a particular form of consumption and not disguised general cash grants. For example the Experimental Housing Allowance Program in the US had program administration costs of 23 per cent.[17]

Conclusion

More space has been devoted to full employment issues than to safety net issues and more often answers have been given to the questions raised under the first category of issues than under the second. This is entirely appropriate, just because full employment was the cornerstone of the Australian welfare state. The welfare state in Australia has fallen on hard times but not because of failures on the part of government to maintain the safety net efficiently and compassionately. No doubt these sorts of failures have occurred from time-to-time. But the basic reason for the decline of the welfare state in Australia is market failure, the failure of markets to produce anything like full employment.

[1] School of Economics, University of New South Wales.

[2] Friedman M Capitalism and Freedom, (University of Chicago Press, Chicago, 1962) p 162.

[3] Incidentally, a third contender, the communitarian state, is also gaining support. See eg, Daly H E and Cobb Jr J B For the Common Good, 2nd ed, (Beacon Press, Boston 1994).

[4] For a different type of definition, see Saunders P Welfare and Inequality: National and International Perspectives on the Australian Welfare State, (Cambridge University Press, Melbourne, 1994) p 1.

[5] See eg, Jamieson House Employment Group (1996), "Redistributing Work: Solutions to the Paradox of Overwork and Underemployment in Australia", Discussion Paper No 7, Australia Institute, Canberra.

[6] Given that already 20 per cent of those working overtime do so without extra pay one immediate issue is whether it would in many cases translate into a pay cut with the same amount of work done at a lower salary.

[7] There is a related issue, the question of whether people have the right to employment at hours that suit them. Consider for example the case in England in which a married female train driver successfully appealed against her dismissal which was because she refused to work night shifts.

[8] The Bill was introduced into the Queensland Parliament in 1890. See Plowman D (1995), "Protecting the Low Income Earner: Minimum Wage Determination in Australia", Economic and Labour Relations Review, 6(2), p. 253.

[9] It should be remembered that the Federal Government and all the Liberal/National Party State Governments argued for an increase of $8 in the 1996 "Living Wage" case.

10. Empirical studies show that unskilled workers are substitutes for capital equipment whereas skilled workers are complements. See Hamermesh D S Labour Demand (Princeton University Press, Princeton,1993) p 135.

[11] Nickell S and Bell B (1996) "Changes in the Distribution of Wages and Unemployment in OECD Countries" American Economic Review; 86(2), pp 302-08.

[12] Card D Kramarz F and Lemieux T (1996) "Changes in the Relative Structure of Wages and Employment: A Comparison of the United States, Canada, and France", National Bureau of Economic Research.

[13] Mishra R (1995) "Social Policy and the Challenges of Globalisation" in Saunders P and Shaver S (eds) "Social Policy and the Challenges of Social Change: Proceedings on the National Social Policy Conference Sydney, 5-7 July" Social Policy Research Centre, Reports and Proceedings, No. 122.

[14] Perry J "Managing the Distribution of Living Standards Over the Life Course Better" in Proceedings of the Future of Work and Access to Incomes Seminar, Commission for the Future of Work (ACOSS, Sydney, 1995) p 81.

[15] Mitchell D Harding A and Gruen F, 1994, "Targeting Welfare", Economic Record, September.

[16] Op cit, p 81.

[17] Industry Commission Public Housing Volume 1, Report No 34 (Canberra, Australian Government Publishing Service, 1993) p 62.