The problem with youth is cost and incentive

At 6.3%, Australia’s unemployment rate is at its highest level in ten years. While our unemployment figures compare well to the rest of the OECD, Australia was unlike its European counterparts in that it was not hit hard by the global financial crisis. It means that rather than returning to the strong growth and record low unemployment experienced in 2008, our economy has flat-lined.

These points were highlighted in Greg Jericho’s recent ABC article bemoaning a significant fall in youth employment since 2008. Jericho points to a near 10% fall in the employment-to-population ratio among 15 – 24 year-olds since 2008 to illustrate the souring employment prospects of our youth. By contrast, the employment-to-participation ratio among 24 – 54 year-olds dropped only 1% in the same period.

What Jericho fails to point out is that changes to the welfare system enacted by the Rudd government have decreased incentives for young workers to find emplloyment. At the same time, changes to labour market settings have reduced the demand for young, low-skilled labour.

Last year, former CIS Research Fellow Andrew Baker pointed to the rise of non-job seekers on unemployment benefits, highlighting that nearly half of those on unemployment benefits did not necessarily need to be looking for work to receive benefits.

Following the GFC, the government altered the eligibility requirements for those on unemployment benefits such that recipients could stay on benefits without being required to look for work, so long as they enrolled in some sort of education and training. Newstart recipients can enter into work experience after 12 months and hold onto their benefits, while early school leavers who later complete year 12 (or equivalent) can continue receiving income support.

These changes made it easier for the unemployed to continue drawing welfare benefits without actively seeking a job. At the same time, the Fair Work Act increased the cost for businesses in hiring young workers.

The award modernisation process simplified and amalgamated 3,715 state and federal awards to 122 modern awards. That made for a simpler award system, but in the process, the minimum wages and penalty rates were factored up towards the highest common denominator rather than the lowest.

This has meant that along with the yearly minimum wage hikes, there have been additional hikes to award wages as the new modern awards are phased in.

If you increase the cost of low-skilled work, you reduce the demand for that work. Young people are now more expensive to employ and at the same time are finding it easier to remain eligible for welfare benefits without looking for work. Does it come as a surprise that young workers are opting out of the labour market?

Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies.