Cost of job loss: Wage scarring

Cross posted from Substack.

Previously we’ve talked about the cost of job loss in terms of revealed consumption responses – i.e. how do individuals cut their spending following job loss. This is a useful concept, and there is going to be more to say on this in the next year.

But a more basic point people may ask with respect to the cost of job loss – how much lower is someone’s lifetime income if they end up getting shoved out of their job!

Let’s chat about that while investigating some initial work my colleagues and I have undertaken at e61. For those who know things already, or don’t want to read, here is the picture you are after:

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How much does benefit abatement influence labour supply?

A common refrain when talking about unemployment benefits is the Iron Triangle of Welfare.

If we are only going to spend a fixed amount on welfare payments, then there is a trade-off between the size of the payment and the incentive to work – where the incentive to work is captured by how much of their new found labour earnings they get to keep. It is even a common point that I make when I’m off lecturing on the topic.

But what if I told you that empirical evidence suggests unemployment benefit recipients who are working don’t appear very responsive to what are essentially huge (50 percentage point) increases in their tax rate?

Well that is indeed what I find here, as discussed by the AFR here.

What does this mean? A number of things so lets have a chat.

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Was the Aussie 2023/24 Budget inflationary?

Last night was the Australian 2023/24 Budget. Like all Budgets it existed and was filled with politics – but I was surprised to find my twitter filled this morning with people calling it highly inflationary, and others saying it would reduce inflation.

The arguments appear to be:

  • Government spending more, inflation!
  • Government surplus and energy subsidies, disinflation!

I’m a bit slow, so I wanted to think things through a bit step-by-step to figure out where people were coming from.

If you’re keen to come on that journey, then let’s go!

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Should we offer higher benefits to those over 55?

In the last blog post I noted that there were rumors of a higher benefit rate for those over 55. Since then we’ve been thrown into an information vacuum in Australia, as noted here by David Plunket.

After some detailed discussion in the e61 offices my boss (Gianni La Cava) snuck off and pulled together a micronote indicating why this policy might not be the right way to go – namely, the average person on the benefit over the age of 55 is much less likely to be in financial stress than a young Australian who is reliant on the benefit. The note isn’t saying that a higher rate isn’t beneficial – it is saying that we should be consistent when applying these arguments to younger Australians! Update: ABC coverage here.

I suggest you go read the note. As I like to pretend to add value I’m going to take a wee bit of a step back to try to contextualise why we are chatting about the payment in this post 😉

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Assessing benefit eligibility and adequacy

Last week we’d been chatting about the unemployment benefit in Australia and the reasons why some unemployed people don’t get it, while some people who aren’t unemployed do.

Everything boiled down to eligibility criteria – criteria that are intended to exclude those that aren’t deemed to need it.

After realising this, my colleagues and I at e61 were interested in using available data to provide an assessment of the whether these eligibility criteria were effective at this stated aim. So here is the note, and here is the appendix. We also used a similar method to evaluate outcomes for those who did receive the payment.

The key result – judging by consumption responses, there are a group of single Australian’s (likely older and without kids) who appear to go through greater hardship following job loss.

[Update: After setting this post to go up I’ve been sent that the government is going to increase payments for those over 55 – I’m guessing for single individuals. Not the biggest fan of highly bifucated rates, but will wait for the proposal and discuss – and would note that outside of the consumption responses we yarn about the international labour supply evidence on this is quite mixed and hopefully we can comment a bit on Australia in a few months 😉 ]

Before jumping to the post I want to note a couple of things:

  • You might believe that irrespective of means this should be a payment for job loss, or a provided minimum income – in this case you’ll still want to scrap criteria no matter what this research says. And that is legitimate.
  • You might weigh the costs from individuals missing out much more highly than the provision of a payment to someone who doesn’t need it – in this case you’ll want to dig in further to identify very narrow groups of individuals who may be excluded. This is also legitimate, but the data sources aren’t quite ready to go that deep … yet!

Given this, lets chat.

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Does JobSeeker go to JobSeekers?

After yesterday’s pitch and related tweet thread, I was keen to dig a bit more into elements of the first note from this release – Income Support Gaps: When JobSeekers don’t seek jobs. The research note can be found here, and a bundle of supplementary material is here.

What is “fair” is complicated and economists have a habit of making it boring (i.e. me here). This leads economists to run away from discussing issues that relate to fairness, towards something where we can make more solid conclusions. However, fairness matters so we should be able to communicate the trade-offs that exist in these types of policy issues.

In this way economists can still add value without telling people what to do – and this is by clearly articulating what a policy is doing and describing the related trade-offs. This first note is simply about defining who receives the JobSeeker Payment (read unemployment benefit) in Australia and who doesn’t. So let’s chat about it.

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