Look I’m from New Zealand – so when everyone around me started talking about ATARs I just smiled and nodded.

In fact I probably couldn’t talk to most people in New Zealand about education. I’m from the “pre-NCEA” era – where a single end of year exam for five courses, scaled to fit a within-course normal distribution, determined most of anything. As a result, these more complex design criteria are well outside of my lived experience.

But it turns out ATARs are a very important part of an individuals assessment in Australia – providing a measure of how well a student performed relative to their peers, and determining their university admission.

This raises a question – how is a good performance on your ATARs associated with future earnings? Luckily for us Elyse Dwyer and Silvia Griselda at e61 decided to find out.

tl;dr a higher ATAR is associated with higher average earnings – but there is significant variability in income by ATAR. As a result, even though we’d expect the type of person who receives a higher ATAR to end up with higher earnings at 30, there is a lot more going on under the hood.

ATARs and earnings

The earning profiles of individuals between 19 and 33 are shown below, with each ATAR bucket also conditional on the individual going to university (well except the No Uni one). Lets chat about them

As we can see, the earnings of those who do not go to university is higher between the ages of 19 and 23. Anyone else who went to university when most of their high school mates went to work can attest to this truth – at this stage people love to go on about how they are not earning cash while your still at school.

Nonetheless, continuing education is a form of investment – so you should expect a payoff in future earnings. And that is what you see, all the other lines move above the no university line, showing that the median individual who went to university did end up earning more than the median individual that didn’t – irrespective of their ATAR.

Then it comes time to compare all the other lines. As we can see, the median individual with a higher ATAR earns more as well. And all individuals that used their ATAR for university entry earn more than those who entered through alternative pathways. So what does this tell us?

1. Individuals with higher ATARs may have characteristics that lead to higher income – harder work ethos, greater capability, better family and friend networks.
2. Higher ATARs may allow individuals to select into higher value educational opportunities.
3. There may be a direct return from having a high ATAR on your CV above and beyond everything else.

The note digs into a few more mechanisms, the main thing I want to note is that no-one is saying the higher ATAR itself causes higher earnings – just that there is an association worth further investigation.

And figure 2 shows that these things get more complex – there is significant dispersion in the earnings of individuals at 30 on the basis of their ATAR.

For a specific example, someone in the bottom 25% of earnings for the top ATAR bucket (the 25th percentile) earns less than someone in the 25% of earnings who didn’t go to university. And they earn about the same as the median “below 70” ATAR individual who did go to university!

I remember that I had friends from high school who went straight into work – and now own and run the business they were working at. I had friends who were clued on whose grades ended up a bit below mine, who went to university and earn significantly more than I ever will.

Unlike how high schools make us feel, that final grade doesn’t determine our full life path and opportunities – it influences it, but even if high school went poorly there are opportunities out there.

Not just that – never confuse a grade or your income with your self worth. You matter just as much as someone everyone calls smart, or someone who seems to have limitless resources – and the person who you view as unsuccessful matters just as much as well. Your power comes from being able to make your own choices, and own the outcomes – so make these choices with kindness.

ATARs and the SAT debate

Can this information about ATARs tell us anything about the standardised testing debate in the US at the moment? Probably not, but its worth thinking about.

The ATAR takes an average of course performance – like a GPA does. However, it scales the scores based on measures of how difficult that subject is – which is more similar to the weighting used for an SAT.

Concerns about implicit discrimination and the interuptions from COVID led to a large number of US univeristies dropping SAT requirements. However, the NY Times has come out stating that – relative to other metrics universities can use – standardised testing does appear discriminatory. Specifically, the advantage of advantaged students is starker when comparing GPAs to SATs.

To understand this issue we’d want to think through two issues:

1. Is it important: What is the return associated with gaining university entrance.
2. What drives differential selection by group: What is the reason why individuals from certain backgrounds are not being selected into study – and does that choice influence the benefit or opportunity cost of such study.

To understand the importance of univeristy entrance we’d want some idea of what would have happened to people who gained entrance if they didn’t – or people who didn’t gain entrance if they did.

To understand selection we would want to look into not just university selection criteria, but the nature of applications and the decision to study. If individuals from disadvantaged backgrounds are not studying because of other family responsibilities, then the policy choice of “removing SATs” isn’t really dealing with the lack of opportunity faced by that person – it is instead a lack of material resources to be able to make worthwhile investments in their human capital.

I think the e61 note informs this by showing just how heterogeneous these returns can be – hinting that such investments in the self may be very uncertain. SAT bans don’t do anything about that, and if they do restrict access to scholarships (say due to a shift to sport and GPA based support) they may make access worse for truly disadvantaged individuals.

So I guess the work did provide some insights to this debate after all!

COVID was a pretty big life shock for all of us – with uncertainty about the virus, and the magnitude of government interventions associated with it, leading people to change their way of doing things across a number of dimensions of their life.

One of the clearest changes was the decision of where to live. In a fascinating note from e61’s Aaron Wong from mid-2023 he shows people did change their behaviour regarding renting property following COVID – and that this shows up clearly in the rental premium paid for living in cities between 2020 and 2022.

The decision on where to live: Rental premiums

The decision about where to live depends on a number of factors. Where are the jobs? Where is my job? Where is a good school? How good is public transport? Am I near a nice park? Where can I get a coffee? How can I see my friends on the weekend?

The varying amenities associated with a location mean that different individuals sort into very different locations. However, the bundle of amenities available near city centres tends to be of higher value than those that are a long way away for the average person. This is a logical result given that, for most, it will tend to be closer to work, and provides more opportunities to hang out with friends and go shopping.

This is what Aaron finds – but something changed in mid-2020!

After COVID kicked off the discount associated with living further away from the a capital city/centre of a city dropped.

So why would the relative value of living in the city decline? This could come from the value of being distant rising (i.e. if I’m away from everyone I’m less likely to get COVID!) or the value of being central falling (i.e. I’m stuck in my house so I can’t make use of restaurants anymore).

Examples of this are:

1. Working from home (travel time): With working from home required, the benefit of lower travel time is gone – removing a major benefit of central living.
2. Working from home (house size): Central city properties tend to be smaller than properties available further away – and it is nice to have an extra room when working from home. [Note: The differences shown above control for property characteristics like the number of rooms]
3. Working from home (internet quality): Internet quality is very variable in Australia – but is generally a lot better in cities than in regional areas. This will have increased the relative value of living centrally.
4. Same stuff as above – but about enjoying your leisure time!
5. Fear of COVID and population density: The centre of the city has more people in it – more people, more COVID. Plus one to living regionally.
6. Freedom during lockdowns: Lockdowns tended to be more severe in central city areas than in regional areas. Another relative benefit in the regions.
7. Availability of groceries: COVID was a period where supermarket deliveries picked up. In central cities this was very available – but was oversubscribed meaning that you would spend time lined up at supermarkets. In regional areas it was variable. It is unclear if the relative value changed on this margin.

Is this a permanent change?

Intuitively, the premium is likely to have started returning over 2023/24 as COVID has moved into the past. But if there is a step-change in working from home the city premium may be permanently gone.

Is there anything in the analysis that allows us to work out what is going on? Well this is where the appendix has our back.

House prices reflect the expected rental/housing service yield associated with a property over time. If the change in the rental premium was expected to be permanent then we would expect to see relative house prices also change.

But they haven’t really (apart from a small tick up for fairly distant properties – but not to the same degree as the rent change).

This suggests that the current reduction in the regional rent discount is expected to be a temporary phenomenon – and we should see the gap between city and regional rents reopen in the coming years.

Does this mean that households don’t expect a long-term “Nike Swosh” in working from home (contrary to Nicholas Bloom’s expectations)? Maybe, but that is a topic for another time.

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:

What is wage scarring?

Imagine you are sitting there doing your thing, working for your generic employer, doing your generic job, thinking about the great things you’ll do on the weekend.

Suddenly, the government says that everyone who has a tax file number that ends in three has to leave their job and cannot be reemployed at the same employer.

That would sort of suck – but it would be a purely exogenous job loss. After that job loss you would go around applying for jobs, trying to understand what might suit your skills, figuring out if you should move country or study etc etc.

Eventually you would find a job, and over time you would progress in that job and earn an income.

Wage scarring reflects the difference in wage earnings between this job, and what you would have earned if you had not lost that initial job (the counterfactual).

We can work out this counterfactual you by considering what happened to individuals who didn’t have a tax file number that ended in 3, but otherwise look very similar. If you would have earned income in a similar way to them in the absense of job loss then the difference between their earnings and your earnings is as estimate of the wage scar you experienced.

Who cares?

It would be easy to say “this is an important measure of the harm from job loss”, but this is actually a question that requires a bit more.

By just framing this as a measure of labour market costs from job loss, it is easy to just view this as a realisation of labour market risk.

If this is the case, then these job losses are just a product of the world changing and a product of the risk we have in life – in that case any arguments about this relate back to how we feel about self vs social insurance for labour market risk.

However, lets think about some of the reasons why income may have declined for the person:

1. Time out of work see’s the workers skills become less valuable (loss in human capital).
2. Technological change has reduced the value of individuals skills (loss in human capital).
3. The firm was a high productivity/high pay firm (firm value/rent).
4. The match between the worker and the firm was better than a new match (match value).
5. The worker was very knowledgeable about using systems at that firm to their best use (match specific capital).

And what about the firm?

1. The value of the worker had declined, but not the tasks involved in the job (reduced match value).
2. The value of the tasks declined (reduced job value).
3. External factors (i.e. credit constraints) forced the firm to end a productive match.

Each of these combinations of reasons why the firm ended the job and reasons why the worker ended up with lower income has different interpretations. Some are just transfers from the worker to other people, while others show loss of surplus that imply this is a net loss in income over everyone.

If we want to fully think through the consequences of shocks that lead to job loss we have a lot of other things to think about. However, understanding the income loss associated with an exogenous job loss helps us start to tease out this problem – and also understand the cost for people who face job loss.

Why do you keep saying exogenous

Fair.

Job matches can end for a whole bunch of reasons. There can be self-selection (i.e. a job-to-job transition or “voluntary” unemployment where the worker quits) or there can be firm selection (being fired).

Self-selection isn’t really our focus, as it is likely people are leaving jobs to get a better job!

Firm-selection also has an issue – as the firm is likely to remove their “least productive” or “worst matched” workers. As a result, they select a type of worker that they were not going to give a pay rise – and so comparing them to other workers will overstate the income loss from this event.

We are trying to isolate the effect due to job loss – not due to selection. As a result, we want to make a case why the job losses we’re looking at do not involve much self-selection or firm selection. Now it is unlikely that we can find a perfect experiment here, but we just need to be clear about this!

What does prior evidence say?

International studies

I’ve already written a lot of words, so I’m going to share a table from Bertheau et al. (2023).

So the five year scars estimated tend to be between 6% and 36%.

What about New Zealand – Hyslop and Townsend (2017) found scars of 13-22%.

The Australian case

There have been a few recent studies in Australia, lets list them out:

1. Lancaster (2021): Using survey data there was no additional wage scar found after 5 years – involved looking at all unemployment.
2. Ballantyne and Coates (2022): Using survey data a scar of around 10% was found after 5 years – again looking at all unemployment.
3. Andrews et al. (2023): A recent e61 piece using administrative data found a 29% scar – focuses on those who are made redundant in ATO data.

Well, what do you all do?

Selection and triggering events

So looking at our piece – specifically the technical appendix – we are looking at a very specific event, influencing a very specific set of firms and workers.

• The Global Financial Crisis (GFC) year.
• Firms who have let go over 30% of their employees for a persistent period of time (mass layoff).
• Workers that leave a mass layoff firm during the GFC.
• Workers who are in their sixth year of work at the same firm (long tenure).

The comparison is then between long-tenure workers who left a mass layoff firm vs long-tenure workers who did not experience this.

What does this have to do with selection? Well a mass layoff helps to mitigate firm selection – as they have many of their workers at the same time.

However, who is to say that these aren’t still the least productive? To help with that we look at long-tenure workers, who have formed a relationship with the firm and where the worker and the firm really know each other.

Results

For most of the results I’d suggest reading the note – it is only 2 pages long

But lets list some highlights here.

What is our five-year scar? 16% of earnings – so the individuals who lost their job in a mass-layoff have earnings 16% lower than expected.

How much is this just about people having trouble getting and maintaining work, as opposed to employed individuals earning less?

Turns out a lot. Those who are re-employed after 1 year (who stay re-employed) have no scar after 5 years. Those re-employed within 5 years have 5% scarring.

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.

Financial disincentives to work

When it comes to the Iron Triangle the “incentive to work” is about these fellas:

Note: Quick heads up that the above numbers are a bit buggy and based on unfinished code – and based on “old” payment rates in this alpha version of a tool here. But the pic is useful for talking concepts.

How do I read these without going through this excessively long blog post? The effective marginal tax rate (EMTR) noted here tells us that, if someone worked for an extra hour they’d give back this percentage of their hourly earnings to government – through taxes and reductions in their benefit.

The effective average tax rate (EATR) tells us that, if someone decided to work at a given hours level, they would give that percentage of their gross earnings back to government.

That is where this line comes from:

Currently, a single Australian working part time on the minimum wage at a department store will pay a higher effective tax rate (including both tax and the loss of benefit income) than someone earning in the low six figures at a large investment bank.

This is due to benefit abatement – in order to “keep the scheme cheap” we essentially ramp up the tax rate faced by those who are on the benefit.

Now that feels sort of BS, but one thing we need to remember is that these beneficiaries are still net recipients of financial support (or in other words they receive more in benefits than they pay in taxes).

So if our view was ONLY that the benefit should provide a minimum standard for people to live on, and we should aim to make this scheme as cheap as possible, we may design a scheme that has very high abatement – and therefore very high EMTRs and EATRs.

The trade-off given this poverty allieviation target is then behavioural responses – do people adjust how much they work because of this sharp abatement. And this is the area we want to build a bit of understanding about.

EMTRs and the intensive margin

Often our focus is on very high EMTRs and how that may lead people to restrict how much they work to stay on the benefit, or maximise government support.

This is what we term the intensive margin response – given you are working some hours, what is your incentive to work another one?

Based on fairly standard techniques we can look at bunching in taxable income data to get an idea of how much individuals manipulate their earnings to avoid paying a higher marginal tax rate. We can see that nice and clearly with our buddies “high income self-employed Aussies” right here:

Look at that spike in response to an 8 percentage point increase in the tax rate! Now such a spike can be the result of a bunch of things, actively adjusting who receives the earnings, when you receive the earnings, rounding bias in reporting an income amount, and a decision to change behaviour (such as work less) in order to earn that amount.

Self-employed people have the most ability to do this, but you do see these types of spikes occur all across the income distribution – including for low income earners at their tax brackets.

So what about benefit recipients when faced with the abatement rate going up by 50 percentage points – that is a big tax change, so it should be pretty wild right?

Na.

On this basis it doesn’t look like there is much of an “intensive margin” response by those on benefits. Similar non-responses show up across a variety of periods and also at the second threshold – while responses are quite typical at tax thresholds in Australia.

So tapering is all good right – as long as we are morally comfortable with these high tax rates on this group (which will still be negative tax rates when we think about it in terms of “redistribution”) no behaviour no problems?

Other margins: Mutual obligations and participation

Participation

Not so fast. Lets start with the elephant in the room – what about the 75-80% of JobSeekers who aren’t working? There is the reason the micro note starts with a clear definition of which margin we are looking at – because the response of these individuals also matters, and isn’t included.

Pushing up the income free zone to around $300 would provide a lump sum to everyone who is on the benefit and earning above that amount of $75. It would also pull a few higher low income earners onto the payment. But most importantly, it would reduce the EATR for a minimum wage worker who want to work part time in this range by around 8%.

The potential to bring in an extra $75 a fortnight if you can find a job that pays anywhere between $300 and $1,000 a fortnight could have implications for people’s willingness to participate – and it could be that any labour supply action you see occurs there. This is an important reflection as noted here:

A ‘large’ extensive elasticity at low earnings can ‘turn around’ the impact of declining social weights implying a higher transfer to low earning workers than those out of work, in turn providing an argument for lower tax rates at low earnings and a role for earned income tax credits.

Blundell, Bozio, Laroque (2011)

Information and barriers

For those working there is a separate approach that captures that there may be informational frictions, or other frictions that lead to bunching “shifting the counterfactual”. Chetty etal 2013 discusses this in great detail – strong recommend. There are two ways this can chip in:

• The change in bunching may occur at “salient balances”,
• The broad density associated with the distribution may move – rather than spike.

For a long time I believed the result had to be one of those two – with the difficult thing defining the “counterfactual group” that could be used to construct it. Lets just say that this “extensive-intensive” margin just didn’t end up changing anything – but is something I’m passionate to keep testing results against it.

Regulatory barriers – mutual obligations

However, there is an important reason why the limited intensive margin response may show up in any extensive margin work – the heavy importance of mutual obligations.

The micro note focuses pretty heavily on mutual obligations as a concern.

The Australian benefit system has surprised me with the sheer amount of conditions individuals and supposed to meet to receive payment. Specifically, significant job search requirements – and the threat of payment removal that is credible – make undertaking part time work to avoid these obligations attractive in of themselves. Part-time work requirements to remove mutual obligations vary, and short amounts of work can be mixed with other requirements in order to maintain benefit eligibility.

If this is the case, then individuals will simply be taking up the job offers available – the lack of bunching behaviour makes sense. However, if it is mutual obligations driving this “non-response” on the intensive margin, then it should show up on the extensive margin as well – given the risk of losing your benefit if you don’t take up marginal work, those who are particularly responsive to financial incentives may have already jumped into work to insure themselves against this loss.

The fact that benefit thresholds don’t show bunching while the tax thresholds do – even at the low end – does indicate that is a systematic difference in the choices made. Although it is common for people to make comments about rationality and attentiveness I call this out in the note – it is more plausible this is about the choice set available to people and the genuine ETRs they face when making these choices.

Mutual obligations are a big part of this. And their existence will change how responsive individuals will be to a change in headline financial incentive measures.

So the potential for people to “move into” work from out of work remains a key margin to understand – but the note is indicating that the stark non-bunching in combination with the mutual obligations system suggests that pure financial incentives might not be enough, given the importance of regulation and mutual obligations for low income earners.

So this gives two key research directions for these labour supply responses – extensive margin responses, and the efficacy of mutual obligations. Let me get back to you on that

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

Ok, so what’s going on

There is talk of increasing the payment someone over 55 gets from the unemployment benefit, but keeping the payment the same for others. Why?

I need lists to make sense of things. So here goes! When thinking about whether payment rates should differ for individuals on the basis of their age there are three key considerations:

• Does their age tell us something about the hardship an individual may face when faced with job loss.
• Does their age tell us something about the labour supply response of the individual to a higher benefit payment.
• Does their age tell us something about our personal values about how much the individual should be self-reliant vs receive social support.

Hardship

The prior research (mentioned here and here) found some indications that it was older, single, JobSeekers who had to cut spending most sharply on job loss (Appendix H – note that it was for 36-55, not 55+). Older individuals have fewer working years to earn, and single older individuals may also have more limited social and family networks – in that regard, an older individual without savings may be in greater financial hardship which would explain that result.

One way to test this is to find data that actually tells us about financial hardship. That is where Gianni was able to make good use of HILDA – and he found that, although these individuals were financially stressed, it did not compare to the financial stress of younger JobSeeker recipients.

So “hardship on average” is not the argument here, as otherwise we’d be looking at increasing the youth allowance.

If the rationale is instead “hardship due to sickness and disability”, which is likely to increase with age, then the government should consider reversing some of the changes to access to the disability support pension and the scrapping of the sickness benefit, instead of introducing age based discrimination.

Labour supply

Hey, economists are generally ok with discrimination if they think it changes labour supply – so maybe that is the answer.

To be less facetious there are the common anecdotes that young people take the benefit and play Xbox instead of getting a job.  However, international research tends to find that it is older people who are more likely to avoid working if they receive a higher benefit – a summary of the mixed evidence here https://www.aeaweb.org/articles?id=10.1257/aer.20111559.

If older people were more likely to retire or leave the labour force this would suggest that benefits should be lower (at least as a proportion of income) as people age – not higher.

Looking at the Survey of Income and Housing we can see that older benefit recipients are more likely to have left the labour force – with only 23% of those aged over 55 looking for work, compared to 40% of younger recipients (looking from 2007/08 to 2019/20).

Values

The final consideration is the likely driver of this policy.  In the same way we offer people a higher payment when they reach the retirement age, or when they have a disability that prevents work, there is a social belief that the payment rate received by people with some form of lower work capacity should be higher.  As mutual obligations are already reduced when an individual turns 55, a higher payment for this group is consistent.

But why are we treating two people who are the same in every way, except their age, differently? Why does the 55 year old who only has partial capacity to work get a higher payment, and an easier ride, than the 35 year old in the same circumstances.

Age is being used as a tag for need – but why not base the payment on the need itself?

Gianni’s suggestion that policy should instead look to rules around the disability support pension, and opening up access to superannuation funds early for older workers, captures this mix. If someone finds themselves in a situation where they are unable to work lets support them consistently irrespective of age – and if someone just happens to be over 55 and we want them to feel comfortable retiring, give them the option of accessing their own money.

At present, we’ve got a benefit solution that solves none of the identified problems, and makes younger Australians feel discriminated against – that just doesn’t seem right.

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.

Eligibility

Given eligibility criteria are largely targeted towards means, it feels relatively simple to just state whether they seem fair or not! There are income and asset tests, and mutual obligation requirements that involve job search components. In this case we’d ask if the income and assets involved in the tests feel like they are at the right level, and whether the cost of job search is appropriate.

This is an important way of looking at the problem, but there is one issue – we can’t observe many of the relative margins where individuals can call on resources to understand how binding this constraint is.

We may observe a low income individual with few assets, but they may have a wealthy family member that helps them through. Or we may observe someone with substantial assets who just cannot access them and is forced into hardship based on insufficient liquidity.

We want to look at a choice that suggests the individual is having to make costly decisions due to the situation they find themselves in – and the choice we can use is their decision about how much they consume.

For a temporary income shock we would expect individuals to try to largely maintain consumption – yes people won’t have to pay for work expenses, and they may be a bit uncertain about future income and so hesitant to spend, but this is the time when people will try to use any access to funds they have to avoid an unnecessarily sharp drop in their spending. We would term this insurance against the income shock.

As JobSeeker is focused on such temporary shocks (where other payments are intended to be for longer term shocks) we can simply ask if people are having to sharply cut consumption when they lose their job. Specifically for eligibility, we can ask if people who do not receive the payment appear to cut spending sharply – as this would imply we are excluding people from the payment, who are not insured against the shock.

How does this look?

At face value there is a drop, so maybe this group isn’t fully insured. But it is hard to tell without a full description of what their optimal behaviour would look like.

The key result instead comes from looking at subgroups – a 3% decline for couples and a 14% decline for single people, when faced with a similar income shock. It is for this reason that we state there appears to be a group of single people who are forced to adjust sharply to job loss, and hence appear to lack the support networks required to maintain consumption.

Adequacy

Given the above way of thinking about the world, we also saw some potential to consider the adequacy of the payment. Static poverty lines are the typical way for looking at adequacy (e.g. this ACOSS-UNSW report) – often augmented with analysis of the assets individuals have on hand.

However, the same choice argument applied above can also be used to think about the consumption choices of those who receive the payment. Right so how’s this look.

So the people receiving the payment cut spending as well – same deal, couples drop 3%, singles 16%. In this way, the payment is inadequate to prevent a drop in spending – and so inadequate purely as an insurance mechanism.

Now it doesn’t follow that the payment rate should rise per se – instead it tells us that there are a group of single individuals who do have to cut their consumption sharply on job loss, even when they receive the benefit payment. Depending on how we view this there are a variety of policies that may be appropriate – a higher payment, an income contingent loan top-up, access to superannuation funds, a levy based income insurance system.

The key point is just that there is this sharp response that is concentrated among a certain group.

Consumption has its own issues

In the appendix to this note we go into a lot more detail about the concerns with using consumption as the measure for considering this. By establishing that the income shocks were similar between recipients and non-recipients, and the expectation of reemployment was similar, we have convinced ourselves that this exercise gives some useful insights about eligibility and adequacy.

Specifically, it is clear that – given the current system and incentives faced – single people respond a lot more to job loss than couples do. Single people, especially those without children, are a perennially ignored group in social policy – even though this is the group that is most of risk of social isolation and in some circumstances poorer labour market outcomes.

In the next few months, we hope to be able to say a bit more about labour market outcomes – and how the benefit system may influence these. But for now, keen for your thoughts in the comment section below!

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.

JobSeeker ain’t just about people looking for work

Look at this mate.

Now this isn’t just Aussie specific (although Bradbury and Whiteford give a great description of it here). We also see this in New Zealand (here and here) and many other OECD countries. Actually, lets look at a version of the OECD plot:

Look, in many ways the Australian and New Zealand obsession with calling this payment a job related payment is a marketing job that is intended to make us view the payment (the JSP, or JobSeeker Payment) in a certain way – there are three times as many people looking for work and not receiving the JSP as there are looking and receiving. And there are twice as many people receiving the JSP and not looking for work as people receiving and looking.

In truth non-JobSeekers are excluded as the system is also trying to make sure people have a minimum living standard – even if they aren’t on the hunt for work at this very minute. While a group of JobSeekers are excluded because they are believed to have sufficient means to look after themselves – so if we buy this Iron Triangle view of welfare we would rather not pay to these people.

Digging into means testing

I’m from New Zealand – where means testing has been quite a harsh beast for a while. As a result, my prior when digging into the Australia data was that it would be equally harsh and that there would be a lot of people excluded by these rules (rather than due to simply not taking up benefits they were entitled to).

I’ve learned that the Australian system is quite different – and so the rules aren’t quite as sharp as back in New Zealand. However, the application of the rules does explain a lot of non-receipt – something that is shared across Australasia, but is different to overseas.

In both countries the eligibility criteria are excluding a bunch of people who are looking for work because they have “sufficient means to look after themselves” – but where that line is drawn is quite different.

Rightio – but how do we actually evaluate that claim? If I’m going to be thinking about policy I’ll want a way to evaluate this using data and beautiful economic frameworks – otherwise its easy to end up apply rules that have unintended consequences. This is something we dig into in the next note, which I’ll save for tomorrow

[Sidenote: If you’re interested in how the payment works, you can play around with this a bit – noting the numbers are out of date, and there are still extra benefit rules to implement]

This JobSeeker payment is something you can get when you lose your job, and it is flat rate and non-contributory – just like in the mighty country of New Zealand, and similar to the general Anglo model. For Europeans this is like imagining a benefit system that only has the “unemployment allowance” without unemployment insurance.

It is typical to analyse allowance systems as poverty allieviation tools and the insurance system as, well, an insurance system. This means that for the allowance system you look at what people can buy with the funds (i.e. here) and for the insurance you ask the dual questions of i) how effective is it at pooling risk ii) do people have sufficient liquidity to see themselves through job loss.

Now in the beautiful nations of Australia and New Zealand there is only one tool – so it has to do both! This was the rationale for New Zealand’s income insurance scheme proposal.

I can understand the logic – even if the details of the NZ scheme didn’t seem quite right. But for both countries there is a first step towards understanding whether another scheme, or policy, is necessary – asking how well the current system actual fits the “insurance” role.

People often say “its not good mate – look at replacement rates” – but this ignores that people can self-insure and any public-insurance may well crowd that out!

This is the logic for the e61 reports – we investigate who misses out on the JobSeeker payment, and who gets it, and do a bit of analysis to understand what people’s consumption choices tell us about how self-insured they are against job loss.

We find that there is a bit of an issue for single Australians. In that way, if the goal is to make up for an inability to self-insure that is where the gap likely is – and if there are going to be reforms, these are the people that require either:

• A higher payment,
• Access to funds (superannuation access or access to the student loan scheme),
• Eligibility to the scheme in the first place.

There are three broader questions to take any of this to the bank and determine what we should do with income support:

• How do these policies change behaviour (i.e. does it distort decisions to work?)
• Are there spillovers from these policies OR sacrifices we don’t capture in consumption (i.e. the urgent selling of assets, rushing to a new job)
• What are our values relating to redistribution, social support, and how responsible individuals are for their own insurance.

In the next few months I can promise you a few insights on the first two – but the last one is up to you. A good economist gives you information but can’t tell you what is right, and I’m not a very good economist but I have an aspiration to be

For the next couple of days I will have a couple more posts – explaining how to use each of the two notes that are released.