Is promoting labour force participation good policy?

download (18)There is a widespread view among politicians and some think-tanks (eg. Grattan) that promoting labour participation is necessarily good policy. But is this the case?

Here’s Joe having his two bob’s worth:

“It’s actually good for Australia’s economy, good for jobs, to have more women choosing to work.”

Now I am sure Joe does not have at the back of his mind the following equation:

GDP/head = GDP/hours worked x hours worked/head

If we convert this to growth rates, the story is basically that the growth of living standards is the product of the growth of labour productivity and growth of the rate of employment (which is closely related to the growth of the rate of participation).

(Come on Cats: you know this discussion is good for you.)

The argument becomes that if you want to raise living standards, one  of the way of doing this is to raise the employment rate.

Now this is all well and good, but the case for spending taxpayer money on promoting the labour force participation of one group is actually more complicated.  Indeed, it is entirely possible that  the costs of promoting labour force participation of one group will be greater than the benefits.

(Note that the PC report on childcare and early childhood learning (yes, I can get with the program) finds quite trivial supply responses (that is, higher female labour force participation) from spending more taxpayer money on childcare fee relief.)

If a government wants to encourage a certain activity, it is always possible to establish incentives (aka bribes). If you want women to have more babies, give them more money for each additional child.  If you want more women to participate in the labour force, one option is to increase the returns from working by reducing their costs of working (eg. by subsidising childcare) relative to the returns from not working.

Whether or not this makes policy sense is a moot point.  The cost of these bribes is always borne by other groups whose participation may well be discouraged to a greater degree.

Take the Temporary (Cats: stop that laughing) Budget Repair Levy – the increase in the marginal tax rate will reduce work efforts (and indeed induce retirement) of many high income earners.

The way to think about this is that the participation decision of people is very individual.  They weigh up their circumstances and make a calculation based on net pecuniary and non-pecuniary benefits of working relative to not working.  (Note that this may include an investment calculation: I may not make much now, but it is worth hanging in because there will be rewards down the track.)

From a policy point of view, we should be concerned about government-imposed distortions which make it difficult for people to make optimal decisions.  (The interaction between family tax benefits and child care subsidies makes it a difficult financial decision for many women to work beyond 2 or 3 days a week.  Mind you, working 2 or 3 days per week may suit many underlying preferences.)

The policy implication is that governments need to be as neutral as possible when it comes to people making labour force participation decisions. The government should not have a view that the participation of one group should be pumped up by taxpayer subsidies, which is inevitably at the expense of others.

By the same token, making it too easy for people to collect taxpayer income while not working is not a good idea.

Here endeth the economics lecture!

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33 Responses to Is promoting labour force participation good policy?

  1. H B Bear

    How about getting rid of all childcare payments and taxing the family as an economic unit – that is full income splitting?

    All this stuff generally happens on the marginal income of the 2nd income earner (usually the wife but not always) who either works part-time or casually. People are highly sensitive to changes in the taxation/welfare regime because the whole work/don’ t work decision is so finely balanced.

    Just like the impact of Keating’s superannuation impact on the pension I’m yet to be convinced all these taxpayer billions spent on childcare have any real impact on participation rates at all.

  2. Leo G

    There is a widespread view among politicians and some think-tanks (eg. Grattan) that promoting labour participation is necessarily good policy.

    It takes a thin spread of intelligence to accept that necessitating a minimum of two incomes to support a household is for the common good.

  3. tomix

    Heard it is the preferred system in gay households. Apparently, it can get very nasty if one partner decides to be a stay- at- home.

  4. Pusnip

    Interesting post, although Judith errs in using the shortcut of GDP/head = living standards- which is problematic when talking about participation rates. That’s because higher participation and employment, while lifting GDP, clearly entail a reduction in leisure and/or domestic (in home) production, thus reducing the un measured (non GDP) elements of living standards.

  5. MartinG

    I’m with H B Bear wrg to income splitting. I see no logical reason why being formally coupled with another person one or the other should lose their personal income tax status.

    Each person should be taxed as you would a company. If expenditure is uncured in order to produce profit, then it’s tax deductible.

    If the persons tax liability falls below the personal tax threshold then some kind of rebate could be arranged to ensure it is always profitable to work for a someone rearing child.

  6. 3d1k

    I’m all for labour participation – by and from all who want to work. I’m less concerned with the female participation rate per se than I am with the youth participation rate. I expect this to get deteriorate further in coming years.

  7. Tel

    Say’s Law: production must come before consumption. It is impossible to consume what has not been produced. If you want production, you need to have people working — no worky, no enjoyable consumption. From that perspective employment participation is helpful.

    That said, producing babies is indeed a type of production, essentially it is infrastructure production with a delay of 20 to 30 years before there’s any return on investment. As 3d1k rightly points out, if you don’t let those fresh young people have jobs, there won’t be a pay-off on the investment of producing the babies, and in the long run we will all be scrunted.

    Jobs for women is a nice thing, and I’m all for it, just remember that in terms of survival of the species it’s optional. Jobs in general (i.e. someone doing production) are not optional. I’ll also note that jobs for women and aggregate employment participation are not tightly linked, because as more women commit to the workforce, more men drop out… and there’s nothing wrong with that, it’s a totally rational result because someone has to look after family (both the very old and the very young).

  8. Chris M

    The real value of our wages have halved over the past few decades, in Australia now it is essentially unavoidable that both partners in a relationship must work in order to live and have shelter; in the past this could be done on one wage. The social / family consequences of this enforced employment are very negative.

  9. Judith Sloan

    Pusnip: I accept your point that GDP/head is only a proxy for living standards and fails to account for the substitution of marke activities for home based activities (including caring for and providing a nurturing environment for children).

    But I am a bit loath to use measures of wellbeing instead. Rather I accommodate your point by acknowledging the loss of home-based production in the labour force decision.

  10. The Pugilist

    Judith, what do you think about differential rates of taxation for men and women? I think this is justifiable on the basis of the Ramsey rule/optimal taxation. That is, labour supply of partnered women/women with children is more elastic, therefore it should be taxed at a lower rate. I would happily go for that and remove childcare subsidies. That way, the government wouldn’t be able to interfere so much in the childcare market and people could make their own decisions about what sort of childcare is right for them.

  11. Entropy

    Maybe treat the family as a single unit for tax purposes, end subsidies that get lost in rent to the childcare operators, and make childcare a tax deduction. Would that result in reduced expenditure for the same outcome? There seems to be a bit of churning going on. Also, it would t matter what the type of childcare it was, and reduce the number of social workers red tape proliferators.

  12. H B Bear

    Childcare, female labour force participation and birth rates are also completely inter-twined with Australia having some of the most expensive housing in the world. The reality is that most families require two incomes for a significant length of time to even get a foot on the housing ladder.

  13. Tel

    Maybe treat the family as a single unit for tax purposes…

    Allow families to incorporate, brilliant idea! Better yet, make it limited liability, when the baby gets left in the hot car, none of the individual employees of that family are responsible, it’s just a procedural issue. When necessary bring in new management, or simply nationalise. I mean government already claims complete ownership of family operations anyway, might as well formalise it.

  14. Crossie

    It takes a thin spread of intelligence to accept that necessitating a minimum of two incomes to support a household is for the common good.

    True. The reason we got to this point is that women first went into the workforce so the family could afford some luxuries. Then housing prices went sky high while globalisation of the job market kept wages and salaries lower and so now you need two incomes to make ends meet or get ahead.

  15. Ellen of Tasmania

    The policy implication is that governments need to be as neutral as possible when it comes to people making labour force participation decisions.

    The fact is that LINO’s fully support the non-neutral position of ‘encouraging’ women into the workforce. (Both Costello & Abbott rattled on about it in their respective books.) That is neither liberal or conservative. It’s a foundational socialist goal and they are in full agreement with it.

    It’s utterly shameful.

  16. Entropy

    Is it too early to trivialise this thread?

    Allow families to incorporate, brilliant idea! Better yet, make it limited liability, when the baby gets left in the hot car, none of the individual employees of that family are responsible, it’s just a procedural issue. When necessary bring in new management, or simply nationalise. I mean government already claims complete ownership of family operations anyway, might as well formalise it.

    Interesting possibilities. You would no longer need divorce courts, and maybe you could return faulty products if they get too noisy or demanding.

    Also, I find that picture Pushes All My Buttons.

  17. Goanna

    Give vouchers to mothers of small children. They can stay at home, spend it on a nanny or spend it on child care. Anything is better than this State, run-away juggernaut that is so called Child Care.

  18. Robert Crew

    Just as exports are not a proper end in themselves, but only the expense we need to go to to pay for our imports, labour force participation should not be a goal. We need enough participation and productivity to provide our desired lifestyle, no more. I have friends that follow the 4 hour work week, living frugal lives of world travel supported by knowledge work on the internet. They are barely participating in work life, but are happy, successful, and self-supporting. The same goes for households, if a family can support itself on a single income, and prefers to, then good on ’em, their goal is lifestyle, not workforce participation.

  19. Jim Rose

    We wages slaves are supposed to work to we drop

  20. Haretrigger

    Indeed, I retired at Christmas at the age of 55 years and 3 months. The reasons were many, but a big factor for me was the amount of tax I paid as a “high income” earner. Now retired, I live on just few dollars (net) less per day from my superannuation investments than my net earnings from working hard. And that extra tax imposed on me to support the bludgers was one of the last straws! I could not , in the end, keep working and paying so much in tax, plus full whack for everything when so many others seemed to pay so little tax, and get so much free stuff. There was so little difference in my net income due to the tax man taking so large a cut when I worked, that there was simply no incentive to keep working.

    As a singer/songwriter James Blundell lyric once quipped, “I just couldn’t understand how so many people can hold out their hand and give nothing in return”.

  21. Pedro

    Child care is productive to the extent that economic gains from the increased labour force exceeds the cost of the care. With the subsidies and the regulations, that will often be hard to determine, especially in some suburbs. It would be better to remove the subsidies and make child care fully deductible.

  22. Andrew

    Take the Temporary (Cats: stop that laughing) Budget Repair Levy – the increase in the marginal tax rate will reduce work efforts (and indeed induce retirement) of many high income earners.

    Not necessarily reduce work efforts, but it convinced quite a few of my friends to continue their work efforts in Bahrain, Singapore or HK. Tax take now zero. But never fear, I’m sure they’ll be back for the free healthcare when they’re 75, waving their AUS passports.

  23. Dan

    Child care is productive to the extent that economic gains from the increased labour force exceeds the cost of the care. With the subsidies and the regulations, that will often be hard to determine, especially in some suburbs. It would be better to remove the subsidies and make child care fully deductible.

    Why make childcare deductible? Remove subsidies and reduce tax across the board, then people have more cash to begin with and better options to start a family. We shouldn’t use the tax-transfer system to goad people into doing anything. Politicians are good at creating seperate constituencies with free-money and the like, which leads to all sorts of problems (which is basically modern life)

  24. Crossie

    Not necessarily reduce work efforts, but it convinced quite a few of my friends to continue their work efforts in Bahrain, Singapore or HK. Tax take now zero. But never fear, I’m sure they’ll be back for the free healthcare when they’re 75, waving their AUS passports.

    And they will have more right to it than the passportless boat arrivals.

  25. rickw

    “It’s actually good for Australia’s economy, good for jobs, to have more women choosing to work.”

    The real economy is the part of the economy that actually makes stuff or produces stuff, the rest just facilitates this. Wouldn’t facilitating the demise of face to face retail be far more productive?

    This is where the next great economic opportunity sits.

  26. Monkey's Uncle

    The shorter version: Governments can increase the labour force participation of any group by subsidising it, either directly or indirectly. But the cost of this has to be borne elsewhere in the economy, which likely impacts on economic incentives and labour force participation elsewhere.

  27. JohnA

    Tel #1587832, posted on February 1, 2015 at 3:00 pm

    Jobs for women is a nice thing, and I’m all for it, just remember that in terms of survival of the species it’s optional. Jobs in general (i.e. someone doing production) are not optional.

    The whole childcare thingy is, as Ellen of Tas says, a socialist construct.

    Bearing children is exclusively a task reserved for women and raising them is a task best carried out within a monogamous, married household of husband and wife. And I don’t give as tinkers cuss for all the modernist claptrap about equality; the social research has been consistent for a very long time.

    So every effort to subsidise child care/early childhood learning (more claptrap) is a sub-optimal – correction NON-optimal – attempt to shift certain people from unmeasured cultural activity for which there is no adequate substitute into some measured part of the economy, to supposedly improve the numbers.

    As Rumplestiltskin points out: every use of magic comes at a price.

    The married family home is a naturally formed economic unit with appropriate specialisation and division of labour. Anything else is just more government interference.

  28. .

    tomix knows an awful lot about gays.

  29. Pusnip

    Points accepted, Judith.
    Yes, wellbeing measures have limitations.
    My concern is when non-economists see economists using GDP as a measure of living standards, without qualification, and assume that economists are therefore narrow or ignorant of other elements when, as we know, movements on GDP have never been anything more than an at best imperfect proxy.

  30. The married family home is a naturally formed economic unit with appropriate specialisation and division of labour. Anything else is just more government interference.

    Truer words, JohnA. Truer words…

  31. Judith Sloan

    Pusnip: if I just used Q that would probably sort the problem.

  32. Gibson T

    Can someone here tell me in simple terms why we want more women working? What if women want to stay at home with their children? Shouldn’t we be supporting them to do that? I know women who have to work but would stay at home if they could afford it. Shouldn’t we be making it easier for them to make that choice?

    Or is feminism only about supporting whatever choices they want women to make, and sabotaging the other ones?

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