Why the JobSeeker ‘rise’ could actually cost 40,000 Australians their jobs - Grattan Institute

The permanent rate of JobSeeker will rise by $25 a week from April. But the $75 a week Coronavirus Supplement to JobSeeker will be abolished at the same time. So people on JobSeeker on 1 April will actually get a $50 per week cut in their payments.

Cutting unemployment benefits in the middle of a recession is likely to cost jobs, rather than create them.

There’s little evidence that retaining the Coronavirus Supplement would hurt employment

There’s little doubt that a very big increase in the long-term unemployment benefit would discourage some people from trying to get a job. But there is little evidence that Australia is approaching that level – even if we kept the Coronavirus Supplement.

After the 1 April ‘rise’, the new permanent rate of JobSeeker will be equivalent to just 41 per cent of the full-time minimum wage. Even if the $75 a week Coronavirus Supplement stayed, the payment would only be about half the full-time minimum wage – hardly a meaningful disincentive to searching for work.

Cutting JobSeeker is likely to cost jobs rather than create them

JobSeeker is one of the best forms of fiscal stimulus there is: unemployed people are likely to spend all or at least most of what they receive. In January this year 80 per cent of people receiving the Coronavirus Supplement said they were spending it on household bills and supplies, including groceries. That’s money in the pockets of Australian businesses, big and small.

Cutting unemployment benefits by $50 a week will take about $5 billion out of the economy in the coming year.1 That’s likely to push the unemployment rate 0.1-to-0.15 per cent higher than if the current $75 a week supplement were kept.2 And that means up to 40,000 fewer jobs.3

If the Federal Government really wants to get more Australians working, it should think again.

1. Approximate calculation based on the fiscal cost of the announced increase. The Prime Minister’s press release announcing the changes disclosed that about 1.95m Australians receive allowances affected by these changes; about 1.24m of these people are JobSeeker recipients, with the balance on Youth Allowance and Parenting Payment. A reduction of $50 per week for 1.95m people adds up to about $5bn per year.

2. Assumes each dollar of JobSeeker payments boosts economic activity by a dollar (i.e. a fiscal ‘multiplier’ of 1) and an Okun’s law relationship, which suggests that increasing GDP by 1 per cent decreases unemployment by 0.38 per cent. See Grattan’s Recovery Book for further details.

3. Employment estimates include both Australians in work due to the lower rate of unemployment, as well as Australians who are currently out of the labour force returning to work. Participation impact based on Evans et al (2018), which suggests that a 1 per cent increase in the cyclical component of GDP leads to a 0.4 percentage point increase in the participation rate over the following two quarters.