The following OECD assessment and recommendations summarise Chapter 6 of the Economic Survey of Australia 2006 published on 31 July 2006.
How can labour force participation be further increased?
International comparisons of labour force participation rates suggest that there is scope for catching up with the best performing countries by increasing participation among welfare recipients, those aged over 55 and women with families. Accounting for hours worked makes female labour supply even lower than headcount measures, given the high incidence of part-time work. Despite low unemployment, reliance on income support remains high, with the numbers of disability pensioners and lone parents on welfare having increased markedly since the mid-1990s although these trends have been recently reversed. In addition, the percentage of lone parents on welfare who are also working has been increasing over the past few years. Notwithstanding these recent improvements, a particular concern is the high proportion of people living in jobless families, which is well above the OECD average, with about three-quarters of such families headed by lone parents. The promotion of individuals’ attachment to the labour force, through reducing income support dependency, was the focus of welfare reform in recent years. Building on previous initiatives, the “Welfare to Work” reform package in the May 2005 Budget included a combination of changes to payments and work incentives, workforce participation requirements, and employment and related services for four priority groups, namely people with a disability, principal carer parents, mature age people and very long-term unemployed. The new arrangements comprise tighter eligibility and participation requirements for new Disability Support Pension applicants, with working capacity above 15 hours per week. For principal carer parents, the reforms involve part time participation requirements for those with a youngest child aged 6 or over, changes to Parenting Payment eligibility, and provision of additional employment and related services.
Employment as a percentage of population in the same age group
1. Denmark, Finland, Iceland, Norway and Sweden.
2. 2004 for the Nordic and OECD averages.
Source: OECD, Labour Force Statistics database, May 2006.
While recent Welfare to Work initiatives are welcome, reforms should go further. It is particularly welcome that under these reforms employment prospects for people 55 and over will no longer be taken into consideration when determining eligibility for the Disability Support Pension. Greater emphasis has also been placed on the assessment of rehabilitation needs for people applying for a disability pension. However, the tighter eligibility requirements applicable to new entrants should be extended to all recipients.
Disability rates are high and have worsened
Ratio of disability benefit recipients to working age population (age 20 64), per cent
Source: OECD calculations based on data from Labour ministries.
Similarly, tighter eligibility criteria for recipients of parenting payments should not just apply to new claimants but extended to the stock of all existing recipients. Access to affordable child care also plays an important role in promoting the employment opportunities for lone parents and women with families. Efforts towards reducing the cost and increasing the availability of child care places should be maintained. The structure of the Child Care Benefit should be changed to reflect the age-related cost profile of child care provision. This benefit should be made more conditional on employment, in contrast to the present situation where it is still available for up to 20 hours to families where no family member works. Steps taken to reduce the financial disincentives to take a job for lone parents and second earners, most of whom are women, are welcome, especially given the high prevalence of jobless households with children. However, one consequence of measures to reduce “inactivity traps” is that they create high effective marginal tax rates from moving up the wage distribution as benefits are withdrawn. Tackling such “low wage traps”, which appear more extreme in international comparison, either by addressing allowance and parenting payment income tests or by reducing the lowest income tax rate or raising the threshold at which income tax is first paid, should be a priority. Relevant considerations for evaluating these options are the fiscal cost and the labour supply response.
To encourage older workers to continue working after they become eligible for an Age Pension the income-test taper on earnings should be further eased as marginal effective tax rates for the elderly can be nearly 70% over a wide range of income. Incentives to retire early under the Superannuation Guarantee scheme could be reduced by aligning the eligibility age of superannuation (currently 55, but to be increased to 60 by 2025) with that of the Age Pension (age 65) over time. If evidence of significant ‘double dipping’ emerges, the generous tax-treatment of superannuation if drawn as a lump-sum after the age of 60 should be withdrawn and limits placed on the exemption of owner-occupied housing in the means test for the Age Pension. Implementation of the proposals to simplify superannuation announced in the 2006-07 Budget would further encourage workforce participation by older workers.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Australia 2006 is available from:
For further information please contat the Australia Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by David Turner and Vivian Koutsogeorgopoulou under the supervision of Peter Hoeller.