A Policy Program for Full Employment

Unemployment is the greatest economic problem facing Australia and otherOECD countries. Yet it has received less attention than issues such as tax reform andexchange rate policy. In part this reflects a general air of fatalism. It is generallyaccepted that nothing can be done to generate substantial reductions in unemployment.This paper is based on the premise that the fundamental cause of risingunemployment is a decline in the demand for labor. This in turn may be traced to thefailure of the publicly financed community services sector (primarily health and education)to continue the expansion of the post-war boom, thereby compensating for the contractionof employment in older sectors such as manufacturing. A second premise is that thecontraction in the public sector, and particularly in publicly financed community services,has been greater than is consistent with efficiency and welfare objectives. Both of thesepremises are defended in more detail in Quiggin (1993).It is argued that both an active labor market policy and an expansion of thepublicly financed community services sector, sufficient to generate a substantial reductionin employment, is feasible. A number of proposals for financing such a program areadvanced.Policy approachesThe primary approaches to unemployment in Ausralia have been based onmacroeconomic expansion and real wage restraint. It is clear from past experience thatfull employment is inconsistent with rapid real wage growth and with contractionarymacroeconomic policies. However, getting macro policy settings and real wages rightwill not be sufficient to restore full employment. it is necessary to consider alternativesacting directly on the demand for labor and on the labor market position of the long-termunemployed.Active labor market policiesThe idea of active labor market policies gained increased acceptance in the late11980s. Institutions such as the OECD moved away from the doctrinaire position that