Efficiency and equity: Is Australia the new economic and social model for the world?

Peter Auer, International Labour Organisation

Some European countries, led by Denmark, are successful, both economically and socially, and Australia could learn from their policy approaches. But is all the learning to be had uni-directional, now that Australia seems to be weathering the recession so much better than even the best European performers?

Previously it seemed that Denmark (and some other smaller European countries, such as the Netherlands and, with some reservations, Austria, Finland and Sweden) had found the right balance between economic efficiency and social equity. Indeed, along with other European scholars, I have claimed that the Danish model had the dynamism of the United States, without its social problems. In recent decades, Denmark has developed labour market regulation combining loose employment protection, which allow for high labour market mobility, with generous income and employability protection. The Danish model also enables effective integration of working and family life through generous maternity, parental and training leave. Taken together, these measures thus constitute insurance against the different labour market risks that individuals may face over their life course, such as unemployment, transitions between jobs, between parenthood and jobs, and between jobs and retirement. This system has been called ‘protected mobility’ (Auer 2005), ‘transitional labour markets’ (Gazier & Schmid 2002) or simply ‘labour market security’ (Auer 2007). However, the different elements of which it is composed—loose employment protection, generous passive and active labour market policies, ample training and family-related leaves, and the social dialogue and collective bargaining for arriving at such a package deal—have become the model for labour market reforms in the European Union under the name of ‘flexicurity’ (Jørgensen & Madsen 2007).

The global financial crisis seems to have changed everything.

The global financial crisis seems to have changed everything. In a recent column, The Sydney Morning Herald’s Peter Hartcher wrote that ‘Australia is the country that seems to have achieved a sweet spot, combining the vigour of American capitalism with the humanity of European welfare, yet suffering the drawbacks of neither’. It appears that during the global financial crisis the Australian economy and labour market fared well—better than the European Union and better even than Denmark. With GDP growth rates of 4.2 per cent in 2007, 0.6 per cent in 2008 and two consecutive positive quarters of growth in 2009, Australia clearly outpaced Denmark where GDP negative growth began in 2008 (–3.7 per cent in the last quarter) and continued in 2009. In general, bleak results have been seen throughout the European Union.

Yet before the crisis, labour market performance was better in Denmark than in Australia: unemployment was down to 3.4 per cent in Denmark, while it stood at 4.3 per cent in Australia in 2008. In the same year, the employment rate was 78.4 per cent in Denmark and only 73.2 per cent in Australia. Denmark had so far produced a good balance between economic efficiency and social equity and presented for many a real alternative to the US model, which is typically seen as having good economic growth and high labour market flexibility, but a weak welfare system. By contrast, high labour market flexibility in Denmark (or in other ‘flexicurity’ countries like the Netherlands) came together with adequate social protection for its workers; this is why these countries could claim the ‘sweet spot’ some now claim for Australia.

THE END OF THE DANISH (SCANDINAVIAN) MODEL?

In the light of the Australian experience, should one reconsider the advantages of the European model in its Scandinavian, ‘flexicurity’ form? This model has been described by the Organisation for Economic Co-operation and Development (OECD) as being as efficient as the Anglo Saxon world but with a much better welfare system (OECD 2006).

Australia’s record of economic and employment growth is impressive. It is the only country in the developed world that has avoided a recession in the global financial crisis, for good reasons. The economic stimulus package has been massive; it is the third largest in the OECD world, at an estimated 4.8 per cent of 2008 GDP for 2008 to 2010 (OECD 2009d, p. 19). The stimulus package has also been well-designed, with a mixture of infrastructure spending, tax cuts and household income bonuses. Interest rates were rapidly reduced, and the dollar depreciated in the short term. Other, more long-term, reasons include its better regulated banking system. Exports to resource-hungry China and, more generally, its fortuitous location in the fast growing Asia-Pacific growth hub have also been important. Another reason is that the housing bubble did not burst as it did in the United States, Ireland and the United Kingdom. Still another is to be seen in the ongoing influx of immigrants that apparently is beneficial for the economy.

Australia’s record of economic and employment growth is impressive.

The European Union has been less able to go the same route. One reason has been the reluctance in some countries to use fiscal stimulus (for example, Germany, which later spent quite massively, however). Another is the barrier imposed by the criteria of the EU’s stability and growth pact, which govern macro-economic policy in EU countries in normal times by putting a ceiling on deficits and debt. Related is that some countries already have high debts and deficits, and that it is difficult to co-ordinate crisis responses across the 27-strong ‘mixed bag’ of European countries. Further, the banking system has proved to be fragile and to require bailing out at high costs. Workforce ageing and demographic decline caused by low fertility and restrictive migration policies, also accounts for a lack of economic dynamism in some countries.

In economic terms, Australia seems to have done the right thing at the right time. But it profits also from factors that are not in its discretion (and thus not replicable by Europe): situated in the Asia Pacific growth hub, it has and will profit from this location, and from its natural resources in a resource hungry world. Australia will also continue to profit from the influx of people into the country and so into its labour market. This population increase will probably contribute, along with the banks’ tighter lending criteria, to Australia’s avoidance of a dramatic bursting of the housing ‘bubble’.

EFFICIENT, BUT LESS EQUITABLE?

Clearly, Australia’s economic situation seems relatively sound. However, when we look at the social side of the equation, is the ‘sweet spot’ claim justified? Does Australia effectively balance labour market mobility with adequate employment and social security, like the flexicurity countries? Denmark, for example, has the highest shares of good jobs as measured through wages and perceived job satisfaction (EU Commission 2001) and tops other European countries in regard to perceived employment and income security, despite its flexible labour market. And while there are costs associated with flexicurity (for example, high rates of expenditure on unemployment benefits and active labour market policies), it seems that the money is well spent—at any rate, Denmark has one of the lowest budget deficits (surplus of 3.8 per cent in 2008, with a projected deficit of 1.1 in 2009) and lowest government debt (33.3 per cent of GDP in 2009) among European countries (European Commission 2009, p. 57).

Poverty rates are much lower in Denmark than in Australia.

What about unemployment, income distribution, and social inclusion in Australia? Unemployment remains stable near the 6 per cent threshold, which is on a par with Denmark, but above the 3.5 per cent of the Netherlands or the 4.7 per cent of Austria. But there is concern about underemployment in Australia. The OECD (2009a) reports that the number of Australians involuntarily working part-time has increased 23 per cent since 2007, to an estimate of approximately 900,000 people at the beginning of 2009. Youth unemployment is another area of concern, especially for those aged fifteen to nineteen years. The rate of unemployment for this group stands at 16.4 per cent in Australia (OECD 2009b).

There are even more concerns regarding women’s employment: the employment to population rate for women in Australia in 2008 is about 8 percentage points below the Danish rate, which stands at 75.5 per cent. The gender pay gap is about 15 per cent in Australia but only 9 per cent in Denmark. In Australia, 24 per cent of the labour force works part-time, with women’s share in part-time jobs being 71 per cent, while Danish women’s share is 61 per cent of an 18 per cent part-time share overall (data from OECD 2009c).

Economic growth is certainly higher in Australia than in Denmark, especially in recent times, but GDP per capita is still slightly higher in Denmark. The fruits of growth are also more unequally distributed in Australia. The Gini co-efficient, a measure of income equality such that 1 represents total inequality, and 0 total equality in the income distribution) is 0.38 in the United States and 0.30 in Australia, but only 0.23 in Denmark. The richest 10 per cent of income receivers get 12.5 times the share of the poorest 10 per cent in Australia, but get only eight times as much in Denmark. Average wages currently stand at around US$52,000 in Australia, but were at US$64,000 in Denmark in 2007. In Australia, the share of low wage workers is 16 per cent in Australia, compared to 12 per cent in Denmark. While poverty comparisons are difficult, the evidence shows that poverty rates are much lower in Denmark than in Australia (Förster & Mira d’Ercole 2005). Overall, then, there are still gaps in social inclusion through employment, especially for women, in income inequality and in poverty between Australia and the more advanced of the European welfare states, like Denmark.

The difference in some policy variables relating to the safety net are also striking. For example OECD data for 2007 show that labour market policy expenditure amounted to only 0.74 per cent of GDP in Australia (marking a continuous reduction down from its 2.35 per cent level in 1992). In Denmark, spending on these programs was more than three times higher, at 2.81 per cent of GDP (although spending there had also declined from former high levels as unemployment declined). It is true that for labour market policy, as for many other policy areas, spending levels alone do not tell the whole story. But when we compare the 0.01 per cent that Australia spent on labour market training in 2007 with the 0.33 per cent spent by Denmark, we do learn something about policy priorities (OECD 2009c).

It seems premature to cast the Scandinavian model into the dustbin of history.

And what is the score on the other important part of flexicurity, which offers choices for people to work flexibly when the need arises? This is part and parcel of the Scandinavian model, but not (yet) of the Australian. The Rudd Government’s new efforts on training and the introduction of eighteen weeks parental leave in 2011 are steps in the right direction. However, paid leaves for family reasons are and will remain more generous in the flexicurity countries, as can be seen by the 52 weeks paid parental leave in Denmark.

STILL SOME WAY TO GO TOWARDS THE SWEET SPOT

Let’s stop here as the point is clear: in efficiency terms, Australia has for the moment an advantage over all other OECD countries. In the long term, this is partly the luck of being resource rich and located in the Asian-Pacific hub, of which Australia has actively taken advantage. In the short term, the government’s stimulus packages count for much, as do the radical interest rate cuts of the central bank and the generally more healthy state of its banks. However, in terms of equity and social inclusion, the balance needs to be improved before Australia can genuinely claim that it has achieved ‘the sweet spot between the vigor of American capitalism and the humanity of European welfare’. The employment situation of women and training are important issues here, as are income distribution, and policies that allow for the integration of work and family. The reforms introduced through the Fair Work Act, especially collective bargaining, with a greater role for unions will contribute to changing this, as will the safety net and modern awards. Nevertheless, a lot of tough bargaining lies ahead.

Australia is on a good track, but it seems premature to claim the sweet spot between the US model and the more successful countries within the European model, and to cast the Scandinavian model into the dustbin of history. That said, I do not mean to imply that the teacher-student relation should be one-sided: Australia can learn much from European best practice, but Europe could also learn from Australia; for example, how to weather a recession effectively, at least concerning its discretionary part.

REFERENCES

Auer, P. 2005, ‘Protected mobility for employment and decent work: Labour market security in a globalised world’, Employment Strategy Paper 2005/1, International Labour Organization, Geneva.

Auer, P. 2007, ‘Security in labour markets: Combining flexibility with security for decent work’, Economic and Labour Market Paper 2007/12, International Labour Organization, Geneva.

European Commission 2009, Spring Forecasts 2009–2010, European Commission, Brussels [Online], Available: http://ec.europa.eu/economy_finance/pdf/2009/springforecasts/dk_en.pdf [2009, Nov 5].

Förster, M.F. & Mira d’Ercole, M. 2005, Income distribution and poverty in OECD countries in the second half of the 1990s, Social, Employment and Migration Working Paper No. 22, OECD, Paris.

Hartcher, P. 2009, ‘Riding the tsunami’, The Sydney Morning Herald, 12–13 September.

Jørgensen, H. & Madsen, P.K. (eds) 2007, Flexicurity and Beyond. Finding a New Agenda for the European Social Model, DJOF Publishing, Copenhagen.

Organisation for Economic Co-operation and Development 2006, Employment Outlook: Boosting Jobs and Incomes, OECD, Paris.

Organisation for Economic Co-operation and Development 2009a, Employment Outlook: Tackling the Jobs Crisis, OECD, Paris.

Organisation for Economic Co-operation and Development 2009b, Jobs for Youth: Australia, OECD, Paris.

Organisation for Economic Co-operation and Development 2009c, Data extracted from OECD.Stats Extracts, theme ‘Labour’, sub-theme ‘Labour market programmes’, OECD, Paris [Online], Available: http://stats.oecd.org/Index.aspx?DataSetCode=LMPEXP [2009, Nov 2].

Organisation for Economic Co-operation and Development 2009d, Policy Responses to the Economic Crisis: Investing in Innovation for Long-term Growth, OECD, Paris.

Schmid G. & Gazier B. (eds) 2002, The Dynamics of Full Employment: Social Integration Through Transitional Labour Markets, Edward Elgar, Cheltenham.

Dr Peter Auer is Senior Fellow of the International Institute for Labour Studies of the ILO. Between July and September 2009, he was Visiting Fellow in the Discipline of Work and Organisational Studies at The University of Sydney.