Australia's youth unemployment policy needs to be seen as a hand up, not a hand out

There are two youth unemployment programs offered by the major parties this election. Both are distinct, but surprisingly similar to the two main policy approaches to unemployment internationally. The question for Australian voters is do we see unemployment policy as a ‘hand out’ or a ‘hand up?’

If Australians view it as fundamentally a ‘hand out’, then the Coalition’s PaTH program will increase the participation rate and decrease the cost of employing young people. If Australians want to target the ‘skills gap’ and reduce long term unemployment then Labor’s Working Futures program will give young people a real hand up.

What’s the difference?

The hand out view of addressing youth unemployment is common in countries like the UK, USA, Canada, New Zealand and Australia. These countries tend to focus on means-testing unemployment benefits that are below a living wage, and offering subsidies to firms to offset employment costs.

In economic terms this approach focuses on stimulating demand for employees and is often dependant on a negative characterisation of unemployed people. Think of the common accusations of “dole bludgers”, “benefit scroungers” and “food stamp families.”

The alternate approach is the hand up view of fixing unemployment. This approach uses a combination of employment services, unemployment benefits, and vocational training to smooth transitions back into work. When the formula is correct, unemployed people are assessed, trained and targeted towards labour market shortages.

While this approach is popular across continental Europe and beyond, the Nordic region (Denmark, Finland, Iceland, Norway, and Sweden) is best known for this approach.

The Nordic model is generous. For example, if you’re a Danish graduate who can’t find work after university, you’re entitled to a weekly benefit of around A$694. In Norway, if you have little or no work experience you can enrol in a 6 month employment program. This will include motivation classes, a vocational qualification, practical job training and tailored assistance in your job search.

Current youth unemployment situation

As it stands, Australia’s youth unemployment policy is all about getting people back into work - any type of work. Newstart is set at a level that is unable to cover basic living standards, to make even low paid or casual employment preferable.

Employment services set quotas for job applications, and stiff penalties for failing to meet those quotas. Vocational training is costly, poorly regulated, and isn’t required to offer courses that address labour shortages.

The question is, does it work?

Australia actually has an enviable youth unemployment rate when we compare to the Nordic average. This is good news for the overall health of our economy, but unfortunately we have been steadily trending up as the mining boom has died down, driving up male youth unemployment. However, this isn’t the most concerning comparison.

Figure 2 Long Term Youth Unemployment Rates

When we look at the long term youth unemployment rate we see a drastic shift. Almost 20% of unemployed young Australians are out of work for over a year – and again, this is trending upwards. Compare this to the Nordic countries, which have experienced 4-6% long term youth unemployment over the same period. Arguably, this approach has been effective at addressing the skills mismatch that makes long term unemployment more likely.

How PaTH and Working Futures compare

If we only consider wage driven unemployment, both the Coalition’s PaTH program and Labor’s Working Futures program do seem to approach wage rates similarly.

This type of unemployment occurs when wages are too high or low. When they’re high, firms are less likely to take on additional staff. Conversely, jobs with wages that are too low (or close to the unemployment benefit) might not seem worth working.

By offering businesses A$1000 to take on an $200 intern or $10,000 to take on an eligible young job seeker, PaTH offers a considerable discount on wage costs. Similarly, by increasing the number of traineeships on offer, Working Futures allows firms to pay legal wages that are still a fraction of the minimum wage.

However, there is a much bigger divide between the programs in their approach to addressing long term unemployment. Only one targets the ‘skills gap’.

This ‘skills gap’ occurs when there is a mismatch between the general or technical skill level of the working population and the skill needs of firms. This type of unemployment is most susceptible to technological change, disruption, and globalisation.

By offering a vocational qualification and a six month structured traineeship, Labor’s Working Futures starts to look more to the Nordic example and offers a real hand up to young Australians.