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Wage subsidy to employers of older workers



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Wage Subsidy to employers of older workers

29 July 2010

The following briefing was commissioned on behalf of a non-Government member of Parliament by the Pre-Election Policy Unit of the Parliamentary Library. The Unit was established to assist non-Government Senators and Members develop polices in the lead-up to federal elections. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion

NATSEM www.natsem.canberra.edu.au

29 July 2010

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WAGE SUBSIDY TO EMPLOYERS OF OLDER WORKERS

NATSEM is a research centre associated with the University of Canberra that undertakes research and analysis specialising in the use of microdata and microsimulation modelling to address ongoing and emerging research agendas and client demand and contribute to and enhance social, economic and business decision making.

Using microsimulation models, NATSEM can estimate the effect of changes in Tax/Transfer policies before these policies are implemented. This provides a powerful tool to Government policy makers, and NATSEM’s microsimulation models have been used extensively in the past by the Government, researchers and lobby groups to model particular Tax/Transfer policies.

It should be noted that NATSEM is a professional independent research agency, with no political or social bias. The results in this report are based on a number of assumptions, and these are central to the results obtained. We would therefore ask that if this report is released, the whole report is made available, so media and commentators can see all the assumptions being made. We would also request that NATSEM is consulted on any media release, to ensure that the results are shown and interpreted correctly.

The scenario modelled in this paper is a wage subsidy of $250 per fortnight to employers who give a full time job (pro-ratad for a part time job > 20 hours) to people who are: • not currently working;

• aged over 50 years; and • receiving any form of income support including the age pension.

The subsidy would last for either 6 months or one year (both options to be costed). If the job did not work out, the employee could move back on to income support immediately.

This project involves a relatively complex policy analysis covering a range of variables, some of which are difficult to estimate, such as the salary flow-through rate from the employer to the employee and the take-up rates. The extremely tight deadline provided by the Parliamentary Library required NATSEM to provide only a basic analysis with little regard for potential ‘unintended consequences’ of policy change. In this scenario, the take up rates and flow-through rates are assumed, and scenarios are developed around these assumed rates, rather than being modelled in any way. NATSEM asks that the client respects these limitations and treats the results with due caution.

The wage subsidy is likely to involve an administration cost to the government. NATSEM is unable to provide an estimate of this cost.

NATSEM www.natsem.canberra.edu.au

29 July 2010

METHOD

The modelling used NATSEM’s STINMOD microsimulation model, which is based on 2005-06 and 2007-08 ABS Survey data. There were around 900,000 people in the base population eligible for this scenario (people aged 50 - 65 not currently working, so either unemployed or not in the labour force and receiving some government payment).

From this base population, a person is randomly chosen to be offered a job, and the employer is given up to $250. Job offer rates of 5 per cent, 10 per cent, 20 per cent and 50 per cent were used. We assume three scenarios for this subsidy:

• None will flow through to the employee, so the employer will keep it all; • 50 per cent flows through to the employee; and • 100 per cent flows through to the employee.

Once these offer and flow-through rates were applied to the base population, the people selected were given the wage minimum wage ($15 per hour). NATSEM considered that given that more than 90 per cent of those eligible for this benefit are currently not in the labour force and may have been outside employment for a considerable period the minimum wage was most appropriate. The people were also given an additional wage, based on the flow through rate. After 6 months or 12 months, the wage was set back to the minimum wage, as the subsidy finished.

STINMOD was then used to calculate how much tax the people who are now working would be paying; and how much in benefits was no longer being paid to this group.

The cost to the Government was calculated as up to $250 per fortnight for each person offered a job for 6 or 12 months depending on hours worked.

To test the validity of the results, the scenarios were run 5 times using a different pool of people taking up the offer (so the seeds for the random selection were changed for each run). Similar results were obtained each time, signifying a high level of confidence in the results.

Given the time constraints, we had to make a number of assumptions relating to the analysis, which included: - assigning people who take a job a fixed wage per hour; - randomly assigning take up rates to the base population;

- The base year was chosen to be 2010/11. Results beyond this year assume population growth of 1.5 per cent and inflation of 2.75 per cent for all wages and benefits.

- Each year was assumed to be independent of previous years. STINMOD is a static model so takes no account of a potentially smaller (or cumulating) base population each year. Caution must be taken in interpreting beyond 2010/11. Any shrinking of the base population as a result of the allowance will most likely lessen the impact on aggregate unemployment, taxation and benefits, while any accumulation of recipients would increase the impacts.

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NATSEM www.natsem.canberra.edu.au

29 July 2010

- The model has only taken into account economic costs and benefits of the proposal, not social costs and benefits. So the social benefits of finding a job have not been counted in the analysis.

- The subsidy provides an incentive to employ those aged between 50-65, no account is taken of any disincentive to employ other age groups which may partially offset the monetary and job gains from the allowance. - The jobs offered are assumed to persist and that persistence is also assumed for

the 6 month subsidy. - NATSEM has provided estimates of the effect of this policy on the unemployment rate for the 50 - 65 years age group, but is not able to provide estimates of the aggregate unemployment/employment picture for Australia

resulting from this subsidy. It is likely that while there may be some offsetting job losses (or less demand) for younger age groups, the incentive to employ additional staff would compensate for this, leaving aggregate employment unchanged or possibly higher. - NATSEM’s analysis was conducted under the simple rules of the scheme on a

random basis. No account has been taken of the individual circumstances of those employed. Given the high likelihood that many individuals in the 900,000 pool will be unable or unwilling to work NATSEM suggests the scenarios with the lower ‘offer’ rates are more plausible.

RESULTS

Results are provided for 12 scenarios (4 offer rates and 3 flow-through rates). The simulated results are provided for the current financial year (2010/11) up to 2013/14. The impact of the policy is assumed to have fully impacted on each financial year.

The scenarios provide projected results only and do not represent forecasts. The scenarios enable the client to better understand a range of possible outcomes. Given the short time-frame of the modelling work there was little prospect for forecasting job offer rates or flow-through rates. NATSEM is unable to provide guidance on the relative likelihood of given scenarios.

By way of example, for the 2010/11 financial year, for a full 12 month allowance, with an offer rate of 10 per cent and a flow through rate of 50 per cent is estimated to yield the payment of 83,000 wage subsidies, costing $404 million, increasing tax revenues by $115 million and lowering social security payments by $769 million. The unemployment rate for those aged 50 to 65 would drop by 0.21 percentage points (to 3.5%) and the participation rate would increase by 1.91 percentage points (68.7%).

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NATSEM www.natsem.canberra.edu.au

29 July 2010

Scenario Results (12 month Wage Subsidy) Offer Passthru Cost Increased Fewer Subsidised Unemp* Part*

% to Employee ($000s) Tax Revenue Benefits Jobs Rate Rate

% ($000s) ($000s) pp ch pp ch

2010/11 50-65 yo 50-65 yo

5 0 206,110 47,261 359,739 41,784 -0.11% 0.96%

5 50 206,110 61,466 397,237 41,78 4 -0.11% 0.96%

5 100 206,110 78,199 434,023 41,784 -0.11% 0.96%

10 0 404,360 88,926 697,01 9 83,010 -0.21% 1.91%

10 50 404,360 115,47 8 769,186 83,010 -0.21% 1.91%

10 100 404,360 146,518 839,598 83,010 -0.21% 1.91%

20 0 851,49 8 194,366 1,474,268 175,395 -0.45% 4.03%

20 50 851,498 251,346 1,627,688 175,395 -0.45% 4.03%

20 100 851,498 317,507 1,773,572 175,395 -0.45% 4.03%

50 0 2,170,384 510,271 3,770,771 444,084 -1.15% 10.21%

50 50 2,170,384 662,767 4,144,107 444,084 -1.15% 10.21%

50 100 2,170,384 837,19 8 4,501,429 444,084 -1.15% 10.21%

2011/12 5 0 214,973 49,294 375,208 42,410

5 50 214,973 64,10 9 414,31 8 42,410

5 100 214,973 81,562 452,686 42,410

10 0 421,747 92,750 726,991 84,25 5

10 50 421,747 120,443 802,261 84,25 5

10 100 421,747 152,818 875,700 84,255

20 0 888,112 202,723 1,537,661 178,026

20 50 888,112 262,153 1,697,679 178,026

20 100 888,112 331,15 9 1,849,836 178,026

50 0 2,263,711 532,213 3,932,914 450,745

50 50 2,263,711 691,266 4,322,303 450,745

50 100 2,263,711 873,19 8 4,694,991 450,745

2012/13 5 0 224,217 51,413 391,342 43,047

5 50 224,217 66,86 5 432,133 43,047

5 100 224,217 85,069 472,151 43,047

10 0 439,882 96,739 758,251 85,51 9

10 50 439,882 125,622 836,758 85,519

10 100 439,882 159,38 9 913,35 5 85,519

20 0 926,301 211,440 1,603,781 180,696

20 50 926,301 273,426 1,770,679 180,696

20 100 926,301 345,39 9 1,929,379 180,696

50 0 2,361,050 555,098 4,102,029 457,507

50 50 2,361,050 720,990 4,508,162 457,507

50 100 2,361,050 910,74 5 4,896,875 457,507

2013/14 5 0 233,85 8 53,624 408,170 43,692

5 50 233,85 8 69,740 450,715 43,692

5 100 233,858 88,727 492,454 43,692

10 0 458,797 100,89 8 790,856 86,802

10 50 458,797 131,024 872,739 86,802

10 100 458,797 166,243 952,630 86,802

20 0 966,132 220,532 1,672,743 183,407

20 50 966,132 285,183 1,846,818 183,407

20 100 966,132 360,251 2,012,342 183,407

50 0 2,462,575 578,967 4,278,416 464,369

50 50 2,462,575 751,993 4,702,013 464,369

50 100 2,462,575 949,907 5,107,441 464,369

Total over the forward estimates 2010/11 to 2013/14 5 0 879,15 9 201,592 1,534,459 170,933

5 50 879,159 262,180 1,694,403 170,933

5 100 879,159 333,557 1,851,313 170,933

10 0 1,724,787 379,31 4 2,973,117 339,587

10 50 1,724,787 492,567 3,280,943 339,587

10 100 1,724,787 624,96 8 3,581,283 339,587

20 0 3,632,044 829,062 6,288,453 717,524

20 50 3,632,044 1,072,108 6,942,865 717,524

20 100 3,632,044 1,354,317 7,565,128 717,524

50 0 9,257,720 2,176,550 16,084,129 1,816,705

50 50 9,257,720 2,827,015 17,676,585 1,816,70 5

50 100 9,257,720 3,571,049 19,200,737 1,816,705

* Based on ABS Survey of Income an d Housin g and STINMOD estimates for une mplo ymen t (3.7%) and a participation rate of 66.8 per cen t.

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NATSEM www.natsem.canberra.edu.au

29 July 2010

Scenario Results (6 month Wage Subsidy) Offer Passthru Cost Increased Fewer Subsidised Unemp Part

% to Employee ($000s) Tax Revenue Benefits Jobs Rate Rate

% ($000s) ($000s) pp ch pp ch

2010/11 50-65 yo 50-65 yo

5 0 103,055 47,261 359,739 41,784 -0.11% 0.96%

5 50 103,055 54,141 378,668 41,784 -0.11% 0.96%

5 100 103,055 61,466 397,237 41,784 -0.11% 0.96%

10 0 202,180 88,926 697,019 83,010 -0.21% 1.91%

10 50 202,180 101,532 733,331 83,010 -0.21% 1.91%

10 100 202,180 115,478 769,186 83,010 -0.21% 1.91%

20 0 425,749 194,366 1,474,268 175,395 -0.45% 4.03%

20 50 425,749 221,488 1,550,066 175,39 5 -0.45% 4.03%

20 100 425,749 251,346 1,627,688 175,395 -0.45% 4.03%

50 0 1,085,192 510,271 3,770,771 444,084 -1.15% 10.21%

50 50 1,085,192 583,159 3,957,863 444,084 -1.15% 10.21%

50 100 1,085,192 662,767 4,144,107 444,084 -1.15% 10.21%

2011/12 5 0 107,487 49,294 375,208 42,410

5 50 107,487 56,469 394,950 42,410

5 100 107,487 64,109 414,318 42,410

10 0 210,874 92,750 726,991 84,255

10 50 210,874 105,898 764,864 84,255

10 100 210,874 120,443 802,261 84,255

20 0 444,056 202,723 1,537,661 178,026

20 50 444,056 231,012 1,616,719 178,026

20 100 444,056 262,153 1,697,679 178,026

50 0 1,131,855 532,213 3,932,914 450,745

50 50 1,131,855 608,235 4,128,051 450,745

50 100 1,131,855 691,266 4,322,303 450,745

2012/13 5 0 112,109 51,413 391,342 43,047

5 50 112,109 58,897 411,933 43,047

5 100 112,109 66,865 432,133 43,047

10 0 219,941 96,739 758,251 85,519

10 50 219,941 110,452 797,753 85,519

10 100 219,941 125,622 836,758 85,519

20 0 463,151 211,440 1,603,781 180,696

20 50 463,151 240,945 1,686,238 180,696

20 100 463,151 273,426 1,770,679 180,696

50 0 1,180,525 555,098 4,102,029 457,507

50 50 1,180,525 634,389 4,305,557 457,507

50 100 1,180,525 720,990 4,508,162 457,507

2013/14 5 0 116,929 53,624 408,170 43,692

5 50 116,929 61,430 429,646 43,692

5 100 116,929 69,740 450,715 43,692

10 0 229,399 100,898 790,856 86,802

10 50 229,399 115,201 832,057 86,802

10 100 229,399 131,024 872,739 86,802

20 0 483,066 220,532 1,672,743 183,407

20 50 483,066 251,306 1,758,746 183,407

20 100 483,066 285,183 1,846,818 183,407

50 0 1,231,288 578,967 4,278,416 464,369

50 50 1,231,288 661,668 4,490,696 464,369

50 100 1,231,288 751,993 4,702,013 464,369

Total over the forward estimates 2010/11 to 2013/14 5 0 439,580 201,592 1,534,459 170,933

5 50 439,580 230,936 1,615,197 170,933

5 100 439,580 262,180 1,694,403 170,933

10 0 862,394 379,314 2,973,117 339,587

10 50 862,394 433,084 3,128,00 5 339,587

10 100 862,394 492,567 3,280,943 339,587

20 0 1,816,022 829,062 6,288,453 717,524

20 50 1,816,022 944,751 6,611,771 717,524

20 100 1,816,022 1,072,108 6,942,865 717,524

50 0 4,628,860 2,176,550 16,084,129 1,816,705

50 50 4,628,860 2,487,452 16,882,166 1,816,705

50 100 4,628,860 2,827,015 17,676,585 1,816,705

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NATSEM www.natsem.canberra.edu.au

29 July 2010

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Relevant Parliamentary Library Publications

Parliamentary Library, Budget Review 2010-11, Research Paper, 26 May 2010, No. 17, 2009-2010, http://www.aph.gov.au/library/pubs/RP/2009-10/10rp17.pdf

M Thomas, A review of developments in the Job Network, Research Paper, 24 December 2007, no. 15, 2007-08, Parliamentary Library, http://www.aph.gov.au/library/pubs/rp/2007-08/08rp15.pdf

© Commonwealth of Australia 2010

This work is copyright. Except to the extent of uses permitted by the Copyright Act 1968, no person may reproduce or transmit any part of this work by any process without the prior written consent of the Parliamentary Librarian. This requirement does not apply to members of the Parliament of Australia acting in the course of their official duties.

This work has been prepared for the Pre-Election Policy Unit of the Parliamentary Library in response to requests from non-Government Members and Senators to support them in developing policies in the lead-up to the Federal election. The views expressed do not reflect an official position of the Parliamentary Library, nor do they constitute professional legal opinion.

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