Coronavirus: Jobseeker leaves recipients facing huge income cliff

The government’s plan to help Australians without work in the pandemic has a big loophole that means you can get more cash for doing less.

OPINION

We need to talk about JobSeeker.

The government added a $550 supplement payment on top of the regular unemployment benefit and it is going to create a nightmare scenario if we do not change it.

It creates dangerous incentives in the welfare system because its design leaves recipients facing a huge income cliff.

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People queue up outside a Centrelink office in Melbourne in April. Picture: William West/AFP

THE FIRST CLIFF

Normally, if a person is on the dole (currently known as JobSeeker, formerly known as Newstart), they can legitimately earn a few dollars without losing the payment completely.

As they make more from work the government payment is progressively reduced, as the next graph shows. For example,

• if you do no paid work at all you get $566 a fortnight,
• If you earn $500 a fortnight in the private sector you can still get $343 from Centrelink for a total of $843; and
• if you earn $1200 you get zero from Centrelink.

Jobseeker for a single person with no caring responsibilities; Does not show taxes.

This is a good system. Otherwise unemployed people wouldn’t be willing to take on a small part-time job, because they’d lose their whole income.

It encourages people who are looking for a job to take a few hours work if it is available.

Fading-out of welfare payments is a good policy.

But the new $550 JobSeeker supplement doesn’t have a fade-out.

As the next graph shows, you get the $550 a fortnight if you’re receiving JobSeeker no matter what, whether you’re working zero hours or grinding away for most of the week to make $1000 a fortnight.

Jobseeker for a single person with no caring responsibilities. Does not show taxes.

If you go from earning $1000 a fortnight to earning $1100, you suddenly lose the whole $550 payment. Your income crumbles.

The situation as it stands means many people are better off working fewer hours, or turning down a promotion. That’s crazy.

The welfare system is not meant to discourage people from working.

In fact under the JobSeeker supplement, you’re slightly better off earning $0 a fortnight from a job than $1100 a fortnight.

That’s bad design. It’s acceptable only in an emergency, and yes, coronavirus is an emergency.

But later in the year, as we begin our long march back to normality, we need to fix it.

We need to get rid of the cliff but we don’t need to get rid of the new generous approach.

One popular “solution” would be to simply get rid of the $550 JobSeeker supplement and go back to the old system of paying people just $550 a fortnight.

However attractive that simple idea is, we should be very careful of it. Not only is the old JobSeeker too low to live on, but by going back to it we could harm the economy.

“The sudden withdrawal of massive government spending will leave an enormous hole in economy activity and the incomes of business and households,” said the Grattan Institute, an economic think tank.

That’s the second cliff.

CLIFF TWO

Australian income and spending will collapse if the government simply terminates the JobSeeker supplement payment and the JobKeeper payment at the end of September, as planned.

“[T]hese emergency measures have been successful at supporting the incomes of many households and businesses … each and every one will be gone by the end of October, making October a very dangerous time for businesses and for the economy,” said the Grattan Institute.

Australia’s economy is being held together at the moment by the huge range of new government payments.

The payments can’t last forever, but we can’t expect to push the Australian economy off a cliff and see it fly either. We need to phase out the payments gradually.

One suggestion for the JobSeeker supplement is to reduce it down from $550 a fortnight to $370.

This idea comes from Australian National University Professor Peter Whiteford, and he argues it would be a great chance to simplify our whole welfare system.

You see, the aged pension and the disability pension are currently set $370 a fortnight higher than JobSeeker (once you include the pension supplement and energy supplements).

Lifting JobSeeker by $370 a fortnight would make JobSeeker the same as the pension, and reduce the incentive for people to try to qualify for a pension instead of JobSeeker.

This is just one idea, and it’s a neat one, because it solves another problem at the same time.

But whether we do this or something else, one thing is clear: something needs to be done.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.