In 2006, the Howard government’s Welfare to Work reforms placed new eligibility requirements on recipients of the Disability Support Pension (DSP) and Parenting Payment (PP), with the aim of reducing their numbers. Since then, the number of people on PP has dropped by about 20%: a remarkable result. However, the number of people on DSP has marginally increased. This suggests that DSP should be the focus of future welfare reform.
Evaluating recent welfare reform is particularly important at a time of rising unemployment. When jobs are hard to find, the incentive for unemployed people to move to other welfare payments such as DSP grows. There is a real danger that rising unemployment could undo the recent gains in reducing long-term welfare dependence.
Several relatively easy policy changes can be made to DSP, such as extending work requirements to existing recipients who were ‘grandfathered’ from the recent changes. But this alone will not solve the problem of growing DSP numbers.
Some of the success of the PP reforms is undoubtedly due to the fact that the new jobs being created were suitable for many sole parents, such as part-time positions in female dominated industries. However, many DSP recipients are older, unskilled people who have work experience in areas where jobs are limited. A key component in reducing welfare numbers—both among DSP recipients and other payment types—must be removing structural impediments to greater unskilled job creation.
One solution is a system of ‘in work’ benefits that uses the tax-transfer system to top-up the disposable income of low-paid workers while letting the minimum wage fall. This strengthens both the incentive for employers to hire low-skilled workers and for welfare recipients to move into work. This type of system has some drawbacks but represents the best chance to reduce long-term welfare dependency and stimulate jobs growth.
Policymakers should draw lessons from both the successes and failures of past welfare reform to ensure that any short-term rise in unemployment is not the catalyst for an explosion in long-term welfare dependence.