A pragmatic idea for labour market reform
The case for labour market reform is obvious enough. If people have a marginal productivity of labour below the minimum wage, then they will not get a job. The only way to fix that is to (1) increase their productivity; or (2) lower the minimum wage. Increasing productivity is a slow long-run project, so the only short-term option to increase employment is to lower the effective minimum wage (including all the costs of employing somebody, not just the wage).
Equally obvious is the political reality that prevents real reform. One of the reasons that the Liberals lost the last election was the unpopularity of Workchoices — the overly complex and bureaucratic attempt to marginally increase labour market flexibility. The consequence has been that labour market reform has stalled and gone slightly backwards.
In this context, what can be done? I have one minor suggestion…
Double council rates – abolish payroll tax
Over at Catallaxy there has been a bit of a raging debate about land value taxes. I find it all quite intriguing.
The argument for land value taxes is that they essentially entail no dead weight costs. Whether this is true or not is open to some debate however I think it seems reasonable to claim that they entail a lot less in the way of dead weight costs than most other taxes. So on that basis it would seem reasonable to suggest that as a starting point we abolish payroll taxes and make up the revenue via a doubling of council rates (assuming we have to be revenue neutral about such things). Both taxes currently amount to about 4.5% of total government revenue.
The following article argues that ironically a revenue neutral shift toward more land value taxation would in fact be good for current land owners. That whilst the land tax would pull down property values, the upward push on land values from the subsequent stimulus to economic production would more than compensate.
http://www.lvrg.org.au/
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