Competing with dad: changes in the intergenerational distribution of male labour market income

Two decades ago a discussion of the interactions between expenditure on the welfare system and labour market changes would have focussed on the impact of changing unemployment levels. Today, the unemployment-welfare expenditure link is still important but another factor has been added. Increasingly welfare policy discussions are focussing on the relationship between wage changes and welfare payments. There are three important recurring themes. First, the labour market has been generating wage falls among the low paid and changing the financial balance between low wages and social security benefits. After long periods of high unemployment, particularly long term unemployment, questions are increasingly raised as to whether a significant proportion of unemployment may be attributable to unemployment benefits that are too generous relative to employment at low wages. Second, there are increasing calls to adopt labour market policies to weaken centralised wage fixing and unions and, in this way, encourage low wages to fall further. In order to avoid the rapid growth of the working poor that may result from these initiatives, it is often suggested that labour market deregulation policies should be accompanied by income subsidies for the low paid. Under these circumstances, the demands on the social security budget will grow and there may be pressure to divert an increasing share of resources away from the unemployed towards those employed at low pay. Third, if low wages fall and there is an inadequate employment response, poverty will increase. The combination of unemployment, and low wages when employed, will severely affect the ability of the poor to escape poverty. Now that there is an increased interest in the interaction between wages and social security policy it seems natural to take the next step. This would involve combing the changes in employment and wages to focus on changing labour market income and to tease out some of the implications of the large changes that are occurring. Changes in labour market income can be an important contributor to changes in poverty. There are many dimensions along which changing labour market income could be explored. We choose to direct attention to the changes that are occurring among males of different ages. The changes in Australia are very large. Changes of a similar magnitude are occurring in the UK and similar, but smaller, changes are observed in the US. The paper is structured as follows. Part II provides some general background. It compares Australian changes in the distribution of male wages with changes in the UK and US. The US can be thought of as an unregulated labour market that perhaps describes the direction in which Australia is moving. The UK is particularly interesting because it has followed a policy of labour market deregulation and since many UK labour market institutions were similar to ours the experience there might be particularly relevant. Part III widens the discussion beyond wages to employment and draws attention to the large changes that are occurring in male labour market income across different age groups. It focuses on wage and employment changes and documents the growing loss of labour market income among the young. We conjecture about some of the implications of these changes. Part IV returns to the international context and compares the Australian labour market income changes across different age groups with the changes that are occurring in the US. It adds an employment dimension to the large US literature on wage inequality (see Levy and Murnane, 1992). Part V offers concluding comments and speculates on the important of these large changes for social security policy.