Comment on `Towards Full Employment'.

The article comments on the article "Towards Full Employment," by Peter Dawkins and John Freebairn (hereafter, DF). They have written a very useful and stimulating paper on Australia's most pressing economic problem, unemployment. They present a fairly mainstream analysis of the causes of unemployment, attributing it essentially to two factors, high real wages and inadequate economic growth. They propose a solution aimed at reducing the aggregate rate to around 5 per cent over the next few years, which is to allow a fall in real wages of around 10 per cent. The most significant contribution of the paper lies in DF's recognition of the close nexus between wage outcomes and social security arrangements. This leads them to promote a radically different role in Australia for the tax and transfer system, one designed eventually to lead to negative income taxes. Their essential argument for a negative income tax is that such an approach allows cuts in real wages without increasing the dispersion of incomes; further it is alleged that the policy can be designed to avoid the current high effective marginal tax rates which make the reduction in unemployment more difficult than it need be.