Brian Fallow: Job insurance plan wont come cheap


Like the ACC it is modelled on,unemployment insurance for those who lose their jobs through redundancy or illness would be a civilised reform. But it will not come cheap.

It extends the concept of social insurance to a wider set of misfortunes than accidental injury, even if it leaves many more to a welfare safety net that is still slung low.

As proposed in the discussion document put out for consultation this week, and endorsed by Business NZ and the Council of Trade Unions, it would replace for up to seven months 80 per cent of the wage or salary lost by people “displaced” from their jobs by redundancy or illness.

But it would also widen the gap between what it costs to employ someone and their take-home pay by 2.78 percentage points, split equally between employee and employer.

At a time when inflation, not unemployment, is the most pressing economic challenge, imposing that extra cost on workers, many of whom face a falling real wage, and on employers, many of whom already face a daunting array of extra costs — well, the timing is not great.

Finance Minister Grant Robertson’s response on that point was that the new regime is not due to come into force until late next year, by which time inflation should be back near the 2 per cent mid-point of the Reserve Bank’s target band.

Predictably, the reaction from the political right has been scorn and derision.

“It is a jobs tax and a solution looking for a problem,” said leader of the Opposition Christopher Luxon.

“It will effectively punish work and subsidise unemployment,” said Act leader David Seymour.

“A classic productivity killer” was the Taxpayers’ Union’s verdict. “Why bother finding a new job when you can sit at home for six months on nearly full pay, courtesy of the taxpayer?” This is facile nonsense.

For one thing, almost every developed country — Australia is the other exception — has unemployment insurance of one form or another and most of them have much higher productivity and incomes than we do.

And for another, a key objective of this reform would be to reduce the productivity-hobbling and welfare-sapping effects of “wage scarring”.

Wage scarring is the totalof the future wages lost when people who are made redundant take, out of necessity, the first job that comes along regardless of whether it makes the best use of their skills.

They also forgo an opportunity to retrain and upskill. Increasing the opportunities to do that, through active labour market policies, is another key objective of the proposal.

“Compared with workers in other countries, displaced New Zealand workers appear to experience greater wage losses when they return to work, suggesting poor use of their skills, lower income and poorer conditions. With insurance payments that are close to the level of lost wages, paid for a reasonable period, workers would have a chance to find the right job, upskill or retrain, or address health conditions. Insurance payments would give workers opportunities they do not currently have,” the discussion document says.

Economists at theMotu think tank, in a paper last year, estimated that the future wages lost by people who lose their jobs during a year in which the economy is enjoying an upswing could have a net present value of around $3.3 billion or 1 per cent of GDP. On other sets of assumptions, the estimates of this wasteful opportunity cost range from $2b to $25b.

The document acknowledges the risks that with an insurance scheme in place, employers could become more inclined to make people redundant or that workers in declining firms could wait to be made redundant. “These effects could increase economic displacement,” it says, “but are likely to be small.” The reasons the document cites for businesses to support the plan are:

• Longer job search periods would enable better matches between displaced workers and subsequent employers, improving the skills available to employers

• Displaced workers would have greater opportunities to retrain and upskill, also improving the skills available to employers

• There would be greater opportunities and benefits for workers with health conditions or disabilities to stay in work or successfully return to their place of work, reducing staff churn and keeping experienced staff in businesses

• It could reduce worker resistance to change (through the confidence of an effective social protection system), leading to more support for business restructuring

• It could increase workers’ willingness to leave secure employment for opportunities in emerging and higher productivity sectors where there is a greater risk of displacement, and lessen the need for entrepreneurs to offer premium wages to attract workers into start-ups

• And it would help sustain consumer demand through recessions, reducing the risk of business closures.

A more cynical view of why the proposal might command business support is offered in a trenchant critique of the plan from Simon Chapple and Michael Fletcher at Victoria University’s Institute of Governance and Policy Studies.

“It is possible that big business in New Zealand favours social insurance because it provides a socialised cushion which allows the continuance of otherwise easy-hire, easy-fire labour market regulation under the umbrella of ‘flexicurity’, for which it has a preference.”

Chapple and Fletcher argue that a social insurance scheme disproportionately benefits the employed middle classes with sufficiently stable employment histories to qualify for significant social insurance, playing politically on a classic middle-class fear of downward mobility.

“It is hard to see why someone moving into unemployment has greater merit for income support if they lose their job due to redundancy or sickness than those becoming unemployed or moving onto welfare for other reasons,” they say.

Chapple and Fletcher see a risk that mandatory unemployment insurance — administered by ACC, rather than the Ministry of Social Development — will reduce public support for the current social welfare floor by removing from the social welfare system many of the remaining middle-class users, who are currently typically short-term users.

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