Brian Fallow: Employment Insurance won’t come cheap

OPINION:

Like the ACC on which it is modeled, unemployment insurance for those who lose their jobs through layoff or illness would be civilized reform. But it won’t be cheap.

It extends the concept
from social insurance to a broader set of misfortunes than accidental injury, though it leaves much more to a still very low social safety net.

As proposed in the discussion paper put out for consultation this week and endorsed by Business NZ and the Council of Trade Unions, it would replace up to seven months 80% of wages or wages lost by those ‘displaced’ from their jobs through dismissal or sickness.

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 this additional cost on workers, many of whom face falling real wages, and employers, many of whom are already facing a impressive array of additional costs – well, the timing isn’t great.

Finance Minister Grant Robertson’s response to this has been that the new regime is not expected to come into effect until the end of next year, by which time inflation is expected to be back close to the 2% midpoint of the Reserve Bank target range.

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

“It’s a tax on jobs and a solution in search of a problem,” said Opposition Leader Christopher Luxon.

“It will effectively punish labor and subsidize unemployment,” said lawmaker David Seymour.

“A classic productivity killer” was the verdict of the Taxpayers’ Union. “Why bother finding a new job when you can stay home for six months on almost full pay, thanks to the taxpayer?” This is easy nonsense.

On the one hand, almost all developed countries—Australia is the other exception—have unemployment insurance in one form or another, and most of them have much higher productivity and incomes than we do.

And on the other hand, a key objective of this reform would be to reduce the productivity-stifling and welfare-sapping effects of “wage scarring”.

Wage scarring is the total future wages lost when laid-off people take, out of necessity, the first job that comes along, whether or not it makes the best use of their skills.

They are also giving up an opportunity to retrain and hone their skills. Increasing the possibilities to do so, through active labor market policies, is another key objective of the proposal.

“Compared to 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 earnings and poorer conditions. With insurance payments that are close to the level of lost wages, paid for a reasonable period, workers would stand a chance of finding the right job, upgrading or retraining, or coping with health issues. Insurance payments would give workers opportunities they currently don’t have,” the discussion paper says.

Economists at the Motu think tank, in a paper published last year, estimated that the future wages lost by people who lose their jobs in a year when the economy recovers could have a net present value. approximately $3.3 billion or 1%. of GDP. On other sets of assumptions, estimates of this unnecessary opportunity cost range from $2 billion to $25 billion.

The paper acknowledges the risks that with an insurance scheme in place, employers might become more willing to lay off people or that workers in declining companies might wait to be laid off. “These effects could increase economic displacement,” he says, “but they are likely to be small.” The reasons given by the document for the companies to support the plan are as follows:

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

• Displaced workers would have more opportunities to retrain and upgrade their skills, also improving the skills available to employers

• There would be more opportunities and benefits for workers with health conditions or disabilities to stay on the job or successfully return to their workplace, reducing staff turnover and retaining experienced staff in the workplace. businesses.

• This could reduce workers’ resistance to change (through confidence in an effective social protection system), leading to increased support for corporate restructuring

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

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

A more cynical take on why the proposal might need corporate backing is offered in a scathing critique of the plan by Simon Chapple and Michael Fletcher of Victoria University’s Institute for Governance and Policy Studies.

“It is possible that large New Zealand companies favor social insurance because they provide a socialized cushion that allows the maintenance of an otherwise easy to hire and easy to pull labor market regulation under the aegis of the “flexicurity”, for which she has a preference.”

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

“It’s hard to see why someone who ends up unemployed has more merit for income support if they lose their job due to layoff or illness than those who lose their job or go on on welfare for other reasons,” they say.

Chapple and Fletcher see a risk that compulsory unemployment insurance – administered by the ACC rather than the Department of Social Development – ​​will reduce public support for the current social protection floor by removing many of the remaining users from the social protection system. of the middle class, who are currently generally short-term users.