Economist Brian Easton says providing for the redundantly unemployed is admirable but difficult and expensive to implement

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

The 2021 Budget announced that the government was, at the urging of Business NZ and the Council of Trade Unions, committed to the development of a Social Unemployment Insurance scheme. It is likely to have two main components. First, it would provide income protection for those who become redundant; second, it could provide a constructive path for redeployment of the redundant.

Essentially social unemployment insurance is income smoothing so that the redundant do not suffer an immediate and catastrophic income collapse. There are a number of ways this of doing this. Here is one. (Further details are here.)

The background is that we have two distinct public systems of income support. The first, which might be called ‘Woodhouse’ because it was consolidated by the 1966 Royal Commission on Accident Compensation presided over by Owen Woodhouse, goes back to Bismarck who introduced in 1889 to Germany a scheme which was contributory with earnings-related support for those who contributed when the need arrived. It is the principle underpinning our Accident Compensation Scheme and Kiwi Saver.

The second system, we shall call ‘McCarthy’ after Thaddeus McCarthy, who presided over the 1972 Royal Commission on Social Security which consolidated it, is non-contributory and funded from general taxation and entitlement is universal for those who belong to the appropriate category of need. It began in New Zealand in 1898 with the Old Age Pension. There have been various extensions, most notably by the 1938 Social Security Act.

(There is a third part of our public system which provides grudging relief to the ‘deserving’ poor who are not properly covered by the first two. It goes back to the English Poor Laws of the late sixteenth century. Our nineteenth-century British ancestors came out here to escape it but it followed. The McCarthy system was developed to avoid it.)

The two systems do not always interface well. For instance, an injury from an accident results in compensation from ACC (Woodhouse); the same injury from sickness gets considerably less support from social security (McCarthy).

On the other hand, Kiwisaver (Woodhouse) sits on top of New Zealand Superannuation (NZS) (McCarthy). This might be called the (Henry) Lang merger, because the Secretary of the Treasury proposed something similar for retirement support in 1974, synthesising the two approaches.

Redundancy support is a bit shambolic. The worker might be entitled to the unemployment benefit (McCarthy) and there may be some earnings-related lump sum payments from the employer which is a kind of Woodhouse scheme. The clumsiness and erraticness is a major reason why Business NZ and the NZCTU are seeking a better solution.

As far as a worker is concerned, the income smoothing from the new scheme will give her or him time to find a new job and to adjust to new circumstances. Many workers have fixed commitments – like housing outlays – that cannot be changed the day after they are laid off.

There are a number of possibilities including creating a parallel to ACC and upgrading the unemployment benefit. (Try to do both in parallel and you end up with the botch job of the Treasury’s retirement scheme of 1998; people between the two schemes faced very high effective marginal tax rates.) I am attracted to a Lang-type scheme (like our retirement provision) in which there would be a base-tier entitlement of flat-rate social security benefit (at, say, 30 percent of the median wage – near the current rate) and a contribution-based second tier which would be equal to 50 percent of recent earnings. So somebody on the median wage would get 80 percent of their earnings up to a maximum cap,  just as they do for ACC.

(Yes, the scheme is slightly more generous to the lower paid. It is not unreasonable that those on higher earnings to make more personal provision for the shock of the loss of a job. A two-tier scheme makes a mild reduction of income inequality.)

Since the proposed scheme provides earnings-related support funding it needs to be based on a levy on earnings. My thinking is that there should be a fund which builds up reserves in good times and runs them down in depressed time (so it has a cyclically offsetting effect which would be a further benefit). Keep the actuaries away from the fund (you will recall that Nick Smith almost wrecked ACC by trying to make the fund actuarially balanced). I would set the levy rate based on the average need over, say, the last 10 years – about the length of three standard business cycles.

There is a critical difference between whatever is proposed for the redundant and ACC, which pays a long-term benefit where the injury is permanent. Unemployment from redundancy is short term, so the coverage is short term – the usual suggestion is for six months. The idea is that the redundancy support cushions the shock of the loss of income, while the redundant seek alternative employment.

What if the worker finds a job within the six months (most currently do)? Does the income support immediately cease or taper off? Currently the unemployment benefit stops immediately.

However, Business NZ, the NZCTU and the government have an alternative approach. Go back to the late-1980s/early-1990s, when about half the workforce lost their jobs from neoliberal policies and unemployment rose to above 10 percent of the labour force. Unemployment was not higher because most workers found another job reasonably quickly. Most found a job which was not as well paid, and was often below their abilities.

Instead the proposal wants to offer the opportunity to upgrade or redirect the newly redundant’s skills. We need to rely more on upgrading our labour force than turning to immigrants for skills. The idea is that the government macroeconomic policy will maintain demand pressure in the labour market (while the Reserve Bank controls inflation). So in principle the jobs are there. It is a matter of matching the redundant to them, including providing them with the requisite time and skills.

One of the biggest difficulties is that the new jobs may be in different regions from where redundancies occurred. For instance, Southland’s aluminium smelter employs about 800 workers, almost all of whom will become redundant. But the new jobs for them may be in the North Island. Given the redundant’s local connections and housing and schooling, they may want to stay south. The government might replace the lost Tiwai jobs but only with a substantial subsidy (as it has been doing). We could end up with the plethora of subsidies we associate with Muldoon era, retarding the regional adaptation which has been integral to New Zealand’s development since the arrival of the first Polynesians.

So there is a lot of devil in the details. One admires the courage of the government in going forward. But will, or can, it deliver? The step after – support for the sick?

(For a Motu report on the issue with a lot of research backing see here.)

This column was previewed in RNZ Nights by Bryan Crump: 15 June, 2021)

Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.