Insuring against OECD’s blindspot

Roger Partridge
Insights Newsletter
4 February, 2022

The OECD’s country report for New Zealand always reveals sobering home truths. This year’s was no exception. If the pandemic was not enough of a threat, the OECD warns of a deluge of other risks. A large and sudden fall in house prices. Unsustainable levels of Government spending. And terms of trade susceptible to a global slowdown.

Yet, OECD officials themselves are not immune to self-delusion, and this year’s report is littered with mistaken beliefs. At least on one matter – unemployment insurance – Minister of Finance Grant Robertson will have been delighted by the OECD’s myopia.

On Wednesday, Robertson announced details of the Government’s proposed compulsory unemployment, sickness and disability insurance scheme. Foreshadowed in the May 2021 budget, the proposal involves ACC-style insurance for workers who lose their jobs or face long-term sickness or disability.

Those laid off or who have to stop working because of a health condition or disability will receive 80% of their usual salary for up to seven months, subject to a salary cap set at the same level as ACC. A compulsory levy (a tax by any other name) of close to 3% will pay for the scheme, with workers and firms both contributing.

The OECD has long supported unemployment insurance schemes. Many developed economies have them, especially in Europe.

And like the Government’s innocuous-sounding “Fair Pay Agreements”, unemployment insurance sounds good. Who would not want to receive up to 80% of their income for seven months if they were laid off or could not work due to ill health?

But as with FPAs, there is a catch. Indeed, several of them.

First, New Zealand suffers from no identified problem for compulsory unemployment insurance to solve. Our welfare system is well targeted by international standards. We have comparatively low levels of unemployment (including less than half the OECD average level of long-term unemployment).

Secondly, Robertson’s scheme is estimated to cost firms and workers $3.5 billion a year – a hefty bill for insurance most workers have chosen not to purchase for themselves.

More importantly, as the Initiative showed in our 2021 research note, Unemployment insurance – more tax for more unemployment, the international evidence reveals costly unemployment schemes like Robertson’s lead to increased unemployment, including long-term unemployment.

Only a moment’s thought reveals why. If the Government increases the generosity of the unemployment benefit, the incentives for the unemployed to seek work are relaxed. And the longer workers stay out of the workforce, the harder it becomes for them to return to it.

Unemployment is a peril for workers. But Robertson’s compulsory insurance is worse.

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