The wrong kind of legacy project

Dr Oliver Hartwich
The Australian
28 September, 2022

If you are a political reformer, New Zealand should be your oyster. You could turn around a failing education system. Do the same for healthcare. If you dare, you could even try to fix the housing market.

There are endless opportunities to leave a legacy of positive change. Not least because almost every aspect of life in New Zealand is in crisis.

The New Zealand Government, meanwhile, has other plans. It has picked the one part of the New Zealand economy that does not require a big reform for its biggest legacy project: the welfare state.

Yes, welfare in New Zealand could be improved at the margins. In particular, it might be a good idea to enforce work requirements for beneficiaries who are fit for work. The Ardern government substantially eased enforcement during Covid but was slow to reimpose requirements, despite an overheating labour market. An increase in beneficiary numbers should not have been a surprise.

Aside from that, New Zealand’s welfare state operates relatively well as it is. It assists those in need. Unlike many European countries, it does not require high social security taxes. Finally, it provides limited incentives for people to view welfare as a long-term lifestyle choice.

In short, there is no urgent need to reform welfare.

That makes it odd that the Government of New Zealand is setting up a ‘Social Unemployment Insurance’ scheme to supplement the benefits system. And, as its flagship legacy project, it pursues this ‘reform’ zealously.

The basic idea behind the scheme is easily explained. In the future, a percentage of the salaries of all New Zealand employees will be paid into this new insurance. In return, they will be entitled to 80 percent of their salary for up to seven months if they lose their jobs.

To an average employee, social unemployment insurance sounds like a good idea. You would not have to worry about losing your job anymore.

If you became unemployed, you would not be dependent on meagre benefits. Instead, you would be able to maintain your lifestyle while still paying your mortgage and bills. Also, you could relax a bit about finding work. What’s not to love?

Unfortunately, the same features that make social unemployment insurance so tempting also make it economically problematic.

There is a general rule in economics that if you pay more for something, you will get more of it. This is also true of unemployment.

Social unemployment insurance payments provide people with an incentive to remain jobless for longer. Finding a new job is not that urgent if you receive 80 percent of your previous salary for, effectively, having a holiday at home.

Researchers have known about these effects for years. A US study by Aland Krueger and Andreas Mueller, for instance, found that the more generous unemployment benefits are, the less time the unemployed spend searching for new employment. Unsurprisingly, job search intensity only increases shortly before benefits are scheduled to cease.

In this way, social unemployment insurance schemes prolong periods of unemployment. This is the consensus view in labour economics, and it is well-documented in empirical research.

From an economic perspective, it is not desirable to have people paid to sit at home who would otherwise work.

But it is not only this macroeconomic effect that makes social unemployment insurance so dubious. It actually hurts the people it purports to help.

Obviously, people claiming their insurance pay-outs are only too happy to receive them. So how are these recipients inadvertently hurting themselves?

Economic research by Eva Bell and colleagues has shown that employers use job candidates’ unemployment duration as a sorting criterion. The longer people are out of work, the worse their chances are of finding new employment. 

Inducing people to stay out of the labour market for longer than they otherwise would risks making them less employable. They might not attract high salaries once they have been out of the labour market for too long. Against this, there is only a vague but hardly substantiated hope that social unemployment insurance might help jobless people avoid taking jobs for which they are overqualified.

So, there are no good, convincing arguments for this scheme. It would structurally increase unemployment in New Zealand and make its ‘beneficiaries’ worse off. It will also decrease take-home pay due to the levy required to fund it.

There is no real need for it, either.

Both New Zealand’s current rate of unemployment and its long-term unemployment rate average of the past two decades lie well below the OECD average.

From 2000 to 2020, New Zealand’s average annual rate of unemployment was 5%, compared to 6.9% for the OECD. It currently stands at 3.3%.

Long-term unemployment, defined as people unemployed for 12 months or longer, is also comparatively rare in New Zealand. From 2000 to 2020, New Zealand’s average annual share of long-term unemployment in total unemployment was 11.8%, compared to 29.4% for the OECD and 44.7% for the EU. Put differently, only 1 in 169 people in the New Zealand labour market was affected by long-term unemployment.

Unemployment is thus a less pressing policy concern in New Zealand than in many other developed economies. Maybe that even has something to do with the historical absence of schemes like the one the government is proposing.

To round off arguments against the scheme, the timing of its proposed introduction could not be worse. New Zealand businesses are struggling with an avalanche of cost increases. To add almost three percentage points to their wage bills for the new levy in the current circumstances would be painful for many businesses – and potentially fatal for some.

There is only one reason the New Zealand Government might want to introduce this new social insurance: as a legacy-building project. Because it would be the biggest addition to the New Zealand welfare state in decades.

This is what makes it tempting for the current NZ Labour Government. It would leave a mark on New Zealand policy which, once established, would be hard to reverse.

And for a Government that has made no progress on education, health, crime, defence, foreign policy, infrastructure, productivity, local government, race relations – or anything else that matters – leaving at least one lasting bit of policy, however flawed, must be quite a tempting idea.

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