sign uplog in
Want to go ad-free? Find out how, here.

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

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.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

11 Comments

Would the insurance coverage be affected by any redundancy payments received.?

"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 understand this to mean not providing for future claims and preferably dipping into the current account to fund ACC shortfalls. Providing for future claims does of course increase levys.
I once was told an actuary is an accountant with brains. Perhaps one could extend this to economists as well. Alternatively an actuary is an accountant with out a personality.

Interesting read. One thing it doesn’t cover (and that I have seen no media on) is, what is the problem that the proposed unemployment insurance scheme seeks to address? Over the past 20 years, on average, has there been a major structural problem with significant numbers of people losing their jobs and having their houses repossessed or suffering other long term consequences from a short term loss of income? Or is the scheme designed more as a preparation for a major shock a la COVID, to be used instead of a wage subsidy?

Does the problem merit an additional tax on every worker’s wages (which will no doubt be called a levy / pre funded rebate payment / funbursement)? How would the scheme affect incentives to quickly get another job and minimise CV gaps?

The current system requires you to have hardly any cash in the bank before you get the benefit plus a stand down period. Most people would run out of cash after about 2 weeks then the debts would pile up for 2 months before they could receive a pittance which is the beginnings of a poverty trap. COVID was a caution that shocks do happen. I'd rather my grandchildren wouldn't have to pay off the debt raised to cover the next shock, if there is one. A precautionary approach isn't so bad.

Mmmm... I see this as an opportunity to retire at 64.5 years'.

I am always curious when I read articles like this that informed writers tend to overlook the experience of United States programs. In the past 50 years I have seen NZ turn to the US for many business, cultural, and entertainment influences -mainly Capitalism at work the country will import US ideas, but when it comes to Wellington and policy thinkers they seem to assiduously avoid looking for settled solutions that originated in the US first, so much so that it took 40 years longer to bring in Kiwi Saver (US introduced in early 1970's), and still far more generous to the worker since no taxes are paid on annual contributions.) Unemployment Insurance has been in force in the US for nearly 80 years. As a former US employer I can tell you Employer Contributions are based on total payroll but factored by company "layoff experience". The higher the frequency of "lay offs" the higher the premium. Thus Building companies who laid off their chippies each winter in the North where it was too cold to work outside paid perhaps 15% of payroll for Unemployment Insurance-but their employees were taken care of over the winter. My company paid 2% of payroll as we never laid anyone off. Employer paid premiums are high enough to restock the State Unemployment Insurance Fund so that cycle to cycle it has worked for 80 years, albeit often times individual states needs loans from Uncle Sam-like in 2020/2021 with Covid era layoffs.

The IRA is taxed, at withdrawal ....

Reframe the approach from dealing with redundancy to improving job mobility.

If the objective is to increase the 'fluidity' of the labour market, then I suggest we look at a tripartite fund to cover activities like job training, management development, job search, job change etc. This would address businesses' concerns about funding staff training only for them to move onto another business, lack of investment in training and management development, and increase the ability/competition in job changing which should result in higher wages.

Just another tax and more complexity for employers.

I struggle with the concept of the government providing social unemployment insurance.

This would be additional taxation, some of which would come from the poor/middle class and be redistributed to the richer if they become unemployed.

It would be far better to:

a) allow access to kiwisaver in the first instance in the case of redundancy (savings for a rainy day)
b) require employers and insurance companies to provide income protection insurance options (with minimum requirements) to employees, with the employees paying the fee.

Not buying it. This is exactly what people are paying tax for already in the form of social welfare. To then slug them with an extra payroll fee for unemployment insurance ala ACC is a defacto admission that social welfare and the unemployment benefit is not fit for purpose.

If it doesn't work for people who have been recently put out of work, then one must wonder who it does work for? And if it's not for short-term stints on unemployment, who is using it, and for how long? At some point this gets into the 'too hard' or too politically sensitive basket, but I'd like to know why wholesale reform of the UEB isn't being discussed and once again, the government is talking about reaching into the pockets of workers.