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  • rmacculloch

Don't Buy the Baloney on Unemployment Insurance

Below is my Opinion Piece in the NZ Herald today - there's a lot of misinformation being peddled about Unemployment Insurance at present - so wanted to set the record straight since its long been a field of mine in economics:

Who would've thought it? Left and right alike have turned on the Government's unemployment insurance (UI) proposals. Rightists complain it means another tax and would precipitate an outbreak of collective laziness among workers. One needs the threat of harsh unemployment to keep them disciplined, they say.

Meanwhile, leftists are outraged too. They're hating how folks who lose their job would receive 80 per cent of previous wages for six months, meaning higher-paid workers get more. Better everyone gets the same payment, flat-rate, North Korean-style, even if it's uniformly low, they argue. Oh, dear.

That America has a UI scheme - increased in generosity during the pandemic by President Trump - seems not to matter to the Kiwi right. That most equality-loving Scandinavian countries have UI systems seems not to matter to the Kiwi left.

What a lesson in the difficulty of doing a welfare-enhancing economic reform. That being said, Labour hasn't helped things by messing up the specific design of its proposals.

As for National, an opportunity to position themselves as the party of small government proved too hard to miss. Rather than use the UI debate to advocate for tax and welfare reform to lower inequality and enhance productivity, the party simply chose to rubbish Labour's plans. National's objection to UI is an act of shameless hypocrisy. National lobbied in 2020 for a multibillion-dollar scheme to help ensure NZ's entire workforce was supported during lockdowns by receiving at least 80 per cent of their wages.

That policy, the so-called "wage subsidy scheme", was met with wide popular approval. It was also a hastily banged-together and, as such, poorly designed, UI scheme, promoted under another name. So what were the flaws?

First, the funds were paid to firms that were meant to pass the money on to workers. In other words, the funds were not paid directly to the intended recipient - the employee. As a result, it was open to abuse. Firms could receive money, claiming they were in trouble and about to lay off workers, when they were not.

Second, the scheme was unfunded, relying fully on debt. Taxes haven't yet been hiked to pay for it, but they will be in the future.

Initially, the wage subsidy scheme, introduced in March 2020, was capped at $150,000 per employer, meaning larger firms could not take much advantage of it. The estimated total cost to the public purse back then was around $5 billion. So which politician first spoke out against the cap? It was National finance spokesman, Simon Bridges. The cap was indeed subsequently dropped and the cost exploded to around $15 billion.

What's more, there was always a degree of subterfuge about the wage subsidy scheme, since the recipients were not classified by the Government as "layoffs". As a result, they weren't included in Statistics NZ's unemployment figures.

Consequently, playing on definitions, the scheme let our Finance Minister assert he'd kept NZ's unemployment rate low, at 5 per cent when the true rate was around 15 per cent, similar to America's in April 2020. The US rate was mostly made up of "temporary layoff unemployment", being workers who receive support whilst awaiting recall to their employer. NZ counted them as employed.

Yes, our wage subsidy recipients had jobs in name only. Well, not quite. In most countries, it is strictly illegal for the employer to ask such folks to work for them while at the same time receiving public money. Not in NZ it wasn't. That was one sweet deal. Even the US Republican Party didn't dare try it on.

The point of such techy talk is that the differences between UI and our wage subsidy are small, the main one being that the latter is open to grand fiddle by big business.

The media has, of course, run stories of large firms which got the subsidy, $68 million to Fletcher Construction alone (slightly larger than the original $150,000 cap). Even law firms such as Bell Gully claimed around $1.8m of public money, at least for a time before repaying it.

So don't buy the partisan baloney that the current UI proposal is just Labour's excuse for a new tax. You're already going to be paying higher taxes for supporting 1.7 million temporarily laid-off people, as well as Fletcher's profits, these past two years, partly courtesy of National's urgings. Some $15 billion worth.

As for a former Bell Gully chair's line in the NZ Herald that this proposal comes "at the worst possible time", being in the midst of a shock, hold on. Welfare states, and UI systems, in particular, were introduced as a direct result of the fear and uncertainty arising from the Great Depression in 1929. President Roosevelt considered it the best time for the New Deal in the US, as did PM Savage in NZ and Lord Beveridge in the UK.

Regarding the problem at hand, what's a sketch of the answer? Introduce a funded limited-duration UI scheme for employees but at the same time cut corporate and income tax rates. Finance those cuts by stopping the $10b per annum in welfare payments going to the richest families in NZ. Yes, reform can be designed so that workers gain, business gains, and the nation gains. But the knee-jerk primal instincts of the left and right just won't let it happen.


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