Tuesday, December 16, 2008

ReStart could rev-up recession

The government's temporary, boosted assistance for workers made redundant, ReStart, may play a role in deepening the recession. That is because, as usual, with welfare paid out of general taxes there will be distortional incentives.

The package is going to encourage these responses.

From employers;

1/ They will feel more comfortable laying off workers. An employer who might otherwise have worked with staff to share in a decreased return from the business might now mentally justify making one or two redundant. Especially if he is inclined to keep his own returns to a status quo.

The Minister has been explicit in urging employers to ring the 0800 number to find out what support can be provided if employers 'need' to make staff redundant. Some individuals take their 'morality' from the state. They will be assured they are doing the 'right' thing.

2/ Employers will be incentivised to minimise redundancy payments in order that employee qualifies for greater assistance.

From employees;

1/ As the extra assistance is means-tested the redundant worker may be tempted to take a lower redundancy payment, or dispose of any cash assets or investments within 20 days. He will find ways to maximise the assistance on offer even if conditions have been put on eligibility for reasons of 'fairness'.

2/ Employees will be encouraged to take voluntary redundancy where they might otherwise not have. For instance, low paid women who have left DPB to work 20 hours may find a return to benefit will see them in a better financial position (for up to 16 weeks at least).

These incentives then, could drive unemployment higher than it would otherwise have gone, thereby reducing desperately needed productivity. The rise could be compounding.

What will it cost?

The costing of ReStart is based on a 'worst case scenario' of 70,000 job losses over two years. As I have previously pointed out however, if Treasury predictions are right (and they are lower than other economists) and unemployment rises to 5.7 percent by 2010 then the total unemployed is likely to be over 135,000.

The costings of $50 million are far too modest. Even if they are based on 70,000 redundancies the figure assumes an average payout of $714. Using the Ministry's own examples of typical payouts, this assumes each person becomes re-employed within 8 weeks.

There are also difficulties with the concept of self-employed people effectively making themselves redundant. A self-employed person just scraping by, who was considering a move back to being an employee anyway, could be tempted to declare himself redundant in the interim.

Additionally there will be people who miss out on the help because of technicalities. For instance a worker with a long and stable employment history who just happened to have a break during the last 6 months will be ineligible.

In countries which operate dedicated unemployment insurance schemes it is normal to pay one claimant more than another based on the difference in the premiums that have been contributed. But that is not what is going to happen here. The extra assistance qualified for is based upon need, not contribution. Sounds fair but why is one family needier than the next? Perhaps one family has been living frugally in order to pay down their mortgage while the next has been living beyond their means. The family that will be eligible is the second because they have high mortgage repayments and no savings. (A cynical bureaucrat may point out that the first family, which is used to living frugally will manage better on just the basic dole whereas the second is accustomed to chomping through more money.) This is more of the socialist imperative of punishing responsibility and rewarding irresponsibility.

The good aspect of this development is the government employing the principle of temporary assistance. That is something we need to see more of. But not on top of indefinite entitlement benefits.

6 comments:

Anonymous said...

Spot on.

Where was the principled opposition in parliament?

If ACT won't make a stand on sound economic ideas, then they appear increasingly pointless.

Dave Christain

Adolf Fiinkensein said...

Good God Almighty! If ever I needed to be reminded why ACT struggles to poll more than 4%, this post and comment provides the explanation.

Only the loopiest of imbeciles could imagine a person would engineer his own redundancy for a lousy $2.5k.

Do you reckon Rodney and Co will vote again st it?

Lindsay said...

There is no voting on it becase no legislation is required. I would be interested to hear what Roger Douglas thinks though. He is bound to identify what the unintended consequences will look like.

And can I just stress that I do not speak for ACT. So don't use my posts as an excuse to have a go at them.

(Used to be you derided ACT over their inability to poll more than 1.5% thanks to 'imbeciles' like me. Funny how the percentage has had to be amended upwards aye)

Anonymous said...

They will feel more comfortable laying off workers

This is a good thing.

Employers will be incentivised to minimise redundancy payments

And this is a better thing. I can't understand how or why anyone gets redundancy payments: weren't they eliminated in 1984? I guess not - so an even better move would be overriding legislation removing all redundancy provisions.

or dispose of any cash assets or investments within 20 days

Right. And this is a real problem, IF you've 20K in the back, better spend 4K on a big TV and a trip to Fiji - it's the last you'll be enjoying for a very, very long time! This is a real problem.

Employees will be encouraged to take voluntary redundancy

right - but again I can't see this as a problem. The real issue her are NZ's crazy workplace laws biased in favour of employees - anyone can leave at any time, so what's the point of "voluntary redundancy" except to get a bit of cash. The solution here, once again, is to remove all redundancy arrangements.

a worker with a long and stable employment history who just happened to have a break

Sorry. Stable workers don't have "breaks"

These incentives then, could drive unemployment higher than it would otherwise have gone

Given that NZ's unemployment is probably heading up to 10-15% in a couple of years, I doubt this will make any difference whatsoever. From a business perspective, however, its better if it gets up there sooner rather than later - hopefully this will help get this moving again.


this assumes each person becomes re-employed within 8 weeks.

Any public policy that is not based on the fact that NZ's unemployment is going to reach 10-15%, that many of those made unemployed over 40 will never be re-employed, that corporate tax revenue will go to zero, that income tax revenue will come down, and that the operations of government must be funded from income tax and GST for the foreseeable future (10-15 years) - is basically, living in a dream world.

The urgent policy prescriptions for dealing with this situation are well known: corporate tax to zero; remove benefits; remove health & education from taxes -- and of course only ACT (well only Roger) comes close to enunciating a realistic policy, and even then, the timeframes and compensations (tax-payer funded universal insurance schemes - COME ON) will not really address the issues.

Anonymous said...

Adolf, if an employee were considering redundancy - for any of the myriad reasons which people have for the decisions which they make - the $2.5K would be in the pro column never in the con.

I have known plenty of employers who have genuine qualms about laying people off. This will tip the balance against negotiating for pay cuts with all staff, and in favour of redundancies.

If you pay for something then you will get more of it. Only those who approve of increasing unemployment could support this proposal after serious reflection (assuming a soupcon of economic understanding).

Anonymous said...

This will tip the balance against negotiating for pay cuts with all staff, and in favour of redundancies.

perhaps. Even if it did: that would be a good thing!
Because on-costs are generally fixed, redundancy saves more for employers than across-the board reductions would - which is partly why employees prefer across-the-board cuts rather than letting the losers go.

but more importantly, this is a false dichotomy. A prudent employer would never make this tradeoff: if redundancies are required, they are required whatever pay rates other employees have. Similarly if pay cuts are required then pay should be cut -and given the fact that "workers" are paid 30% more in NZ than they would get in australia for the same productivity, there is no question across-the-board cuts are required (30% in the private sector; 50% in the public sector).

But firing people has the great benefit that it increases unemployment, and so over the medium to long term, drives down wages. So there is no choice necessary: given the option, employers should choose redundancy every time - and we'll get the pay cuts over time anyway!


Only those who approve of increasing unemployment could support this proposal after serious reflection

precisely.