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.