Finance Minister Grant Robertson is acting as the Pied Piper

Friday, 11 February 2022

Damien Grant is a regular columnist for Stuff, and a business owner based in Auckland. He writes from a libertarian perspective and is a member of the Taxpayers’ Union but not of any political party.

OPINION: I enjoy dystopian fiction, so it was with some pleasure that I read Grant Robertson’s Unemployment Insurance proposal. The finance minister is acting as the Pied Piper, whistling a lovely tune to rid the administration of its RAT problem.

Originally envisioned as merely an insurance scheme for those who are made redundant it has already expanded to cover workers who lose their employment as a result of sickness or disability.

The official unemployment rate is based on a survey by Stats NZ. To count, people must have actively looked for work in the previous four weeks.

Questions remain. Should contractors and the self-employed be included? How do you stop people who would otherwise be fired from coming to a gentleman’s agreement with their employer to be made redundant instead? What do you do with seasonal workers?

* The last two years have been hell on earth for most of us - inflation will make it worse

* 'Little, if any evidence' income insurance schemes improve job-market outcomes

Remarkably, the document does not consider if the scheme should be extended to those workers whose firms fall into the clammy hands of an insolvency practitioner. I shall be submitting.

Other, better, commentators have highlighted why this scheme makes as much sense as a cowshed made out of cheese sticks; so I shall not repeat their excellent analysis.

Let me instead consider how much worse this will make the coming economic beaching that I have been confidently predicting for a decade and why this idea is economically awful but politically brilliant.

Politics first. As always.

Unemployment is a feature of any recession and the fastest way out of an economic slump is getting people back into the workforce, writes Damien Grant.

In 18 months this government will be up for re-election. If the economy continues to bubble along nicely Labour is looking good for a return to the plush electrically heated seats of the Crown limousines.

However, if the dark clouds of economic uncertainty have arrived a frisson of fear will sweep through Fendalton, St Marys Bay and their ilk. Suddenly the spectre of unemployment will begin knocking on the heavily mortgaged doors of the middle class.

Faced with the prospect of having to rub shoulders with those at a Work and Income office insecure workers may vote for a government promising seven months of 80 per cent of their salary.

The regime has attracted criticism from the left, and it is important to understand that Labour, at least in opposition, has had a hankering for a statutory redundancy regime. Darien Fenton in 2010 and Sue Moroney in 2013 tried to get legislative changes to enforce redundancy provisions into employment agreements.

A four-week minimum and two weeks for every year employed is the option preferred by the more progressive wing of the Labour caucus. Some in the business community may consider Robertson’s proposal as the better of two possible evils.

Statutory redundancy would create a significant drag on corporate balance sheets. There is also the reality that, if the record of the past is a guide, the business community cannot rely on National to unwind the worst excesses of the current regime.

The rumour in some quarters of the capital is that the finance minister is determined to have this regime embedded in legislation by the end of this year and operational early in 2023. This is an aggressive timeframe but, unlike KiwiBuild, this is a policy agenda that the state can introduce itself and will not be hampered by external constraints that sunk their housing program.

As politically attractive as this new programme is, however, it has the capability to severely deepen the next downturn.

Damien Grant: We like to think New Zealand is a wealthy nation. It isn’t. Three decades of poor economic management has seen us fall further behind comparable nations.

Unemployment is a feature of any recession and the fastest way out of an economic slump is getting people back into the workforce. Often, this involves workers accepting jobs on lower wages and often less status than they had previously enjoyed.

At the peak of an economic cycle, there is high demand for middle managers, marketing executives and diversity officers. As the process of creative destruction clears out those firms whose business model, capital base or managerial competence makes them untenable, new firms spring up, using the capital and resources displaced.

This reduction of wages is defined as employment or wage scarring. This isn’t a term I’d encountered before despite three decades of interest in economics and a post-graduate qualification in the topic. It could be this reflects my journeyman credentials or, more likely, this is a problem invented to justify the beauty of the solution.

What is now referred to as wage scarring is simply the result of someone whose skills are no longer in demand and being required by the market to seek employment better suited to their capability.

Unemployment Insurance will prevent emerging firms from being able to access the skills and talent of workers cast adrift during a recession as they take advantage of the state-sponsored seven-month sabbatical.

Two negative outcomes are predictable. First, unemployment will become prolonged, deepening the downturn. Workers laid off will remain out of the productive sector for longer and new firms will be slower to take up the slack in capacity. Second, taxation revenue will slump just as spending on transfer payments will rocket up much faster than in previous downturns.

Even under our current settings, a fall in employment depresses revenue and increases welfare spending. The new scheme will have insufficient revenue to meet its outgoings and the current proposal is that the taxpayer will underwrite it.

More money being spent, with fewer goods and services being produced, will only fuel our already dangerous inflation problem and would force an independent and honest central bank to increase interest rates despite a struggling economy.

High interest rates, as even a Treasury analyst understands, has a profound negative impact on the economy.

We like to think New Zealand is a wealthy nation. It isn’t. Three decades of poor economic management has seen us fall further behind comparable nations and a levy equal to 2.7 per cent of a workers wage will inevitably depress a worker’s take-home pay. That is the real wage scarring.

Like the Pied Piper, this proposal may divert the electorate from the RAT problem, but we cannot pay the Piper his due. The end result, as in the fairy tale, will be another lost generation as many of our best and brightest young things will disappear offshore.