Finance Minister Grant Robertson is leading one of the biggest expansions of New Zealand's social safety net with social unemployment insurance. Photo / Mark Mitchell, File
Finance Minister Grant Robertson is leading one of the biggest expansions of New Zealand's social safety net with social unemployment insurance. Photo / Mark Mitchell, File
Opinion
OPINION:
The chess world is currently looking to Dubai, where the World Championship match between the reigning and defending world champion Magnus Carlsen and challenger Ian Nepomniachtchi takes place.
Chess players at this level rarely make so-called "blunders", i.e., devastating mistakes. If the current Labour government was a chess player, blunderswould not be as rare.
Soon, the Government is going to announce its plan for the so-called "social unemployment insurance" which will be in place by 2023.
We do not have details about its precise design, but what we hear is that the new scheme will pay up to 80 per cent of income for up to half a year, if an employee loses their job. In any case, the reform will be a historic turning-point.
This policy, however, will reduce welfare (wellbeing would be more politically correct), increase unemployment, increase the duration of unemployment, reduce income, increase inequality, and lead to higher inflation. This outcome is robust and well-known in the field of macro-labour economics.
Recent experiences in Spain and Germany have shown that increasing the duration of unemployment insurance increases level and duration of unemployment. The probability of being unemployed for 12 months, for example, increases from 15 per cent to 40 per cent, if you move from a no unemployment insurance scheme to a one-year unemployment insurance scheme.
Hence, this leads to more (long-term) unemployment.
Because of stigma and depreciation of skills from ongoing unemployment, long-term unemployment is especially concerning to economists.
In Germany, the so-called Hartz reform included a reduction in the level and duration of unemployment benefits, which led to a 2.8 per cent-point reduction in the unemployment rate and a drop in the number of long-term unemployed.
Theoretical models inform us that increasing the level of unemployment benefits will reduce welfare. The idea is that an increase in benefits leads to an increase in the wage required by workers to accept a job offer (the so-called reservation wage).
Hence, there are fewer incentives to accept a job offer and unemployment will be higher.
Dennis Wesselbaum. Photo / Supplied
Those workers who are employed enjoy a higher wage, but there will be fewer of them. This will increase income inequality in the economy. Importantly, overall welfare in the economy decreases.
Firms face higher labour costs which increases prices and creates inflation.
With less consumption, production falls, and overall income in the economy drops.
Further, these effects will have significant fiscal budget implications. More unemployment increases the total amount of benefits paid beyond the initial increase in benefit payments and tax revenues fall due to lower income.
This will reduce fiscal space to deal with future recessions and restricts spending for important long-run factors such as infrastructure, education, or health.
Even worse, be prepared to have lower incomes, because all of this will be financed via an income tax increase. Taxes will increase by about 3-4 per cent. This tax hike will damage economic growth, by reducing incentives to invest and work. This will additionally shrink the supply side, which further fuels inflation.
In conclusion, you will be paying higher income taxes, have lower income, and pay higher prices such that the Government can implement a policy which will be harmful for the economy in many ways and reduces welfare – which this Government claims to be its raison d'être.
This reform is against every lesson economists have learned.
In my opinion, this shows the Labour Government does not care about designing useful economic reforms that would lead to better outcomes, but rather does whatever is required to transform Aotearoa into a socialist welfare state with a central government controlling all aspects of life.
• Dr Dennis Wesselbaum is a senior lecturer in the Department of Economics at the University of Otago.
