A proposed income insurance scheme for redundancy and sickness is being billed as the most far-reaching social policy development since the creation of ACC. By Rebecca Macfie.
When Kawerau's paper mill closed last year, the laid-off workers were well cushioned against the blow.
Built in an era of vaulting government ambition 66 years ago, the mill was a relic of a bygone industrial era. The market for newsprint had been shrinking for years as people turned to the internet for news, and everyone at the plant knew the end was coming.
Tane Phillips, secretary of the Pulp and Paper Workers Union, would say to management, "Shut the mill before it's forced shut." He was worried that if they held on and ran the place into the ground, there would be no money left to pay workers their redundancy.
"They honoured all agreements," he says of Norske Skog, the Norwegian owners who shuttered the place in June. Those agreements included compensation foreign to most workers in today's labour market: a six-and-three redundancy package, which means they got a payout of six weeks' wages in recognition of their first year of service, and three weeks for every year thereafter.
Wages at the unionised site were good: machine operators were on $120,000, cleaners on $60,000-plus. Turnover had always been low, so the payouts to long-serving workers were big. Phillips says many walked out the gate with a couple of hundred thousand dollars in redundancy pay and company superannuation. Some, who had been there for decades, got half a million.
It was a very different story for a group of Kawerau early childhood workers caught up in a restructure a year or so earlier. As for most workers in the modern era, there was no redundancy clause in their contracts to recognise their service or ease them through the transition. Even though they weren't his members, Phillips got involved in the scrap and squeezed a confidential settlement out of the owners.
Losing a job is traumatic; losing a whole plant or industry can shatter entire communities and regions. But it's easier if displaced workers receive a decent wad of money to cover the bills and provide breathing space to search for a suitable replacement; better yet if there is help with retraining.
The problem is that New Zealand workers are far more likely to experience the financial vacuum faced by Kawerau's childcare workers than the sizeable buffer received by the mill workers.
This country is rare in the world in not requiring employers to pay redundancy compensation. Like wages and conditions, it's just another matter that's up for negotiation between workers and bosses.
Before the radical deregulation of the labour market under the 1991 Employment Contracts Act it was reasonably common for workers to be entitled to redundancy compensation under national awards. But as the ECA pushed workers onto individual contracts, they lost many of the minimum protections they had previously enjoyed.
These days, about 320,000 workers are on union-negotiated collective employment agreements that include redundancy notice and compensation provisions. But the great majority of workers are on individual contracts, and few have the bargaining heft to get their employers to include redundancy pay in them.
This is especially true for the growing army of "precarious workers" – temps engaged through labour hire outfits, those on fixed-term or casual contracts, or "self-employed" as gig workers – for whom there is neither job security nor negotiation.
The absence of statutory redundancy protection has long been recognised as a yawning gap here. Now, a far-reaching proposal to plug that deficit is on the table. It would see all workers and employers levied to fund a $3.5 billion income insurance scheme that would pay out 80 per cent of prior incomes for six months to those laid off or who become unable to work because of sickness.
The proposal emerged in February this year after 14 months of negotiation by a tripartite working group of Council of Trade Unions, Business New Zealand and government officials. But it has met with derision from both sides of the political spectrum:
National leader Christopher Luxon calls it a jobs tax that should be aborted; the Greens say it's inequitable and would embed two-tier welfare.
It is also bitterly opposed by anti-poverty campaigners, who say its development has been secretive and rushed and that it's a major philosophical lurch in this country's social policy.
Although the scheme seemed to emerge with little forewarning from the fog and confusion of the pandemic, it follows years of failed efforts to get a better deal for redundant workers. From the economic reforms of the 1980s and 90s, which pushed Māori and Pasifika unemployment to above 25 per cent and left regional towns such as Ōpōtiki and Murupara impoverished, through to the shedding of hospitality and retail jobs during Covid, it's been clear for decades that Kiwi workers carry a disproportionate share of the burden of business and economic restructuring.
In October 2008, an advisory group set up to investigate the adequacy of severance laws recommended the introduction of statutory redundancy notice and compensation, and suggested a range of options, including a standard legal formula for severance pay and a levy-based redundancy insurance scheme similar to ACC. The Public Advisory Group on Restructuring and Redundancy found that only 20 per cent of workers in small and medium businesses got redundancy pay, and 30 per cent weren't even entitled to a notice period.
The then-Minister of Labour, Trevor Mallard, planned to put the issue out for public consultation. But his government was booted out of power a month later, and the report was binned. By then, the Global Financial Crisis was reaching its zenith. About 200,000 workers lost jobs between 2007 and 2011, according to a Ministry of Business, Innovation and Employment analysis for the tripartite working group. A minority will have got redundancy pay, some will have had savings to fall back on and, if they qualified, the dole.
From the Opposition benches, Labour MPs made two attempts to get members' bills through that would have mandated four weeks' redundancy notice and a four-plus-two payout. Both were voted down at first readings.
Research into the impact of redundancy has grown in the years since. A 2017 study by Motu Economic and Public Policy Research found that most laid-off workers don't recover their prior earning power, suffering a 20-25 per cent lower rate of employment after one year compared with those who hadn't been displaced, and 10 per cent lower after five years.
For those who found new jobs, their earnings were 25-30 per cent lower after one year (compared with similar workers who didn't lose their jobs), and 13-15 per cent lower after five years. This is called "wage scarring", and the Motu research shows it's worse for those over 50, whose earnings are about 25 per cent lower five years after losing their jobs.
More recent work by Motu has concluded that the value of wages lost by redundant workers ranges from $3.3 billion to $15.4 billion a year (the latter figure relating to periods of severe economic downturn).
"Workers who experience involuntary job loss suffer from deep and persistent negative consequences," the researchers wrote. "Displacement harms workers' mental health and economic security in the short term and negatively affects their earnings and mortality risk in the long term."
Contributing factors are the tendency for laid-off workers under financial pressure to grab the first job that comes along – even if it doesn't use their skills or pay what they are worth – and the risk of "self-reinforcing cycles of unemployment … [or] psychological discouragement".
Although New Zealand is currently enjoying booming employment rates, it won't last. Business restructuring and economic ruptures are a fact of life and, in this country, the cost of such shocks "fall[s] largely onto individual workers", according to the OECD.
New Zealand's job protection regime is well below the OECD average and support systems for displaced workers are among the weakest. Laid-off New Zealanders suffer some of the worst wage scarring in the developed world.
For most workers who lose their jobs, the welfare system offers scant support. In many households, two or more jobs are needed to pay the rent and put food on the table, yet the means-testing of benefits disqualifies most redundant workers whose partners have jobs from the Jobseeker payment.
Although private income protection insurance is available, the tripartite group describes it as "neither efficient nor effective"; it's expensive, which puts many people off having it, making it even more expensive for those who are most likely to need it.
Nor does the burden of restructuring fall evenly. New research by Reserve Bank economists shows Māori and Pasifika workers have been significantly more exposed during historical downturns, with their rates of unemployment increasing by 6.9 and 11.7 percentage points respectively. In contrast, unemployment among Pākehā workers increased only 1.3 percentage points. Women and young men are also hit harder, as are those in the regions.
Measures to buffer the shock to workers caused by restructuring, technology and the need to shift from climate-damaging industries were central to a "Future of Work" commission led by Grant Robertson when Labour was in Opposition. That work has continued in government under a Future of Work Tripartite Forum set up in 2018.
The concept of an insurance scheme to ease workers through economic shocks and help them preserve and build their skills was given an emphatic shunt two and a half years ago with an unusual display of unity between union and business leaders.
In February 2020, before anyone understood the scale of disruption that Covid-19 would bring, Business New Zealand chief executive Kirk Hope and CTU president Richard Wagstaff signed a joint statement supporting an insurance system to cushion redundant workers. They agreed it should include an "income replacement rate that is a significant improvement on current social welfare entitlements and in line with other OECD countries", and that it should sit alongside "good quality" active labour market programmes including education and training, career planning and relocation help.
The unions wanted something that would finally shore up the position of laid-off workers; and Hope says his group was interested in a scheme that could help match skilled workers with suitable jobs and that could take some of the sting out of recessions by maintaining earning power in affected households and communities.
Fast-forward two years, and the most far-reaching social policy development since the creation of ACC in 1974 is on the government's bulging reform agenda. And the discussion is no longer just about redundancy; the proposed social income insurance scheme would also cover those who have to quit or cut back because of sickness, partially addressing a long-standing injustice in which those with health conditions have been excluded from ACC benefits while those harmed in accidents are covered.
At 80 per cent of prior earnings, coverage under the scheme aligns with the compensation threshold paid by ACC. Higher-paid workers would receive more than lower-paid: someone who had been on $2000 gross a week would get $1600; someone on $880 would get $704. There would be a salary cap of $130,911.
Redundant workers would get four weeks' notice and the employer would have to pay the first month out of work at 80 per cent, after which insurance would kick in for up to six months. Workers would also be entitled to any redundancy pay under their employment agreements, and the insurance cover wouldn't be asset-tested or affected by partners' earnings.
There would be obligations to look for work and accept a job that matches the person's previous income, unless their health limited what they could do or they were in training or rehabilitation. Coverage could extend for up to a year to allow training to continue.
Casual and part-time workers, and others on precarious contracts, would be covered, provided they have contributed to the scheme for six months over an 18-month period. If someone is working three jobs and loses one, they would be covered for the lost job as long as it accounted for at least 20 per cent of income.
Like ACC, the scheme would be fully funded by levies. Workers and employers would each pay 1.39 per cent of wages and salaries to finance a scheme expected to cost $3.54 billion a year. ACC would administer it (although the money would be in a separate pot, under separate governance), and claimants would have case managers to help them back to work.
Robertson told the Listener the scheme would be an additional layer of support and protection. "We don't want people to just take the next job. We want it to be one that is building their skills but also building the overall skills of our workforce, and [addressing] that immediate loss of income and that dramatic scarring effect if you suddenly can't pay your mortgage and have to lose your house and so forth."
The scheme had a rough-and-ready pilot with the controversial Covid income relief payment, under which people who lost their jobs during the pandemic got a 12-week untaxed benefit set at twice the single person's Jobseeker rate. The payment scheme was put together during the early months of Covid when Treasury thought unemployment could hit 26 per cent, and there was concern about a "new cohort" of unemployed people with high living expenses. It was budgeted to cost $1.2 billion.
Those dire predictions were proved wrong, and the scheme eventually paid out $196 million to fewer than 41,000 people. Nevertheless,it was panned by anti-poverty groups as middle-class welfare, giving succour to well-off folk with big mortgages while those on normal benefits, including those who had lost jobs before Covid continued to live in desperate hardship.
That same accusation is now being levelled at the income insurance proposal. One of the most vocal critics is Michael Fletcher, a senior research fellow at Victoria University of Wellington and an adviser to the Welfare Expert Advisory Group, whose 42 recommendations for major benefit reform remain largely unfulfilled. He says the scheme creates "massive horizontal inequity", with "nothing for those on supported living, sole parents and migrant workers".
Fletcher has written an excoriating critique, using himself as a hypothetical test case. As an academic on $115,000, with a four-plus-two redundancy clause in his collective employment agreement, "being laid off would be worth over $83,000 for me", he wrote on the Stuff news website. The scheme as proposed would also allow him to get a part-time job to top up his earnings to pre-redundancy level without any clawbacks. "Compare that with an ordinary Jobseeker Support recipient: they lose 70 cents from their benefit for every dollar earned above $160 per week."
He argues most high earners can get by if they lose their job, "but there is a genuine problem with low-to-medium earners where both are working, they have kids, and one loses their job … And at the moment, our welfare system doesn't deal with that because it's based on assessment of the couple's income. But that could be fixed quite easily by assessing each earner individually up to, say, the median wage, before the benefit is abated."
At the other end of the spectrum, in cases where whole industries are shut down – for instance, oil and gas production in Taranaki – the proposed scheme wouldn't be adequate, he says. Redundant workers in that situation could need years of retraining, and a "bespoke" regional package would be required to manage the transition.
Fletcher fears that if the scheme goes ahead, "the political economy will play towards the insurance scheme [rather than welfare improvements] … Faced with a budget deficit, a future government will just say, 'Well, we have to squeeze down on benefits.'"
Another who is aggrieved by the scheme is University of Auckland economist Susan St John, a leading voice in the Child Poverty Action Group. She says CPAG wasn't consulted on the development of the proposal, and found it difficult to get information. She's concerned that it is of such scale that it will soak up the government resources needed for overdue reform to a welfare system which – according to new research – leaves families locked in poverty.
Even after the April 1 benefit increases, the Fairer Future coalition has calculated that a couple with three children receiving Jobseeker are $300 a week short of the income needed to meet living costs, pay unexpected bills and allow their children to participate in sport. A sole parent with three children is $240 a week short.
The group's spokesperson, Brooke Stanley Pao, of Auckland Action Against Poverty, is "totally against" the proposed income insurance scheme, arguing it entrenches a two-tier system of the deserving poor and the undeserving. The proposal is a fundamental shift in values "from providing support based on need to providing support based on prior income", she says. "We already have income insurance – the welfare system."
Advocates of the proposed scheme are exasperated by the critics. CTU economist Craig Renney – a former adviser to Robertson – rejects Fletcher's arguments that it's regressive and a gift for the salaried class. "When we look at who gets laid off, it's people in insecure work, young people, women, Māori, Pasifika," says Renney.
"The last two years of data that I have shows 60 per cent of the redundancies occurred to those earning less than $48,000. This scheme is progressive, because it's taking money from people like me, who don't get laid off, and giving it to people who do lose their jobs, who are in insecure forms of work and often low-paid. That's how it should be."
Renney blanches at the accusation that the union movement is turning its back on those who rely on welfare. "We support the welfare system and the delivery of the [advisory group] reforms. We think we can do both [income insurance and welfare reform]. We don't think the delivery of one stops the other. We think it helps. We are not turning against unemployed workers or those with disabilities."
He worries that if this rare moment of tripartite consensus is lost, there might not be another chance at this breadth of reform.
“Everyone [Business New Zealand, the CTU and the government] has signed off on this … We have what we think is a really good package on the table. We shouldn’t let perfection be the enemy of good.”