Foundation system

Policies are not based on facts

The Fair Pay Agreements Bill and the Social Unemployment Insurance scheme are not economically viable and will cause incalculable disruption to the labor market if they go ahead, Dennis Wesselbaum argues.

According to public opinion, the New Zealand labor market is doing incredibly well: 93,000 Kiwis are unemployed, which equates to an unemployment rate of 3.2%, the lowest in decades.

However, at the end of the December 2021 quarter, 106,362 Kiwis were taking part in the work-ready jobseeker support scheme, more than 60% more than five years ago when Labor took office. . Thus, the “true” unemployment rate is around 6%. Add to that the increase in the number of “inactive” people over the past five years and the picture looks less impressive.

In addition, companies are facing labor shortages: job vacancies have reached record highs, especially job vacancies for low-skilled workers, which are significantly higher than job vacancies. employment for highly skilled workers. Wages over the past year have increased by 2.6%, but inflation is north of 5%.

We are also still waiting to see if the so-called Great Resignation will be imported to New Zealand. In the United States, people are quitting their jobs and taking time off or finding new jobs due to high levels of job vacancies. These rotations are costly for the economy, as they create transition costs.

What’s more worrying than

me it’s only work

the market will see disruption

and transformative changes

if Labor gets what it wants. At the heart of these changes are the Fair Pay Agreements (FPA), the Social Unemployment Insurance Scheme (NZIIS) and changes to immigration policies.

The Labor government has announced its intention to rethink immigration policy. Among the changes are limitations for tertiary students, low-skilled migrants and, potentially, families of highly-skilled migrants.

Also, once the borders are fully open, we are likely to see workers leaving the country for better opportunities elsewhere. This will put additional pressure on businesses, especially those employing low-skilled workers. It is also unclear whether New Zealand is currently an attractive destination for highly skilled migrants.

CCPs were introduced by the Department for Business, Innovation and Employment (MBIE) in early 2021. The MBIE and the government say some workers are vulnerable because they are not covered by collective bargaining and that wages do not follow productivity. Therefore, the CCPs will create a collective bargaining mechanism that will set binding minimum conditions at sectoral or occupational level.

For some sectors, SPCs imply that if only 1% of workers are unionized, that would be enough to start a SPC process that would then cover all workers in that sector. This minority capture implies that a small minority of workers have great power. Furthermore, with only around 17% of workers covered by unions in New Zealand, it is surprising to say the least that unions are key players.

Ironically, MBIE’s regulatory impact statement itself indicates that while the overall FPA case is weakly positive, there are significant downside risks and it is unclear whether the system would still have net benefits. In other words: it doesn’t work.

The second disruptive policy is the social unemployment insurance scheme (run at the MBIE). Under the proposed scheme, workers who lose their jobs due to layoff, ill health or disability will receive 80% of their income for up to six months.

This will be financed by higher income taxes for workers and a contribution from employers.

Both reforms lack a solid basis in the facts of the New Zealand labor market and run counter to solid, long-standing research findings.

For example, nine years ago I published an article showing that higher unemployment benefits reduce welfare, increase unemployment, reduce income and create higher inflation. In a post earlier this year, I showed that APPs would likely reduce welfare, increase unemployment, reduce incomes, and create higher inflation.

To my knowledge, this was the first quantitative analysis of the macroeconomic and labor market impacts of PPAs. This analysis is not perfect, but it took me about two days to get an informed idea of ​​the quantitative impacts of this reform.

Why then is the government trying to implement these policies? In my opinion, the government has shown that it is not interested in evidence-based decision-making. Additionally, I believe there is a shocking lack of economic knowledge and scientific rigor in government institutions like MBIE, so I guess we shouldn’t be surprised to see these policies come to life – we’ll just have to deal with the adverse effects they will create.

– Dr. Dennis Wesselbaum is a senior lecturer in the Department of Economics at the University of Otago.