Unemployment insurance is anti-social

Published in Insights, The New Zealand Initiative’s newsletter, 3 December 2021

In all the excitement over the new ‘Traffic Light System’ and National’s new leader, a big story went almost unnoticed last week.

According to the Herald, the Government is about to complete its proposals for unemployment insurance.

It is perhaps unsurprising that hardly anyone noticed what an important change this would be. The proposal seems innocuous enough.

Yet, when you think it through, this move has enormous implications.

Here is what we know so far about the Government’s plans. If made redundant, people will receive 80 percent of their income for at least half a year. An extra tax of 3 to 4 percent will be charged on income to pay for it.

Despite the tax being shared between employers and employees, much of the burden falls on employees. Without the tax, they would be paid more.

Extra income taxes of 3 to 4 percent should be a big deal. There is only one reason they are not, and that is people have not heard about them yet.

In a recent research note*, and based on international experience with similar schemes, we pointed out reasons to be cautious.

To start with, the more you pay for something, the more of it you will get. Hence, if you pay people for being unemployed, more people will remain unemployed for longer. This ultimately hurts their employability.

Likewise, if something costs more, people will buy less of it. If unemployment insurance increases the cost of employing people, fewer people will be employed.

In these two ways, unemployment insurance has the perverse effect of increasing unemployment.

That is bad enough. But it gets worse.

Once unemployment insurance is introduced, it is almost impossible to abolish. People will feel entitled to future pay-outs as soon as they start paying in.

Therefore, unemployment insurance cannot be stopped, no matter how obvious its bad economic effects become.

On the contrary, once unemployment insurance is in place, it will set a precedent. Politicians will like the ability to channel social insurance contributions through shadow budgets. They will come up with novel things to do via separate ‘social security’ systems.

You can find examples overseas. In many European countries, between a quarter and half of all tax revenue runs through social insurance schemes. Politicians then twist parts in favour of their most pet groups and projects.

Were the innocently titled ‘social unemployment insurance’ better understood, the project would be gone by lunchtime.

Right now, people know little about it. Let’s tell them before it is too late.

* Research Note: Unemployment Insurance – A recipe for more unemployment?