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It doesn’t pay to lose your job!

Advisor, Productivity Commission
14 August 2019

How well does NZ support people who face job loss?  

I feel fortunate. In my working life – 3 ½ years – I have not yet lost a job. But roughly 2% of New Zealand workers each year do lose their jobs, based on Stats NZ data.1

Job loss can be a difficult and deeply frustrating experience causing psychological distress. For many, job loss also leads to financial pressure. An unexpected loss of income can mean having to quickly find new work to support oneself and one’s family. A displaced worker’s subsequent job may pay less than their previous job, which can affect the trajectory of their earnings in the long run. This is called the ‘financial scarring’ effect of job loss.

New Zealanders who lose their job experience, on average, an especially large scarring effect by international standards. New Zealand doesn’t have a system of unemployment insurance where workers receive income support based on their previous earnings. Unemployed workers are paid at a flat rate and are also income tested, both of which make the New Zealand (and the Australian) systems outliers in the OECD.

Because countries have very different systems of support, making meaningful comparisons can be quite tricky. For instance, while all OECD countries provide some kind of unemployment benefit or insurance, some countries provide other forms of support for unemployed people (eg, subsidies for housing costs). And some countries provide relatively generous support initially with payments reducing after a fixed period, while others provide less generous support but over a longer period.

Despite these issues, Michael Fletcher had a go in 2015 at comparing the generosity of unemployment support in OECD countries. He found:

  • In the early stage of unemployment, New Zealand’s level of income support is less generous than most other OECD countries. For single people, New Zealand’s level of support was 31st out of 33 countries, 28th for sole parent families, and 25th for couples and couples with children.
  • Most countries with unemployment insurance systems also have ongoing income support that kicks in once the unemployment insurance period runs out. Comparing these ongoing levels of income support, New Zealand’s level sits around the median of OECD countries.

The OECD also has data that compares unemployment support across countries. The data is consistent with Fletcher’s findings – it suggests that New Zealand’s support is among the least generous in the short term, but relatively more generous to people unemployed for long periods of time. This is because unlike many other countries, our benefits are not time-limited.

These comparisons don’t take into account who is entitled to support. Nearly all OECD countries provide support for displaced workers regardless of what their partner earns. This is not the case in New Zealand. As an example, a person with no children and a partner earning over about $31k (gross) per year would not be eligible for support. In 2015, about 43% of displaced workers did not qualify for support because of their partner’s income. For this reason, Fletcher concluded that New Zealand’s unemployment support for couples is one of the least generous in the OECD.

Jobseeker support obligations

Some displaced New Zealand workers receive redundancy pay from firms. Survey data from the 2000s suggest that roughly half of displaced workers receive redundancy pay. Lower-skilled workers and younger workers are less likely to receive redundancy payments.

Some thoughts and take-aways:

  • New Zealand’s system of income support is designed to provide a household income safety net. Those who qualify for government-funded support receive an amount that for many is not enough to cover basic living expenses or meet existing financial commitments.
  • The system is not designed in a way that helps people to move smoothly from one job to another.
  • Our not so generous support in the short term provides a big incentive for people to find work quickly. This seems consistent with the fact that our rates of long-term unemployment are so low. It is also possible that inadequate support could lead to poor job matching. However, I can’t think of a way of readily testing that hypothesis.
  • Low levels of support could also make New Zealanders less welcoming of new technology.
  • And finally, if I got a choice of the country in which I had to lose my job, New Zealand wouldn’t be my first choice! 

Notes

1. In this post I use the terms “lose a job” and “displaced” synonymously. In both cases I’m referring to involuntary exit from a job. This doesn’t include the normal and expected termination of fixed-term or casual work, though that may result in unemployment. Displacement does not necessarily lead to unemployment; but in this post I’m interested in the cases in which it does.

Photo (top): Closed down. No work today. Source: Judy Kavanagh.

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Comments

  • Gravatar for Tuatara Hunter

    Tuatara Hunter 21 Aug 2019, 11:06 (3 months ago)

    Interesting post, Tim. NZ is certainly less generous than some countries in state income support for higher earners who lose their job. Our system evolved from an English alms-for-the-poor welfare tradition, not from a "social insurance" income protection model.
    Do you think it would be socially/politically sustainable in NZ for the state to pay higher benefits to people who recently lost a well-paying job than to lower-wage earners or people who are longer-term beneficiaries?
    What would be your first-choice country in which to lose a job? (and does this depend on where you stand in the income/social hierarchy?)

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