Brian Fallow: Want to improve productivity? Try some Danish

Denmark offers more income security and job flexibility than NZ - and has much higher productivity. Photo / Bloomberg

COMMENT:

Removing the link between income security and job security, and focusing more on the income side, would make the economy better equipped to seize the opportunities technological innovation provides, the Productivity Commission argues.

The economy has been pretty good at generating jobs, the commission notes in the second draft report from its inquiry into technological change, disruption and the future of work. Productivity and income growth, on the other hand, not so much. Not by a long chalk.

Within the OECD club of developed economies, New Zealand ranks high for prime-age employment, for example. That is the proportion of people aged between 15 and 64 who are employed.

But, at the same time, we are laggards in output per hour worked, which is fundamental to incomes. Labour productivity remains around 40 per cent less than the average of the top half of OECD countries.

New Zealand (with Australia and Mexico) is an outlier in not having mandatory unemployment insurance, to soften the income loss associated with job loss. The gap between a wage or salary, and the dole (designed only to prevent extreme hardship) is particularly brutal.

It is a system more likely to produce inertia than dynamism in the labour market — a greater reluctance to change jobs or to embrace technological change which might imperil a job, than would otherwise be the case. Tax-based data indicate the rate of the job-to-job flow — people leaving one job to immediately start another — is subdued by historical standards.

It can also mean that people who become unemployed are more likely to take a new job for which they are over-qualified. That can result in a persistent fall in pay known in the jargon as "income scarring", and they are less able to afford to retrain at their own expense.

"High income economies are characterised by highly skilled workers with high-capital-intensity jobs and the rapid uptake of emerging technologies," the commission says. The result is high labour productivity and incomes.

"By contrast the New Zealand economy appears stuck with low wages, low productivity growth and low technology adoption."

More workers do grow the economy, at least in absolute terms. "However, this approach is a bit like recruiting more people to push a broken-down car rather than fixing its engine."

So would some form of income smoothing, which made the loss of a job less financially scary, boost productivity?

Commissioner Andrew Sweet says there is pretty clear evidence on attitudes towards technology, that some countries are more open to it than others. "We don't have robust evidence of that link, as opposed to correlation, but my argument would be that firms and unions are going to be more resistant to anything that increases the chances of job loss without income smoothing."

The gap between a wage or salary, and the dole (designed only to prevent extreme hardship) is particularly brutal. Photo / 123RF

The commission is not saying that a precarious gig economy driven by automation is either evident now or in the offing, rather that an approach which shifts the focus from job security to income security would be a sensible precaution and make the economy more resilient.

It suggests three forms that could take.

• One would be an unemployment insurance scheme. It could be government-run, as ACC is now, or a regulated commercial market, like the Danes'.

ACC is the most familiar form of social insurance, providing a degree of income protection during recovery from an injury. As it applies to the self-employed as well as employees, it avoids one of the pitfalls of some models, like the French, of creating a two-tier labour market with very high protection for some workers and very low protection for others.

Designing an unemployment insurance regime would require detailed and careful analysis, Sweet said, but would have the benefit of a lot of international experience of what works and what does not.

In any case, there is no free lunch. New Zealand is unusual in not having (ACC apart) payroll taxes to cover social security costs. As a result, the tax wedge on wages (the difference between what it costs to employ someone and their take-home pay) consists almost entirely of their income tax. It is one of the lowest such gaps in the OECD.

Funding unemployment insurance would widen that wedge. The trick would be not to widen it so much as to create a deterrent to employing people in the first place.

• The second option the commission suggests is more akin to KiwiSaver — except that it would be compulsory. It is a system of portable individual redundancy accounts, built up while workers have a job, but which they can draw on if they lose it (or retire).

Such a scheme is likely to require some degree of government backstop for people early in their working lives or on low incomes.

• The third option would be to use the existing welfare system to provide increased but time-limited income support after job loss.

However, integrating that with the current system of household-based means testing would be a nightmare, and of course it would impose a cost on taxpayers.

"The welfare system is all designed around the avoidance of severe hardship and deprivation, but what we are arguing is that for job loss an economic, dynamic efficiency lens is more appropriate," Sweet said. "Why would you only provide assistance to a small subset of those made unemployed?"

If the focus is on job security, there is an inherent tension between that and productivity-enhancing things like free trade, openness to foreign investment and flexible labour markets, he said.

By contrast the Danes — who are the poster boys of the "flexicurity" model, with its emphasis on income security, that the commission is advocating — have managed to have their cake and eat it, Sweet says.

"The OECD judges their labour market to be more flexible than ours and that their approach to foreign investment is more liberal than ours." Their productivity is around one-third higher than ours and incomes reflect that.

"Obviously there is a direct financial cost to funding these things," Sweet said. "But I would argue there isn't a broader economic cost. We are not saying 'Can we afford to slow down growth or reduce productivity by doing this?' There is a virtuous relationship."

- Submissions on the commission's draft report are open until February 7 next year.