Policy Paper | Back to Work

Nations around the world are expecting low or negative growth and higher unemployment rates as a result of fighting COVID-19. The supply side shock means that parts of the economy are in hibernation or struggling with a lack of demand, while other parts of the economy are struggling to find the right people to pick harvests or help with calving.

At this stage projections suggest that the economic recovery and transition to something new might take up to four years. In reality even this timeframe is uncertain, with the potential for unforeseen bumps along the way. At the same time, in the wake of the COVID-19 shock New Zealand’s economy and labour market needs to pivot toward a future that seems beset by environmental, and technological change as well as population ageing and decline.

Read the paper here:
Back to Work Policy Paper

Government-led Active Labour Market Policies (ALMPs) are policies and spending that directly intervene in the labour market to improve the level and type of employment available. They also have the potential to help people transition to something new and help to shorten spells of unemployment. ALMPs have been extensively used in New Zealand (and overseas) as a way to soften the immediate economic blow of the pandemic (via wage subsidies) and different types are now being lined up as a way to continue to soften the blow in the future via training and infrastructure investments. Unfortunately, research highlights the returns to ALMPs are neither assured nor even always positive.

Key to their effective use is good design, and responsiveness to change. Recent meta-studies into the effectiveness of ALMPs offer us design insights and highlight that:

• ALMPs have better outcomes in times of high unemployment and low growth (meaning that now is the time use ALMPs);
• While average ALMP outcomes vary by programme type, many often have better effects in the long-run (meaning we should aim for these longer-term returns, which are often associated with investments in human capital, when considering what ALMPs to use);
• A mixed public-private delivery model for ALMPs achieves far better outcomes that the state going it alone (which means when we design our ALMPs using a mixed provision model is more likely to bring positive results); and that
• Average effects of ALMPs differ by participant characteristics (which means we need to highly target our ALMPs on those most likely to bring a long-term return).

When it comes to looking at specific options decision-makers should ensure that known issues around deadweight losses, political capture, and substitution effects are minimised. In many cases this means focusing on the longer-term and ensuring that we are investing in people’s human capital as much as possible.

In regard to ALMPs aimed at improving labour demand:

• Wage subsidies can be a short-term buffer but lock-in historical employment arrangements that may no longer be viable, and have negative long-term effects.
• Hiring subsidies can be used to help pivot the economy toward growing sectors but come with risk of substitution and displacement effects. Continued effective use over time requires specific targeting of people most at risk of long-term unemployment.
• Employment creation schemes are best delivered in a mixed model and are better when combined with education and training schemes. There are issues with lags and timing.
• Work sharing, while best used at a firm level, if combined with training and education initiatives hold some promise for the future consideration.

In regard to the range of ALMPs aimed at improving labour supply:

• Education and training programmes show real promise both as a way to transition long-term unemployed people into work but also as a way to help the economy transform over time. This is especially so if these programmes can be linked to vocational training and future work needs. There are issues with lags and upscaling but these will be offset in the current environment. Uncertainty in regard to fit with the RoVE review will need to be managed.
• Activation and workfare sanctions if overused can introduce bureaucratic churn and slow down employment outcomes. The WEAG recommended changes here that need to be revisited by officials.
• Mobility payments can help but appear to be of limited help given the restrictions around their application in New Zealand.
• Self-employment incentives are unlikely to be helpful for the majority of beneficiaries but have positive impacts if used to help entrepreneurial beneficiaries into business.
• The findings in regard to ALMPs aimed at improving labour market matching including matching services, counselling and mentoring and job search assistance are all seen as relatively cost effective and provide strong short-term returns. This aligns well with current practice and policy expansion in New Zealand.

Overall, we recommend that the government should:

1. Use targeted time-limited hiring subsidies for newly created jobs;
2. Use training conditionalities as part of the approval process for the $15 billion in shovel ready and infrastructure projects to ensure an increase in efforts by the private sector to address skills gaps;
3. Remove life-time student allowance limits for citizens so as to lower the living costs of retraining following redundancy now or the impact of technological change in the future;
4. Widen access to the “$3k to work” mobility assistance grant so as to include unemployed people currently residing in Auckland or Christchurch who wish to take up work in the regions; and
5. Phase out the repeated use of temporary work visas as a way to meet ongoing labour shortages, thus ensuring New Zealand does not return to the pre-COVID-19 over-reliance on short-term or temporary work visa solutions as the economy and travel restrictions ease over time.

Taken together these changes will help ensure that ALMPs can hasten the economic and labour market recovery and improve employment and wage outcomes for New Zealanders over the medium to longer term. The focus, mix and style of delivery of ALMPs will need to constantly change over time, and in response to changing circumstances, if the payoff is to be maximised.

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