Compulsory redundancy payments

Posted by: Matt Nolan on: December 12, 2008

• In: Government Policy | Macroeconomics | Microeconomics | New Zealand Economics | Political economy
• 3 Comments

I see there is some talk of compulsory redundancy payments after this sad story.

Now even though it would be nice if those people hadn’t been left high and dry after all their years of commitment, it is important that we try to get an objective idea about the costs associated with the scheme.

Have compulsory redundancy payments in a contract implies that either:

1. People receive a higher effective wage,
2. People receive the same wage – but the make-up is different.

If the first scenario the cost to businesses is higher, and as a result unemployment will be higher. Furthermore, if workers are more expensive to “try out” then firms will be less likely to hire workers because of “asymmetric information” – leading to a further pull back in employment (same argument that agnitio uses for the 90 day firing bill).

In the second scenario people are forced to accept a worse contract makeup (given that they could negotiate a contract with a severence package in the first place).  As a result, workers are less happy with their total pay package. Furthermore, the fact that employers are forced to pay based on severance instead of on effort makes it harder for them to incentivise work – which will reduce productivity.

In reality, we will have a combination of these costs, all coming into effect. The issues associated with the first impact benefits the employed above the (now larger) people outside employment. The second impact is a cost to people who are employed and receive this in the contract.

What other costs, or even benefits, do you guys see from this policy?

Note:  You could use an “anti-signaling” argument as either a cost or benefit in this case – really this is pretty closely related to (in theory) the 90 day bill.

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