Why Labour’s jobs tax is awful for low and middle income workers

A great analysis of the problems of Labour’s compulsory unemployment insurance proposal by Michael Fletcher. Fletcher is no right winger but a VUW academic and former economist for the Federation of Labour.

He states:

The scheme is huge, costing an estimated $3.5 billion each year. Administration of the scheme alone is estimated at $500 million per annum. This bill is to be funded by a 1.39 percent tax increase on wages, matched by an equal levy on employers. As Inland Revenue has advised, most of the employer levy will eventually be passed on to workers via reduced wage increases, reducing strained family incomes by nearly 3 percent in the middle of a cost-of-living crisis. 

A lot of people, including the self-employed, many migrants, and some precarious workers, will not be eligible. For those who are, the scheme sounds generous – anyone who loses their job because of redundancy or illness will qualify for 80 percent of their lost wages for up to six months. That in itself is a problem because it sets up a two-tier welfare system with higher rates – one might think of it as Koru club welfare for insurance recipients, compared to other beneficiaries in cattle class.

The key thing is that this scheme will take into account current support such as benefits and WFF, so the actual impact on lower income workers who lose their job is minor. Here’s the net increase in income for a single person who lose their job:

• minimum wage – $4,828
• median wage – $6,775
• high earner – $26,416

So a high earner will get five times as much as someone on the minimum wage and four times as much as someone on the median wage.

Now what is the person who loses their job is married and has two kids. Then the income boost is:

• minimum wage – $4,871
• median wage – $8,945
• high earner – $38,896

So here the high earning couple get seven times more than the minimum wage family and four times more than the median wage family.

So every worker will have a 3% drop in their take-home pay, for a scheme that will deliver high benefits to the highest income earners.

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