Compulsory redundancy payments

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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  • Ebolacola

    When most people take a low level job they accept the remuneration offered rather than negotiating how their pay will be split between super, health insurance, redundancy and take home.

    I think the effect of inertia in opt-out vs. opt-in retirement schemes shows that many people don’t necessarily “negotiate a contract with a severance package in the first place” that best suits them.

    Compulsory redundancy payments could reduce the burden on the social welfare system so may be in societies best interest if not the individuals.

  • DG

    I don’t see why there should be any redundancy at all. If you are fearful of the income drop that would come with unemployment, you should save more or take out income insurance (esp if you have a big mortgage).

  • “When most people take a low level job they accept the remuneration offered rather than negotiating how their pay will be split between super, health insurance, redundancy and take home.”

    Indeed there is a cost to negotiations. However, I thought a mix of unions helping form contracts and education surrounding the payoff associated with contract types would more than circumvent this issue.

    “I think the effect of inertia in opt-out vs. opt-in retirement schemes shows that many people don’t necessarily “negotiate a contract with a severance package in the first place” that best suits them.”

    I would like to see the “inertia” associated with opt-in vs opt-out retirement schemes – the initial version of Kiwisaver would have shown this. However, I’m not sure that we actually have a fair idea of how much “inertia” exists.

    Even if the small transaction cost of thinking is significant we have to ask – is legislating the best way to improve outcomes, or could better education/information provide the boost.

    “Compulsory redundancy payments could reduce the burden on the social welfare system so may be in societies best interest if not the individuals.”

    Why? The money is coming from businesses instead of from taxes – which stem from a mix of liabilities on businesses and households. Why should the entire cost of providing a welfare net fall on businesses?

  • DG :
    I don’t see why there should be any redundancy at all. If you are fearful of the income drop that would come with unemployment, you should save more or take out income insurance (esp if you have a big mortgage).

    True. However, I see the argument more as one about why we would want to increase the cost of removing labour – in what ways does that improve outcomes and in what ways does it hurt outcomes.

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