Current Policy Responses & Perverse incentives

The New Zealand government is fully aware of the current rate of unemployment and the issues of long-term benefit dependency. Financial assistance for unemployed New Zealand residents or citizens is provided through an Unemployment benefit. New Zealand residents and citizens 18 – 64 years of age can claim an Unemployment benefit as long as they are actively seeking full-time work. In return, they have obligations to fulfill job seeker’s agreements which require them to actively seek for employment opportunities be it part or full time.

All income, including the government subsidized main benefits, is taxed. This includes the Unemployment benefit. People receiving the unemployment benefit, who supplement their income with part time work, are taxed at the secondary tax rate.  This means that the purpose for their finding work (to increase their income) is defeated. As long as they are receiving an Unemployment Benefit, they are trapped at that income level which limits their choices considerably.

Additionally, a Beneficiaries’ second source of income e.g a part-time job will affect their benefit entitlements. This is called “charging income”. If they earn more than $80 gross from their part time job, their benefit reduced by 70 cents for every $1 of income they make. The government imposes an additional earning ceiling also known as an income cut out point (income level from secondary sources which will completely reduce their benefit to $0), or 30 hours of work which is considered to be equivalent to full time. This means that if the beneficiaries through their work earn more than the cut out point or 30 hours a week, they will lose their main benefit completely.

Table 1: Current Unemployment Benefit rates as of 1 April 2012:

If you are… Weekly payments (after tax)
Single under 20 at home $136.64
Single under 20 away from home $170.80
Single 20-24 years $170.80
Single 25 years or over $204.96
Married, civil union or de facto couple with or without children (each) $170.80
Sole parent $293.58
Less is received if there is  other income. Households with children  may also be able to get family tax credit or extra allowances as well. Tax deducted is at the M rate.

 

Table 2: Unemployment Benefit cut-out points if they are working as of 1 April 2012.

Category Gross weekly income cut-out point Gross annual income cut-out point
Single, 18 – 19 years, at home $276.00 $14,352.00
Single, 18 – 19 years, away from home $324.00 $16,848.00
Single, 20 – 24 years $324.00 $16,848.00
Single, 25+ years $373.00 $19,396.00

 Perverse incentives: As Mentrom mentioned in his contemporary policy analysis book (2011), public policies introduced with the best of intentions sometimes get undermined because they create perverse incentives for relevant actors. [1]  The Unemployment Benefit in New Zealand is helpful for unemployed New Zealand residents and citizens. However, for those who do not have full time employment, it is an incentive for them to direct their efforts toward securing continued receipt of the Unemployment Benefit as opposed to taking up part-time employment offers.


[1] Michael Mintrom, Contenporary Policy Analysis (New York: Oxford University Press, 2011), p.194.