Economists wary of billion-dollar cost of raising sick leave

ANALYSIS

The Government’s decision to double minimum sick leave will cost a billion dollars a year, nearly 1 per cent of the country’s annual wage bill, and will be borne by employers, according to bureaucrats’ estimates.

The increase from a minimum of five to 10 days of annual sick leave, for which a bill was introduced in December, is the second and by far the most expensive of Labour’s three main labour-market policy changes promised in the 2020 election.

The extra sick leave is estimated to cost more than the minimum wage increase and the new Matariki holiday combined.

A 5.8 per cent rise in the minimum wage is scheduled for April 1; the sick leave increase is expected to come into effect in the second half of 2021; and Labour promised a new public holiday at Matariki from 2022.

Lifting the minimum wage by $1.10 to $20 per hour will cost employers $216 million annually in additional wages, according to the Ministry of Business Innovation and Employment (MBIE).

The new public holiday appears to be uncosted by the government, but in sick leave calculations, MBIE used an annual wage bill of $109 billion. Though it is a very rough basis for estimating the public holiday cost, one day’s wages amount to $418m (assuming an average 260 working days a year).

The figure is somewhat lower than a full cost-benefit estimate by PWC for new public holidays in Australia in 2015; if New Zealand circumstances are extrapolated from it, the net cost of a single holiday comes to a ballpark $500m.

Workplace Relations and Safety Minister Michael Wood declined to say whether he has considered the combined cost of the policies for employers. He said his Government is “taking a balanced approach by supporting both employees and employers through the pandemic,” and pointed to business-friendly schemes including the wage subsidy, free apprenticeships and the small business loan scheme.

The cited Government schemes, however, are all temporary, while the labour-market policy changes are permanent.

MBIE advice to the Government calculated that, under the new sick leave provisions, average sick days per employee annually would rise to 7 from 4.7 currently. The $!b price tag, intended as a “broad indication of possible costs,” was based on the direct cost of paying sick leave. While the review noted potential indirect costs arising from the provision of additional cover in some instances, the expense was not estimated.

Approximately half of all employers currently provide the minimum entitlement of five sick days per year, employees can accumulate unused days and carry up to 15 from year to year (under the change, the carry-over provision will rise to a maximum of 20 days). Minister Wood said details of implementation will be worked out at the Select Committee stage of the legislative process.

MBIE noted that manufacturing, construction and accommodation and food services are more likely to provide the minimum entitlement, and consequently are the sectors most likely to be affected.

In December, MBIE recommended the government delay until October the 2021 minimum wage hike, and increase the wage by just $0.25, an increment that would have been in line with inflation. Bureaucrats advised the more moderate move because of the Covid-19-related economic uncertainty. The Government, however, held to its original plan.

MBIE’s review of the sick leave increase produced last November supported the change; reviewers noted that New Zealand has a relatively low sick leave entitlement compared to similar jurisdictions abroad. However, the document also said the very tight time constraints set by the Government limited the scope of the review.

In particular, the work lacked consultation both with small businesses (which may be especially exposed to the cost increases) and with businesses in the sectors most likely to be affected by the change. Reviewers also said they did not consider models other than employer-funded because of insufficient time.

The context of the pandemic has clearly pushed the issue of sick leave to the fore, but the publicly funded Covid-19 Leave Support Scheme and an additional Short-term Absence Payment starting next month mean that the sick leave changes are not needed urgently because of Covid.

While employee representatives, including unions, support the changes, some economists, are concerned about the aggregate effect of the cost increases on business.

Independent economist Cameron Bagrie said the issue is the big picture: “Is any individual policy going to be an issue? The answer is no. But I am concerned about the cumulative aspect of these policies. I’m concerned that policy is becoming unbalanced and it’s too strongly redistributive in its focus at the moment and there’s not enough emphasis on growing the pie.”

Another compounding factor is the speed at which the minimum wage has risen, far outstripping median wage inflation. Between April, 2018, and April, 2020, it jumped nearly 20 per cent (on April 1 this year it will be up 25 per cent in just three years).

Bagrie noted that, while New Zealand’s economic performance through the Covid-19 pandemic has been much better than expected, it has also been “two-tiered.” A lot of firms have “bounced back nicely” he said, “but a lot of firms are on struggle street, their capacity to absorb rising costs is not great.”

Both MBIE and economists noted that businesses may respond to rising costs by reducing employee hours, cutting positions altogether, delaying or avoiding wage increases, and or increasing the use of contractors (not entitled to sick leave).

David Law, a senior fellow at think tank the New Zealand Initiative, said it is poor timing to introduce a suite of measures that will deter hiring when unemployment is rising (it jumped a record 1.3 per cent in the September quarter), labour participation rates are lower than they were before the pandemic, and an increasing number of workers are on reduced hours.

MBIE also noted that the $1b monetary cost of the new sick leave provisions may be offset by “possible financial benefits as a result of healthier workplaces, decreased absenteeism and improved productivity.”

Law said that some productivity offset is credible: “I haven’t looked at it closely but I’d be skeptical that you could save any more than a quarter of the monetary cost in productivity gains through the leave changes.”

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