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Keith Rankin: Another Measly Parental Benefit

Another Measly Parental Benefit

Keith Rankin, 26 April 2001

It appears that something called "paid parental leave" will be implemented by this government. I infer from Radio New Zealand reports that the new proposal will be, as National's 1999 parental tax credit was, the equivalent of a social welfare benefit.

Will it be a means-tested benefit (as National's was), a flat-amount benefit (as the dole is) or an earnings-related benefit (as Accident Compensation payments are)? It is only the latter type of benefit that could lay any claim to being paid parental leave. Yet it is very hard to justify paying such a benefit, in which probably 80% (or more) of the dollars paid will go to professional double income households. We are told we can no longer afford to supply Community Services Cards to many low income working families. So how could we afford a benefit that will be paid disproportionately to professional women with earning partners?

In short, another parental benefit will satisfy few while being an easy target for criticism.

Human beings are an economic resource. Like all resources we come at a cost. In an efficient economy, all resource costs are paid for by the employers of those resources. So, in an efficient economy, "human resource" costs are paid by the employers of labour. It is not the role of third parties to pay costs associated with the employment of labour.

If humans neither reproduced nor took any time off, the productive capacity of the human resource (in the aggregate) would depreciate significantly. Hence employers pay annual leave and sick leave. It is as much a cost of business to incur such labour maintenance costs as it is a cost of business to maintain the productive capacity of its structures, machinery, livestock and freehold lands. (In the case of parental leave, employers should pay collectively so as to discourage employer discrimination against hiring persons deemed likely to become parents.)

It is the role of government to ensure that employers pay the costs they incur. It is not the role of governments to use public revenue to pay employers' costs. It is not even the role of government to reduce the costs of doing business. That is the role of business. Businesses play the market game. Government is the referee. Sean Fitzpatrick notwithstanding, the roles of referee and player are distinctly different.

From the first decades in this century until 1972, the government obliged employers' to pay a somewhat crude form of paid parental leave. Employers were legally obliged to pay men a wage or salary well in excess of the market wage that would otherwise have prevailed. On account of that obligation, few "married" women needed to undertake market work. The issue here is not about gender roles. The point is that employers paid the "family wage" that was paid to husbands and husbands-to-be on behalf of wives, children and wives- to-be.

The sticking problem lies in the international economy. Here the role of government changes. There is no global referee. Governments become players. They play the international market game alongside the businesses that produce for export or that produce goods that might otherwise be imported. It is in this role that many governments believe that they have a duty to absolve businesses of some of their costs. Business costs - such as the costs of enabling workers to reproduce - are imposed upon the general public in the name of international competitiveness.

From the point of view of orthodox neoclassical economics, this practice of making the general public bear some of the costs of business is quite misguided. Indeed, from this point of view, the concept of "international competitiveness" makes no sense at all.

This is because international trade is based, in theory at least, on "comparative" rather than "absolute" costs. According to the well-established theory of comparative costs (also known as 'comparative advantage'), countries will specialise in the production of goods or services which they produce relatively cheaply. In other words, a country which has higher absolute costs than all other countries will still specialise in (and hence export) some product or products. All countries have some comparative cost advantage.

It is pointless for governments to act to reduce the absolute costs of business, because a low-cost environment is not a necessary precondition for full- employment. Indeed subsidies to businesses simply lead to a misallocation of resources. Because most countries subsidise their businesses - New Zealand subsidises by, among other things, not requiring businesses to pay parental leave - there is a significant global misallocation of resources. Much of that misallocation has serious environmental consequences, ranging from foot and mouth disease to deforestation.

OK, the theory of comparative costs only works properly if there is enough demand in the global economy to bring about global full employment. This full- employment condition is not met in the real world. So governments are not totally silly when they allow businesses to pay less than their full costs in the name of competitiveness. There are better solutions to this problem, however.

After the Great Depression (of the 1930s), economist John Maynard Keynes devised a plan to get around this real-world problem of insufficient global demand. He wanted to create a global Reserve Bank that would both create enough money and ensure that that money was spent into circulation. That would ensure global full employment. The Americans thought that Keynes' scheme was too radical, so we got the International Monetary Fund (IMF) instead.

In practice, and in the absence of an effective global solution to the unemployment problem, those governments which do not subsidise the businesses that operate under their jurisdictions have to adopt some protection (eg customs duties) from imports from countries whose governments do subsidise businesses.

The world as a whole, and individual countries, are better off when governments resist the practice of allowing businesses to shirk some of the costs they incur.

The New Zealand government is about to continue to facilitate the practice of allowing employers to evade some of their responsibilities to their employees. The New Zealand public will bear this cost, either by funding a new parental benefit, or by enduring the relative impoverishment that now comes with raising children, or by having too few human resources in the 2020s and 2030s.

© 2001 Keith Rankin

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