The economics of the government's plan for 'social unemployment insurance'

One of the big (and surprising) announcements in the Budget earlier this year was that the government was developing a 'social unemployment insurance' scheme. This would presumably sit alongside the current unemployment benefit system, but would work in a similar way to accident compensation, paying each person who is made unemployed (and meeting certain conditions) 80 percent of their prior wage up to a certain cap.

This would represent a significant shift in the style of social security system that New Zealand operates. In my ECONS102 class, we distinguish three types (or models) of social security system:

1. A social assistance model - where there is an emphasis on self-reliance and responsibility, and the government provides support (often means tested) where a person would otherwise face hardship;
2. A social insurance model - where social assistance is available and based on previous contributions to a fund (which might be an individual account, or a general account for all insured people); and
3. A social citizenship model - where all citizens have a right to assistance for any contingencies they face (and the assistance is often not means tested).

In reality, most social security systems have features in common with all three types, but New Zealand's system up until now has mostly been a social assistance model, with the exception of accident compensation, which is clearly a social insurance scheme. This proposed introduction of social unemployment insurance would move unemployment assistance into the social insurance model (it would be interesting to see what the government would do with sickness and invalids benefits, or whether they would remain under the old system, along with sole parents and student allowances).

Anyway, there was a great article in The Conversation today by Simon Chapple and Michael Fletcher (both Victoria University of Waikato) that outlines some of the economic issues with a social insurance scheme:

However, there are two problems with the private insurance market, meaning they under-provide relative to people’s real need.

The first problem is called “adverse selection”, meaning people choosing to buy insurance have better information about the risks facing them than insurance businesses do, and no good reason to disclose that information.

To protect themselves from this, insurance companies set premiums higher. In turn, due to the costs, this leads to people being under-insured. Ultimately, society’s best interests aren’t met.

There’s also the problem of “moral hazard” – if a person has insurance they may take on more risk, without the insurer knowing exactly which customers are adopting riskier behaviour.

Again, insurance companies set higher premiums and people are generally under-insured. And again, this isn’t in society’s best interests...

These market failures mean there is potential for well-designed government interventions to meet the social interest. In particular, making everyone join a social insurance scheme would fix the adverse selection problem.

But a compulsory social insurance system also expands the scope for moral hazard. People might change their behaviour to increase their eligibility for an insurance payout. They might take on jobs with higher redundancy risks, or be less motivated to look for work, because the consequences are now less severe.

The problems of information asymmetry (including adverse selection and moral hazard) is among my favourite topics to teach in my ECONS102 class. Chapple and Fletcher are right that the unemployment social insurance scheme would not have an adverse selection problem (provided it is compulsory, in the same way that accident compensation currently is), and the key problems would be moral hazard.

To expand on the moral hazard problems a little bit, workers would be less fearful of losing their jobs, because they would receive a higher unemployment payment than previously. So, at the margin, workers would not work as hard, and productivity might decrease. Similarly, absenteeism might increase, which also reduces productivity. 

On the other hand, wages might increase. To see why, consider a search model of the labour market. This model recognises that each matching of a worker and a job creates a surplus that is shared between the worker and the employer, based on their relative bargaining power. A higher unemployment payment increases the worker's bargaining power, since they can afford to hold out for a better deal. Employers will have to offer slightly higher wages than before, in order to attract workers to leave the unemployment payment and accept the job offer. So, wages will increase, and employers will find that vacancies take a little longer to fill.

Workers may also benefit from better job matches. Since they can afford to stay on the higher unemployment insurance payment for longer, they can afford to wait and find a job they really want, rather than accept the first half-decent offer they receive. The number of unemployed will likely increase, and the average length of unemployment spells will also increase.

Clearly, there is a lot for the government to balance here. Chapple and Fletcher also note that:

If it turns out there are gaps in the current system, advocates of social insurance must also consider:

• such a scheme may simply be substituting for one or several of the existing solutions, which would then reduce if the scheme were introduced

• reforming and improving what already exists may be preferable in terms of cost, effectiveness and equity than introducing an entirely new system

• there may be implications for both equity and erosion of the core welfare system of creating a separate, higher tier of assistance for some.

At this stage, all we have had from the government is an announcement, and a promise of "public consultation later in 2021". Presumably that consultation has been delayed until next year, due to the pandemic. It will be interesting to see what comes out of this.

The supply of black market vaccine passes

I was interested to read this article from The Spinoff earlier this week:

New Zealand’s traffic light system comes into play today, and perhaps inevitably, it’s being accompanied by a new black market for stolen, shared and faked vaccine passes...

A Telegram seller who, when I last spoke to them, was selling fake vaccine record cards recently made a big pivot to buying and selling official My Vaccine Passes.

The seller, “Vax Card NZ”, told me via Telegram private message on Wednesday that they were diversifying: “Just transitioning to cover the digital passes, but we still are selling the cards.”

They went on to explain that they’re trying to build up a stock of official passes with a variety of names and birth dates. “We ideally need a variety of cards to cover the base demographics,” they said, in order to be able to offer suitable options to buyers. But so far they’ve not had much luck getting official cards, and have been raising the price they’re offering to buy the passes. “We started at $50 and are now offering $125, and will continue to raise prices until we are able to purchase enough stock,” they continued.

Clear evidence that the supply curve for vaccine passes starts from a point above the x-axis (nobody is willing to sell their vaccine pass even at a price of $50), and is expected to be upward sloping ('Vax Card NZ' will continue to raise prices until they are able to purchase enough stock'). I wonder how high the price will need to go before they have enough variety of passes to re-sell?

This bit is worrying though:

As of Wednesday, Vax Card NZ reported that they hadn’t been able to buy any cards, but they were expecting that to change. “This will likely happen when the passes start to be used as people will be able to photograph other people’s passes and then sell them,” they explained, pointing out that all they needed was an image of the official QR code in order to recreate the pass for sale.

This functionally creates a market for stolen vaccine passes, incentivising people to capture images of strangers’ vaccine passes; a process Vax Card NZ has called “mining” in their online advertisements. 

I guess that, just like your credit card, you want to be careful who is scanning your My Vaccine Pass, and what they are doing with it. To be safe, perhaps each of us should be looking at the screen of the scanner, to make sure that the person doing the scanning is using the official app, and not simply taking a photo of our QR code to resell?

The only way to effectively thwart this behaviour would be for every business that is required to scan vaccine passes, to be routinely checking every pass against a photo ID. That way, it would be more difficult to pass off a fake vaccine pass as genuine. Unfortunately, there doesn't appear to be much of an incentive for businesses to have a robust process in place.

Requiring photo ID then creates problems for the small minority of people who don't have photo ID. To solve that problem, perhaps the government could subsidise people to get Kiwi Access cards? They currently cost $55 each, but they don't require a test (like a driver's licence) or citizenship (like a passport). Perhaps when a person registers with My Vaccine Pass, they could get sent a one-time voucher for a Kiwi Access card.

None of this is rocket science. We could have a vaccine pass system that works for everyone, eliminates the bulk of the black market (although those who are seriously enthusiastic about avoiding vaccination will still find a way, like getting a fake driver's licence to go with their fake vaccine pass), and doesn't meaningfully exclude sections of the population.

Book review: Grave New World

I just finished reading Grave New World, by Stephen King (the senior economic advisor at HSBC, not the horror author). Although, some readers of this book might think it mildly horrifying in a pre-apocalyptic sense. The subtitle is "The end of globalization, and the return of history", which pitches it as antithetical to Francis Fukuyama's famous essay and book The End of History, which is probably very appropriate.

King's narrative is essentially that globalization can, and will, go into reverse. The prophesied mechanisms for this reverse are increasing inequality within countries, increasing migration flows, a loss of credibility in international institutions, and a reduction in US global hegemony as other superpowers (particularly China, but also Russia) rise. To be honest, I really struggled with this book. It is very well written and easy to read, but King's approach is mostly to gather together a lot of contemporary trends, weave a story that seems to link them all together, and propose where all this is leading. I found it overall to be mostly speculative and not very compelling.

However, as I said, it is well written and despite my failure to buy into the overall narrative, there are definitely notable highlights. I really appreciated King's use of political philosophy. In particular, he points to Montesquieu's The Spirit of the Laws, where King notes that Montesquieu argued:

...that a democratic nation state would only survive if the citizens living within its borders thought their own interests were in accord with the interests of the state as a whole... Alternatively, should citizens no longer be willing to place their faith in elected lawmakers and politicians... a democracy would eventually collapse on account of an excessive 'spirit of inequality'...

If globalization is to succeed in a world of nation states, it either needs to retain the support of nation states, or the nation states themselves need to change. Yet if each nation state experiences an increase in Montesquieu's 'spirit of inequality' - thanks to unintended or unexpected effects stemming from globalization - a point may be reached where domestic support for closer integration inevitably falters.

Among other things, King predicts the fall of the Euro currency, NATO, and the European Union within the near future (the epilogue of the book is written as if in 2044, by which time all of those falls have come to pass). Predicting the future is a sucker's game, but King is clearly up to the challenge, and is not shy. The book also has a few blind spots (notwithstanding that it was written in 2017), including the rise of Bitcoin and blockchain (which could have been foreseen four years ago), and then there's this:

Unlike previous superpowers, the US was not so interested in controlling the rest of the world. Instead it played its role as the first among equals...

I guess that could be true, if we first ignore the Korean War, the Vietnam War, American interventions in Central America, Iran and elsewhere, the Gulf Wars, Afghanistan, American dominance of the World Bank, the IMF, and the World Trade Organization, American cultural imperialism, and so on. Your mileage may vary.

Overall, this was an interesting book to read, but I would hesitate to recommend it to anyone who isn't looking to collect a variety of views on the future of globalization.

National football team performance and fertility

Like the media belief in a lockdown baby boom (see here), there is a belief in the media that sports team performances affect fertility and birth rates (e.g. see here, or here). Most stories like 'Super Bowl babies' have been proven to be a myth. However, throwing more data at a question like this is often good. That's what Luca Fumarco (Masaryk University), and Francesco Principe (University of Padova) did in this new article published in the journal Economics Letters (ungated earlier version here). Specifically, Fumarco and Principe looked at how national football (soccer) team performances at international competitions (FIFA World Cup and UEFA European Football Championship) affected the number of births nine months later, for 50 European countries.

National team performance was measured using the weighting of each match used in FIFA's Elo rating system (more on that later). Births were monthly counts. Fumarco and Principe find that:

Across all of the specifications, we see that, on average, an increase in performance by one standard deviation is associated with a reduction in monthly births by 0.3% nine months after the event.

They also perform a robustness check looking at the effect on other numbers of months after the event, and find that:

The effect of performance on monthly births is statistically significant nine months after the tournament... while the effect after ten and eleven months is not significant....

And the results were also statistically insignificant for 1-8 months after the event. So, on the surface, this seems to support the idea of a 'baby slump' rather than a baby bump from better national team performance. Fumarco and Principe conclude that:

...an increase in national team performance in international football competitions is associated with a drop in births nine months after the event...

We hypothesize that these results might be explained by individuals’ time allocations choices... the attendance of live events (e.g., from late afternoon to late night, on TV, at the stadium, on big screens in public places...) may reduce the time spent on physical intimacy...

The mechanism they propose is speculative. However, there is good reason to doubt the headline results in this study. First, I'm not convinced that their measure of national team performance is valid. They claim to use national teams' performance "as measured by the ELO rating system", but clearly they do not. The Elo rating system that FIFA uses takes into account the strength of the opposition and goal difference (see here), neither of which make an appearance in Fumarco and Principe's measure. [*] Fumarco and Principe take into account only the weighting of the match, which increases as the tournament progresses. That is a fairly crude measure of team performance, and not a whole lot better than the number of matches played, or the number of matches won. It would be interesting to see how the results panned out simply using the number of games.

Second, on a related note, Fumarco and Principe appear to use the full time series of monthly births for each country in their analysis (~17,000 observations). However, the tournaments only happen every two years, and most teams don't play in every tournament (or even any tournament). In those cases, Fumarco and Principe set the team performance variable equal to zero, which is not so different from a team that lost all of its games (which would be assignment 3 points, as they assign a minimum of 1 point per game). Including a bunch of months where there is no tournament and every country has a zero for team performance will seriously skew the results. Now, Fumarco and Principe use a variety of fixed effects, including month fixed effects, and month x year fixed effects. That will reduce some of this problem, but won't eliminate it entirely. It would be interesting to instead see how robust the results were to including only the month that is nine months after each tournament (i.e. April of each year), and applying a difference-in-differences format using countries that did not participate in each tournament as controls.

Third, there is no control for population in their model. It should be obvious enough that the number of births depends on the number of women of childbearing age. So, by excluding population size from the model there is a serious omitted variable bias. They do include country fixed effects, but that will simply reduce the size of this bias, not eliminate it.

This is a study that started with an interesting research question, but I don't think we can really take their results as given (even notwithstanding that they are correlations rather than causal). This is the sort of research that a good student could easily follow up on and improve upon.

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[*] A side note: For a number of years, I generated Elo-type ratings for a number of international sports, along with Super Rugby and the NFL (see here). So, I have a bit of experience with these systems.