Tuesday, April 07, 2009

Busting Recessions - Income Contingency Loans for Redundancy & Training

I’ve touched on income-contingency loans in previous posts, time to explore them in more detail.


The point of redundancy is to allow businesses to shed staff as necessary without throwing the people onto the garbage heap. The flexibility provided to hire and fire staff is important in keeping an economy resilient and flexible. Society also benefits from redundancy payments as it reduces the fear of not being able to pay bills. As most redundancies occur during recessions it helps to cushion the demand destruction of job losses.
There are two problems with redundancy systems as they currently stand:

  1. From the point of view of a person, redundancy payments are not enough to survive on, and
  2. From the point of view of the company, redundancy payments are a big hit to cashflow.
The Nordic countries use generous welfare system to reconcile the two competing interests but have high taxation as a result.

The same reconciliation of the competing interests can be achieved by using income-contingent loans. When making someone redundant the company takes out a loan from the Government to pay for the redundancy of the person. The loan is then paid back through the taxation system from the profits/income of the business taking out the loan.

Redundancy payments can then become 75-90% of final salary for a period that can last 6 to 1 year without driving businesses into the ground.

Using income contingent loans allows:
  • Businesses to lessen the impact on cashflow from redundancy payments
  • Individuals get larger payments that reflect their final salary for longer periods
  • Redundancy can be provided to all employees instead of just those that have been at the business for a long time
  • Bills, rent and mortgage continue to be paid reducing negative flow on effects from redundancy to the wider economy
  • Redundancy is guaranteed even if the company eventually goes bust

Training & Education

One of the aspects of recession is that there are too many people chasing too few jobs. Income-contingent redundancy helps lengthen the time an individual has to find another job but it isn’t the only way of smoothing things out.
The second method is to provide income-contingent loans to businesses for training employees. The business would take out an income-contingent loan that would pay for the salary and training. A modification is that the loan is jointly held by the individual and the business.

These loans would achieve:
  • Improved cashflow for the business as the employee is effectively removed from the payroll
  • The person is improving the skills and training so that they are more effective when business picks up
  • The business can hold onto good employees that would otherwise have to be made redundant
  • Less people are chasing the limited number of jobs
  • Bills, rent and mortgage continue to be paid reducing negative flow on effects of redundancy/job losses to the wider economy
  • Society benefits from better trained and skilled workforce
Income contingent loans better address the needs of business and employees without trying to jam them all into the same one-size-fits-all. They recognise the benefits of redundancy payments and training doesn’t accrue just to the business or individual or society but to all three in varying amounts.

On the face of it the training loans are better overall but training will not be suitable for all situations or occurrences. Both systems should be implemented to allow flexibility and support the uniqueness of each redundancy situation.

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