What is the effect of redirecting government tax intake to a consumer retirement saving incentive?
If you've ever looked at the ratchet effects model, you might be able to glean insight from there? Basically, if a worker is paid in a piece rate $a + bq = S, for \space e(q)$, where e is the effort exerted by the worker, we know that it is the most efficient--normally--to set $b = 1$ (no deadweight loss of "taxation" of labor, so to speak), assuming that e is measurable. However, given the cost of effort, the firm will always try to guess what that ($C(e)$) is so that $a + be - C(e) = 0$, to minimize the salary $S$ that is paid out. Workers, anticipating this, ratchet their productivity downwards, since working hard will tell a firm that the job being done by the worker is very easy, and not worth much pay.

So this means the optimum is for the firm to set $b &gt; 1$ in a two period model where you observe effort, and then set the piece rate pay in the second period. Imagine how this might work for employers. They know that the amount they put into the Kiwisave is dependent on how much they pay out to the worker, given some chance that the employee actually puts aside the 3%. So the firm will set pay lower than they normally would if the government raised their investment into Kiwisave. The question is, would firms lower $b$ or $a$. When you optimize a simple model like this, $a$ usually doesn't go into the FOC, so probably what will happen is $b &lt; 1$.

I think that increased government spending wouldn't necessarily increase employer costs if more employees opt in. If employers only had to pay the 2% if employees successfully paid their share that is, 100% chance employees who opt in, then more government spending would do almost nothing, barring elasticity. Those who opt in would simply have their wage set lower by the firm.

All in theory.