COVID-19 Economic response—wage subsidies aim to put workplaces into hibernation

Health and Ageing Employment and Training Economics and Public Finance

Don Arthur

As governments around the world closed down bars, restaurants, universities, schools and sports fields to slow the spread of the coronavirus, policymakers faced the prospect of a wave of job losses and business failures. In an attempt to halt the job losses, policymakers in countries like Denmark and the United Kingdom announced wage subsidies to help employers keep workers on the books until the health crisis has passed.

In an interview with Derek Thompson of The Atlantic, Denmark’s employment minister Peter Hummelgaard said:

After the lockdown, we knew that people would get fired in vast numbers. We wanted to avoid most firings, entirely. The best idea we came up with was for governments to pay businesses to keep employees.

Hummelgaard described this as ‘freezing’ the economy. Similarly, in Australia Prime Minister Scott Morrison described Australia’s approach as putting businesses into ‘hibernation’. Other commentators talk about putting the economy into ‘a medically induced coma’. While the metaphors differ, the idea is the same—keep workers connected to workplaces, stop businesses from closing permanently and minimise any lasting disruption to the economy.

The policy process moved quickly. Denmark agreed on its temporary pay compensation scheme on March 14. The next week stories appeared in the media about plans for a similar system in the United Kingdom. Soon after, the United Kingdom, Canada, New Zealand and then Australia all announced their own schemes.

These schemes share the same broad objectives but differ in design. For example, some, like the UK scheme, are restricted to employees who are stood down. Others, like the Australian and New Zealand schemes cover employees who are still working in addition to those who are stood down. Some schemes, like the UK scheme, pay a proportion of employees’ usual wages while the Australian scheme pays a flat rate. The New Zealand scheme has different rates for part-time and full-time employees while the Australian scheme has a single rate for all employees. All are intended to be temporary.

Policy rationale

The economic downturn caused by the COVID-19 pandemic has different causes to previous recessions. In this downturn governments are forcing their economies to slow by introducing restrictions to minimise physical person-to person-interaction. The hope is that the economy will rebound swiftly once restrictions are lifted. However, as the Wall Street Journal’s Marcus Walker explains:

Social-distancing measures, such as telling people to stay home and businesses to close unless essential, can suspend the buying and selling of most goods and services. But many costs keep on running. Households have rent or mortgages to pay, as well as bills for food and other necessities. Businesses have payrolls, debts and other fixed overheads. Banks owe money and so must collect it.

To help make sure the economy is able to restart, policymakers in many countries are trying to ‘freeze’ their labour markets in place by preventing struggling businesses from laying off workers and triggering a downward spiral that leads to more business failures and more layoffs before the restrictions are lifted.

The Australian scheme—the JobKeeper Payment

Soon after countries like Denmark and the United Kingdom announced their wage subsidy schemes, union leaders, business groups, media commentators and the Opposition began calling for an Australian wage subsidy scheme. Much of the commentary focused on the UK scheme.

The Prime Minister announced the Government’s first set of measures in response to the crisis on 12 March. On 27 March the Prime Minister elaborated on the Government’s economic approach to the crisis. In a press conference he said that many businesses would be forced to close their doors: ‘We want these businesses to effectively go into a hibernation, which means on the other side, the employees come back, the opportunities come back, the economy comes back.’ Soon after the Australian Financial Review reported that the Government was set to announce a wage subsidy scheme.

Ministers ruled out introducing a wage subsidy based on the UK scheme. On Sunday 29 March, Finance Minister Senator Mathias Cormann described the Government’s approach as ‘providing significantly enhanced income support through business ...’.

In The Australian, Paul Kelly and Dennis Shanahan offer an account of how the Government developed Australia’s wage subsidy scheme. According to Kelly and Shanahan, the Prime Minister was:

… committed to an ‘equitable’ system of wage subsidy. He was determined to introduce a flat payment to all those whose jobs had been lost, regardless of income at the time of the job loss or business going into the deep freeze so they could be thawed-out more easily when the virus crisis had past.

The Government announced Australia’s JobKeeper Payment on 30 March 2020, to be paid through the Australian Taxation Office. The JobKeeper Payment proposal differs in important ways from the UK’s Coronavirus Job Retention Scheme. For example, the UK scheme applies only to workers who have been stood down or ‘furloughed’. The amount employers receive for each furloughed worker depends on the employee’s wage. The subsidy covers 80 per cent of the employee’s usual wage costs, up to £2,500 a month plus certain social insurance contributions. The JobKeeper Payment can cover workers who continue working as well as those who are stood down.

Rather than targeting businesses which stand down workers, the Australian scheme targets businesses that have suffered a significant reduction in turnover (30 or 50 per cent depending on the business’s turnover). And rather than varying the amount of the subsidy depending on wages, the Australian scheme pays employers a flat rate of $1,500 per worker per fortnight. The scheme covers permanent part-time and full-time workers and long-term casuals. Because employers must pass the full value of the subsidy onto employees, workers who usually earn less than $1,500 a fortnight will receive more under the scheme than they are normally paid. This makes the Australian scheme different from a similar scheme announced for New Zealand where employers will not pay workers more than their usual wage.

The JobSeeker Payment will require legislation, so some features of the proposed scheme could change following negotiations between the Government, Opposition and cross bench MPs. The legislation may also provide for the Minister to alter some aspects of the scheme at a later date by legislative instrument.

Further information on wage subsidy and related schemes

Canada

Government of Canada, Support to Businesses, Avoiding layoffs

Government of Canada, Frequently Asked Questions – Temporary Wage Subsidy for Employers

United States

Department of the Treasury, Paycheck Protection Program (PPP) information sheet

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