Supporting Businesses Through and Out of the Pandemic
Dr Andrés Bellofatto, Associate Professor Begoña Domínguez, and Dr Jorge Miranda-Pinto
School of Economics, University of Queensland
On the morning of 29 March 2021, greater Brisbane residents woke up to a stressful mix of facts: as the state Premier announced a snap lockdown in the area, the historic JobKeeper scheme came to an end.
In the midst of likely COVID-19 outbreaks around Australia and a slow vaccine rollout, questions remain on whether the JobKeeper program should be further extended.
JobKeeper aimed to preserve jobs by supporting businesses through wage subsidies. This was achieved by exploiting two major channels, which are well-grounded in recent research works. First, JobKeeper sought to prevent job-firm relationships and firm-to-firm relationships from being destroyed because of the pandemic and to avoid ensuing public measures (lockdowns and border closures). By doing so, businesses and workers avoid the large costs involved in finding productive relationships and the losses of job-specific human capital, which can lead to significant declines in workers’ welfare and productivity (see Moscarini and Postel-Vinay, 2016, and Fujita and Moscani, 2017). Second, JobKeeper intended to mitigate business failures and the resulting negative externalities through production cuts, distribution chain disruptions, and intangible capital losses (see Carvalho et al., 2020, and Acemoglu and Tahbaz-Salehi, 2020).
Among the different policy options, academic research shows that wage subsidies like JobKeeper are relatively more expensive “per job saved” (see Gourinchas et al., 2020). However, compared to other policies, they do allow more businesses to survive. In fact, recent data released by ABS shows that business exit rates have actually declined nationally from 12.7% in 2018/2019 to 12.5% in 2019/20.
Such a decline in the exit rate could indicate that some businesses might have been “overprotected” and/or that might have been hard to sell during the pandemic. Widespread support was key due to the high degree of uncertainty at the onset of the pandemic. In the current situation, though, there is a better understanding of which industries will not recover partially or fully until the pandemic is over. For example, data from the ABS show that by December 2020, the tourism industry lost 85,000 jobs compared to December 2019 (-10.8% decline), and 57,300 of these job losses are concentrated in females.
Accordingly, now that JobKeeper dried out, it is time to transition towards a more targeted program that helps keep key industries afloat at the same time that incentivises business and employment creation. While these policies may be expensive, the benefits are large---not only in terms of jobs but also in terms of preserving job-specific human capital and businesses’ intangible capital.
The JobMaker Hiring Credit scheme, which incentivises businesses to employ additional young job seekers, points in the right direction but it is insufficient. This policy is contingent on hiring and, if well targeted, it is triggered by firms that, facing enough demand, have insufficient liquid funds. However, while most job losses are concentrated in young workers, these workers mainly work in COVID-hit industries that are less responsive to the policy (e.g, hospitality and tourism). Indeed, the numbers show that JobMaker has created less than 10% of the jobs it intended to create at this stage (10,000).
A more effective policy would be to extend a version of JobKeeper to the industries whose demand is greatly affected by COVID-19, existing regulations, and border closures. ABS data on business conditions and sentiments show, for example, that accommodation and food services, and arts and recreational services are the industries with the largest decline in business revenue in the previous month and the lowest ability to meet financial conditions over the next three months. As evidenced by the Business Conditions and Sentiments survey, absent government supports the most affected firms expect to cut employment, raw materials order, defer investment, and increase prices. Retaining these jobs not only preserves worker-firm relationships and mitigates negative cascade effects but also provides insurance income for workers. However, it is important to emphasise that this policy must be transitory and supported by a strong plan of vaccination and a clear plan of future border openings to tested and vaccinated visitors.
In addition, wage subsidies targeted to industries with persistently depressed demand must be complemented by policies that seek to train and upskill employed and unemployed workers. This would mitigate human capital depreciation, facilitate workers’ relocation, and reduce misallocation.
From its inception, the nature of JobKeeper was necessarily transitory. However, still, a number of industries are needing support. A combination of more targeted policies and fiscal redistribution to cope with potential business over insurance in already booming industries could complete the cross-over for the most affected Australian businesses out of the pandemic.
References
• Moscarini, G. and F. Postel-Vinay (2016): “Did the Job Ladder Fail after the Great Recession?” Journal of Labor Economics, 34, p. S55-S93.
• Fujita, S. and G. Moscarini (2017): “Recall and Unemployment,” American Economic Review, 107, 3875-3916.
• Carvalho, V. M., M. Nirei, Y. U. Saito and A. Tahbaz-Salehi (2020): “Supply Chain Disruptions: Evidence from the Great East Japan Earthquake,” Quarterly Journal of Economics, 136, p. 1255-1321.
• Acemoglu, D. and A. Tahbaz-Salehi (2020): “Firms, Failures, and Fluctuations: The Macroeconomics of Supply Chain Disruptions,” NBER Working Paper 27565
• Gourinchas, P. S. Kalemli-Özcan, V. Penciakova and N. Sander (2020): “COVID-19 and SME Failures,” NBER Working Paper 27877.