A better approach to hold onto jobs

Dr David Law
Insights Newsletter
27 March, 2020

The Covid-19 outbreak is quickly developing into an economic crisis. A top priority for the Government now is to maintain employment and ensure firms can quickly recover when the lockdown ends.

It has chosen wage subsidies as the preferred measure to help both firms and workers. These were initially set at $585.80 per week for a full-time worker and $350.00 for part-time workers, limited to 12 weeks per employee and $150,000 per firm. The scheme is projected to be worth over $9 billion.

However, good policy is critical now more than ever and there are better ways to preserve jobs.

The Government’s first attempt is not well targeted or flexible enough and lacked a large enough incentive for the big end of town, which is responsible for a substantial proportion of employment, to continue operating in the crisis. If the Government doesn’t shift its stance on wage subsidies it risks a mass lay-off of jobs and the potential destruction of many companies.

A policy called short-time work (STW) is a superior option. It provides firms with wage subsidies to reduce their employees’ working time rather than laying them off. Here’s how it would work.

A hotel with 200 employees running at 20% occupancy needs fewer cleaners, receptionists and chefs. Under the STW, it could reduce everyone’s working hours to 20% and let the Government compensate the employees for a share of their lost income. When the crisis is over, the hours can be lifted again as the hotel’s operations ramp up. Crucially, employee/employer links are maintained.

Evidence supports STW schemes which are now common across OECD countries. For instance, at the height of the Global Financial Crisis, 4-5% of employment was covered by a STW scheme in Germany, with an average working time reduction of 28%. Estimates suggest that for every worker participating in the scheme about 0.8 jobs were preserved.

If New Zealand could achieve Germany’s STW success, employment would be 3% greater than under the Government’s present scheme, as our recent research paper outlines in more detail (available here).

Unfortunately, other bad policies are emerging. The introduction of Universal Basic Income (UBI) – a benefit paid to everyone regardless of work status – is an example. Apart from the cost of UBI (which is astronomical) it would do little to preserve the relationship between employees and employers. It may even be detrimental to employment overall.

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