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JobKeeper and JobSeeker 2.0 look like failing three vital tests

20 July 2020

To be effective, their new versions need to be permanent, generous and consistent

Right:

First, do no harm: treasurer Josh Frydenberg at Parliament House earlier this month. Mick Tsikas/AAP Image

First, do no harm: treasurer Josh Frydenberg at Parliament House earlier this month. Mick Tsikas/AAP Image


So much for the snapback. The government will announce its latest versions of JobKeeper and JobSeeker this week. Most of the details have been kept under wraps, but three worrying details have been made clear: the new payments will be temporary, smaller and different across businesses and industries. This is the opposite of what the economy needs.

The government is right to abandon its rhetoric around the snapback. It was implausible then and is even less plausible now. Melbourne is back in lockdown. Sydney is on a knife’s edge. The only snapback we’ve seen is by the Aussie dollar. Its return to pre-Covid-19 levels means a vital source of stimulus for the Australian economy is now gone. Worse still, the unemployment rate rose last week even as JobKeeper and JobSeeker mask the full damage to the economy. You know you’re in trouble when even life support’s not working.

The situation in Melbourne has highlighted the challenge ahead. Whatever programs the government announces this week will need to be flexible for a stop–start recovery. To be effective, they will need to be long-term, generous and consistent across industries.

The government has already flagged that the new versions of JobKeeper and JobSeeker will, much like the old versions, be temporary. This is a mistake. It ignores what economists call “anticipation effects.” Businesses and households behave very differently in response to a permanent change rather than a temporary one. Faced with a temporary change, businesses and households will save more and spend and invest less — the exact opposite of what we want during a recession.

A permanent change, on the other hand, encourages businesses and households to make the long-term decisions that underpin investment and major spending (houses, cars, renovations) — the things we desperately need to get out of this recession. The fact that businesses and households have been left in the dark for almost four months, not knowing whether JobKeeper would even continue after September, is a huge policy failure. The stimulus effect of both programs has been diminished as a result. Uncertainty kills spending and investment. Announcing new temporary payments repeats the same mistake.

More worryingly, the government has flagged that the new arrangements will be smaller and will differ across industries and firms. This means less stimulus and a system that is more complex, less flexible and potentially inconsistent. Industry-specific payments ignore the fact that workers and businesses will likely be leaving some industries and joining other ones as they transition into the post-Covid-19 economy. Inconsistent payments between industries make that harder. It is also notoriously difficult to pick winners and losers in this environment, resulting in some businesses and households falling between the cracks, as was the case in the first versions of JobKeeper and JobSeeker. Responding with hurried industry-specific packages creates delay, confusion and uncertainty, further reducing the stimulatory effect of the spending.

A permanent, consistent system across the economy would avoid these pitfalls. The question is what such a system should look like. The government has its work cut out for it given there are many competing objectives to be balanced.

“First, do no harm” is the pledge taken by doctors. It’s a good place to start for economic reform. Covid-19 has seen a sharp fall in demand for workers across most industries. But some industries have needed more workers during this time and have struggled to get them. Healthcare, aged care and supermarkets are all examples.

Workers need to be able to relocate to new jobs. It’s important that the new versions of JobKeeper and JobSeeker, and inflexibilities in our labour market don’t stop this from happening. Even when people are not doing substantive work, they are unlikely to change jobs if their current job is still paying them through JobKeeper, particularly if they are getting paid more than they were before. They are even less likely to take on part-time or casual work elsewhere if their employment contract prevents them from doing so.

Worse still, in some instances people might be employed in a business that is no longer viable but continues to exist and employ people because of government payments. Boeing has revealed that hundreds of its workers are only being kept on the books because of JobKeeper. As soon as those supports are withdrawn, those workers will be made redundant. These zombie businesses will make the inevitable adjustments more painful.

It’s not popular to say it, but unsustainable businesses are better off failing, allowing workers and capital to be redeployed elsewhere. Of course, this assumes that there are new jobs for people to go to, new investments for capital to shift to, and a strong safety net to support people during the transition. In other words, reforms to JobKeeper, JobSeeker and industrial relations are intimately linked and need to be considered as a complete package.

It’s little wonder unions aren’t giving much away on proposed industrial relations reforms until they see what the new versions of JobKeeper and JobSeeker look like. The future success of Morrison’s IR reforms will be determined by what he and the treasurer announce this week. Unions are unlikely to accept permanent changes to the IR system in return for temporary changes to the safety net — another reason why permanent changes are vital.

Continuing JobKeeper for businesses in lockdown makes sense. Economy-wide revenue-contingent loans — where the government helps businesses to continue operating by lending them money that only needs to be repaid if their revenues rebound — gives businesses a safety net to decide whether they can viably continue into the future. Replacing JobSeeker with a permanent earned income tax credit that tops up salaries to ensure a living wage would help both the unemployed and the underemployed, while maintaining incentives to work.

The economy needs three things in these dire times: certainty, consistency and generous government support. JobKeeper and JobSeeker 2.0 need to provide all of them. •

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