RDP 2020-07: How Many Jobs Did JobKeeper Keep? 3. Previous Literature

In this section we review the existing evidence on JobKeeper and the international literature on wages subsidies.

3.1 Descriptive Evidence on JobKeeper

The JobKeeper Payment is still relatively new, which means evidence on its effects is only just starting to emerge. Business surveys were useful in forming an initial assessment. In an ABS (2020a) survey of businesses in late April, around 45 per cent of firms reported that the announcement of JobKeeper had influenced their decision to continue to employ staff, and 60 per cent of firms had registered for the scheme or were intending to do so. Qualitative and anecdotal reports have also helped policymakers gauge the initial effects of the scheme. Many of the RBA's business liaison contacts that received JobKeeper reported that the payments helped them retain staff in the near term. The case studies presented in Treasury (2020b) paint a similar picture.

In addition to case studies, Treasury (2020b) provided some novel empirical analysis using administrative data. Treasury were able to match the ATO's weekly Single Touch Payroll data on paid jobs to other ATO data on which firms enrolled in the JobKeeper program. Using this dataset, they found that by late May more than 90 per cent of all job losses since February were experienced by workers who had been employed in a JobKeeper-enrolled firm but were not themselves eligible for the payment (e.g. short-term casuals or temporary migrants). Over the same period, eligible employees in those firms experienced no net job loss, while the number of jobs held by employees in firms that were not enrolled in JobKeeper fell by around 2 per cent.

While Treasury's analysis is a useful addition to the evidence base, a simple comparison of eligible and ineligible employees working in eligible firms does not tell us the magnitude of JobKeeper's contribution to employment outcomes (nor do Treasury argue that it does). Eligible and ineligible employees differ on a number of characteristics that are correlated with their exposure to COVID-19-related job losses. Conditioning on firm eligibility only partly accounts for these differences. The finding that more jobs were lost by ineligible employees than eligible ones may simply reflect that a greater share of employees in the most adversely affected industries were not eligible for JobKeeper. For example, in the accommodation & food industry, which was one of the hardest hit by COVID-19, a large share of employees were ineligible for JobKeeper because of the relatively short job tenures and greater use of foreign labour in this industry, compared to others.^[10] As such, the observed difference in job losses between eligible and ineligible workers may simply reflect that accommodation & food services industry was particularly adversely affected by COVID-19, rather than a causal effect of JobKeeper per se. To establish causality, we need to go a step further and control for other differences between eligible and ineligible employees, such as their industry.

3.2 International Evidence on Wage Subsidies

The international evidence on wage subsidies also provides useful insights for policymakers (RBA 2020). The literature on wage subsidies mainly focuses on the role of short-time work (STW) schemes in Europe, where governments subsidise firms to reduce hours worked by each employee, instead of reducing the number of workers. Several studies find these schemes were generally effective in reducing employment losses during the global financial crisis (GFC), albeit with some variation among countries due to the structure of labour market institutions.

Cross-country studies generally find that STW schemes are effective in moderating employment losses. Lydon, Mathä and Millard (2018) use firm-level data from 20 European countries and find that firms using STW schemes were significantly less likely to lay-off permanent workers in response to a negative shock, but with no effect for temporary workers. Hijzen and Martin (2013) also find that STW schemes helped preserve jobs during the GFC across a range of countries, but find that their continued use during the recovery stage may have slowed the recovery in employment. Boeri and Bruecker (2011), using an instrumental variables approach, find that STW schemes reduced employment losses during the GFC. They note, however, that their results cannot necessarily be applied to other countries given their finding that the effects of STW schemes also depend on labour market institutions such as employment protection legislation and the degree of centralisation of collective bargaining.

Analysis of STW schemes in particular countries also tends to conclude these programs cushion employment losses during adverse shocks. Germany is often a focus of these studies given its long history of STW programs. Balleer et al (2016) argue that Germany's STW scheme contributed to the country's surprisingly muted rise in unemployment during the GFC. Burda and Hunt (2011) and Möller (2010), however, suggest other features of the labour market which provide flexibility were more important. Studies on STW schemes for the United States (Abraham and Houseman 2014), Luxembourg (Efstathiou et al 2018) and Switzerland (Kopp and Siegenthaler 2018) also emphasise the efficacy of these STW schemes.

To date, there have been relatively few studies on the effects of wage subsidy schemes during the COVID-19 crisis. Cross-country analysis finds that increases in unemployment in the first few months of the COVID-19 crisis were smaller on average in those countries which provided a greater level of support through wage subsidy schemes (RBA 2020; OECD 2020). While this suggests these schemes were effective at reducing employment losses, these correlations can be affected by a range of confounding factors and differences in measurement practices across countries.

Several studies have also examined the Paycheck Protection Program (PPP) in the United States, which was announced in March 2020. Autor et al (2020) find that receiving a PPP loan led to a 2¾ to 7¼ per cent increase in a firm's employment levels in June 2020, relative to the counterfactual of not receiving a PPP loan.^[11] Other evaluations of the PPP have yielded mixed results. Hubbard and Strain (2020) find that the PPP substantially increased the employment, financial health and survival of small businesses during the first three months of the scheme. Bartik et al (2020) find that receiving a PPP loan led to a 14 to 30 percentage point increase in a firm's expected survival, and a positive but imprecise effect on employment. On the other hand, Chetty et al (2020) find that PPP loans had little effect on employment at small firms. Granja et al (2020) do not find evidence that the first round of PPP loans had a substantial effect on local economic outcomes. Table A1 provides details on the nature of the PPP scheme and how it compares to JobKeeper.

This international evidence may not generalise well to the Australian case. Economic theory and the cross-country evidence suggests that labour market institutions, such as hiring and firing costs, the stringency of employment protection legislation and the degree of wage rigidity, have a bearing on the take-up of wage subsidies and their effects on employment outcomes (Lydon et al 2018). In addition, some of the design features of JobKeeper, such as the flat payment rate, are largely unique to Australia (RBA 2020), which means that evidence based on proportional wage subsidies may not apply. Another key difference between JobKeeper and the STW schemes overseas is that the flat JobKeeper rate is paid irrespective of hours worked, whereas the overseas STW schemes are usually only paid to workers on reduced hours.^[12] For this reason, a careful evaluation of the short-run effects of JobKeeper on employment fills an important gap in the evidence base.

Footnotes

Data from ABS (2019a) and the 2016 Australian Census indicated that temporary residents accounted for around 18 per cent of total employment in the accommodation & food services industry in 2016, which was the highest employment share of any industry. [10]

The PPP extends forgivable loans to small businesses, via private banks. The forgiveness is achieved by maintaining employment at pre-COVID-19 levels, which means PPP loans constitute an implicit wage subsidy (Hamilton 2020). [11]

There are exceptions, such as Canada's scheme. [12]