JobKeeper helped employment but hurt productivity, Productivity Commission says

Billions in pandemic-era stimulus may be partly to blame for Australia’s recent sluggish productivity performance, with the former Coalition government response helping to shield jobs but tying workers to substandard businesses.

The Coalition’s JobKeeper scheme, alongside a post-pandemic boom in employment, may explain Australia’s productivity slide. Picture: David Geraghty / NewsWire

Pandemic-era wage subsidies that tethered workers to substandard businesses, combined with a rise of young and inexperienced workers in the workforce, may be partly to blame for Australia’s sluggish productivity performance.

That’s the finding of new Productivity Commission research that attempts to explain Australia’s recent productivity slide while the US has benefited from a post-pandemic surge in productivity growth, eclipsing gains in most ­advanced economies.

In comparison to the US, Australia has been a global laggard in productivity growth, having not increased since 2016, with the commission stating the Coalition’s response to the pandemic, including its $90bn JobKeeper wage ­subsidy, could have dragged down the nation’s productivity.

“In the case of JobKeeper, this initially helped productivity by ensuring productive firms did not prematurely go bust during the onset of Covid-19,” wrote James Thiris, a senior research economist at the commission.

“As the economy recovered, however, JobKeeper was more likely to subsidise less-productive firms, reducing productivity-enhancing reallocation of workers by keeping ‘zombie’ firms afloat.”

Changes to insolvency laws introduced by the Morrison government, which stopped temporarily illiquid businesses from shuttering, could have similarly resulted in weak productivity growth, the commission said.

While JobKeeper prevented a large spike in the unemployment rate, the scheme – which handed businesses a $1500-a-fortnight wage subsidy – attracted controversy amid accusations it squibbed taxpayer funds.

To qualify, an employer had to have a “reasonable expectation” of a 30 per cent decline in turnover, or a 50 per cent fall for large businesses. However, Treasury analysis of the scheme found billions went to companies whose turnover either increased or did not ­decline as much as required.

The pandemic response in the US, by contrast, was predominantly focused on unemployment benefits, rather than preserving the attachment between businesses and their workers. While the differing approach likely contributed to a decline in employment, it also supported productivity gains when laid-off workers were hired at more efficient firms.

“Indeed, the US had relatively high rates of labour churn after the Covid-19 pandemic, potentially assisting their recent productivity growth,” Mr Thiris wrote.

“While there are benefits and costs to each approach, one potential cost in Australia was reduced productivity growth.”

The commission’s report also pinned Australia’s poor productivity performance to the resilience of the domestic jobs market, with the share of people employed reaching record levels.

As a consequence of bumper jobs growth, young, less-educated and less-experienced workers were sucked into the labour market, the research found, dragging on productivity in the short-term as these workers acquired new skills and caught up with their more experienced colleagues. “Ultimately, more Australians in jobs is a good news story. And as these new workers gain experience, their effect on aggregate ­productivity should also improve,” the report states.

A lack of equipment and infrastructure, which failed to keep pace with the post-pandemic employment boom, may have similarly impeded productivity gains.

Finally, differing measurement techniques may also explain the divergence in productivity growth between Australia and the US, where government-subsidised em­ploy­ment – including in the education, healthcare and public sectors – is not included in estimates, nor are the agriculture, fishing and forestry industries.

Productivity Commission deputy chair Alex Robson said the rise in government-subsidised jobs, where productivity growth is more difficult to measure, also explained the divergence.

“Australia’s productivity growth has mostly been dragged down by the non-market sectors, although in the (September) quarter, the decline in productivity was based across market and non-market sectors,” he said.

The number of public service roles partly funded by the taxpayer has ballooned to more than 31 per cent of total employment.