Taxpayer the loser in flawed JobKeeper plan

Newly unemployed queue up outside Southport Centrelink. Picture: Glenn Hampson

Given the unprecedented economic pain caused by the COVID-19 pandemic, a government package to support businesses and employees was in order.

The Australian government responded promptly with a range of measures, with JobKeeper payment being one the most prominent of them. The problem is that JobKeeper is flawed and as a result large amounts of taxpayer money are being spent unnecessarily.

JobKeeper is not targeted towards employees who lose hours. Nor is it particularly well targeted towards the most affected employers. Instead, all employees of an eligible employer are potentially covered. Employers’ eligibility is based on how their turnover has been affected by the pandemic.

Why this feature is a flaw is perhaps most evident through an example. Take a wine distributer with two employees Bob and John. Bob handles sales to restaurants and John manages online sales. Assume the company is eligible for JobKeeper, as sales to restaurants have essentially vanished, and Bob was stood down. Under the JobKeeper payment, the company would receive $1500 per fortnight for both its employees. Half the money would flow to Bob. However, the money earmarked for John will be pocketed by the company for simply continuing to run this part of the business as usual, something it would have done anyway.

The unintended consequence of JobKeeper is that taxpayer money will disproportionately flow to the least affected businesses among those eligible.

Businesses that have had to close and to stand down their entire workforce will simply have to pass down the $1500 per fortnight to all their employees. By contrast, businesses that merely cut down work hours would receive a large wage subsidy. This results in a wage subsidy which is in effect inversely related to the reduction in total hours worked, and thus allegedly to the economic harm caused by the pandemic.

The budgetary consequences are enormous

JobKeeper is now flowing to more than 6 million workers or more than half of private sector workers. But the Reserve Bank only expected total hours worked to fall by 20 per cent or the equivalent of about 2.6 million full-time jobs, and some of these jobs would be in businesses not eligible for JobKeeper.

The April to March decline in total hours worked reported by the ABS was “only” 8 per cent, with 750,000 Australians who still had a job but didn’t work a single hour and another million people who worked fewer hours than usual.

Even with the RBA’s higher estimate, it is thus likely that as much as half, and possibly much more, of the $9bn disbursed fortnightly (6 million times $1500) by the government in JobKeeper payments could be wasted.

The waste occurs because money flows to employees who are still working their usual hours and drawing their usual pay cheque.

In these cases, JobKeeper serves neither of its original objectives, which were to maintain valuable connections between employers and employees while supporting workers facing pay cuts.

It does not have to be that way. Other countries have implemented similar schemes while avoiding this flaw. The key is to make the payment conditional on reduced hours of work. For example, JobKeeper could be translated into an hourly rate of $18.75, corresponding to two 40-hour weeks at $1500. Then JobKeeper would flow only to employees experiencing a reduction in hours worked and in proportion of the lost hours.

Under this revised scheme, as in the current one, employees with reduced hours and an hourly wage rate below $18.75 would experience an increase in earnings. If this was deemed to be undesirable, JobKeeper could be made proportional to worker’s wage rate.

For instance, in France and Britain, similar payments are set at 70-80 per cent of a worker’s wage, with a cap at 4.5 times the minimum wage in France and £2500 per month in Britain.

Importantly, making JobKeeper conditional on lost hours would greatly reduce the bill for taxpayers and make sure the money flows to employees affected by the current crises. Employers will not retain any of the payments.

Affected employers deserve support too, but it is better achieved through loan facilities or explicit and well-targeted government transfers rather than through an ill-designed wage subsidy that channels more money to the least affected employers among those eligible.

Indeed, an additional advantage of making JobKeeper conditional on lost hours would be a better targeting. There is little reason why employers and employees should be eligible if turnover falls by 31 per cent but not if it falls by 29 per cent. Conditioning on hours worked should be combined with the removal of such arbitrary thresholds that create all sorts of perverse incentives for bookkeeping manipulations while leaving some affected employees unsupported.

Treasury Secretary Stephen Kennedy said that JobKeeper was by “no means perfect” and that it would “require continuous work”.

A way to improve it would be to take note of what other countries have done. Germany, for instance, has had such a scheme in place for more than 10 years, with one in five workers now relying on it. In Britain, the same share of workers has been placed on the coronavirus Job Retention Scheme. This is less than half as many as in Australia.

Making such payments conditional on lost hours allows for better targeting with the potential to reduce the cost to taxpayers.

Nicolas Herault is associate professor of economics, at the University of Melbourne.