Call time on emergency measures

Glenn Fahey

03 July 2020 | Ideas@theCentre

There’s a time and place for emergency income support through the pandemic. But the usefulness of the unprecedented — but nonetheless unsustainable — emergency measures is rapidly expiring.

New data show that employers are trying to get out of hibernation — but there aren’t the jobseekers to meet the call. Yet, there can be no economic recovery if there aren’t workers filling vacancies.

Lazy analysts are fixated on the demand side of labour markets — presuming employment outcomes are purely driven by broader macroeconomic activity. Lately, they especially elevate government’s role in propelling this activity — through big spending initiatives and associated ‘multiplier effects’.

What they fail to appreciate is how the supply side of labour markets work.

Australia’s income support recipients currently face few incentives to genuinely seek work — many deferring their job search efforts until bolstered measures are slated for withdrawal. Many have little income to gain (some even face income losses) from re-entering the workforce.

Among the most pressing issues facing policymakers is how to unwind income support without sinking the economy. But any illusions that the status quo can accommodate the desired recovery trajectory must now be put to bed.

Going forward, policy support must be two-pronged — with interventions specifically geared to address, separately, the short-term and long-term risks.

In the short term, it may prove infeasible to fully withdraw support to some sectors of the economy adversely impacted by current conditions. But to the extent that extraordinary levels of support are sustained in the short and medium term, they’ll need to be more limited, capped, and targeted than is currently the case.

Limited, in that any supplementary support must be flexible enough to be withdrawn swiftly when conditions now longer make it necessary (rather than being contingent on a fixed time period — which only stalls the recovery). Capped, in that support must be only modest in compensation to avoid further disincentive effects — and in mitigating the cost blowout to taxpayers. And, targeted, in that support should be available only to those in industries and geographic regions where government-imposed prohibitions place unavoidable constraints.

Looking longer term, there’s far more harm to be done by prolonging elevated income support and suppressing work incentives. A particular risk confronting displaced workers is that of ‘scarring’ — meaning individuals may become disillusioned and damaged from being out of work such that they become unsuitable for work down the track.

Accordingly, income support for the bulk of the economy must be eased. With it, the one-size-fits-all approach that has characterised the covid response will need to be reassessed — with more flexibility, tailoring, and a view to actually delivering employment outcomes for recipients.

It’s fast approaching time to call time on the pandemic emergency measures. If we fail to take tough decisions now, the inconvenient truth is that we risk stalling the nation’s economic recovery.

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