It’s too early to cut coronavirus support programs

Stefano Scarpetta is head of the OECD’s Directorate for Employment, Labour and Social Affairs. 

PARIS — Coronavirus vaccines may have given us a glimpse of light at the end of the tunnel, but we are far from reaching the other side of this pandemic. And yet, some are concerned that continued broad-based assistance may reduce incentives to work, keep inefficient firms on life support and slow down the recovery process. 

These concerns are unwarranted. The global financial crisis taught us that in situations with many job seekers and few job postings, like the one we find ourselves in now, well-targeted government support has minimal efficiency costs.  

In order for our economies to recover quickly, European governments will have to provide adequate funding in this transition phase. There are four priorities to keep in mind.  

The first should be to support the families and companies most affected by the economic effects of COVID-19. 

During the first wave of the pandemic in several OECD countries, up to a third of workers were on job retention schemes. The number of claims has declined with the partial re-opening of the economy but is still higher than after the global financial crisis in many countries. The number of people claiming “last-resort” minimum-income benefits and unemployment benefits is poised to rise as the crisis continues. 

To be sure, these support measures are expensive in the short term, but the alternatives will cost more over the long term. Millions are still employed in sectors that continue to be deeply affected by sanitary restrictions. Millions more are unemployed or underemployed, and many companies are in deep financial trouble.  

Until sanitary restrictions are lifted, withdrawing support for affected individuals and companies would lead to more bankruptcies, higher unemployment, poverty and further economic hardship. 

To reduce the immediate costs of these programs, governments should improve the targeting of support to families and sectors most in need. Firms in sectors not subject to mandatory health restrictions should bear part of the costs to free up resources for other sectors.  

The second priority should be to encourage business creation, and avoid bankruptcies among high-performing but over-indebted companies. 

Firms’ closures declined on average by 30 percent in 2020 in OECD countries, despite the unprecedented fall in GDP. This likely means that some unviable firms are being kept afloat by support measures intended to assist companies that would be profitable if not for the pandemic. 

This type of inefficiency is not the biggest risk to the economy. With the economy still uncertain and demand still depressed, the more serious danger is that high-performing companies that are over-indebted will go bankrupt. To avoid this scenario, it’ll be necessary to deal with high levels of corporate debt in these companies.  

Governments should also boost start-up creation and entrepreneurship by providing appropriate protection to self-employed workers, for example through unemployment insurance, which is often not available to those not on formal, full-time contracts. 

The third priority should be to encourage hiring and ramp up support for jobseekers. 

At some point, the only way out of the crisis will be through job creation, which in many countries is 10 to 20 percentage points lower than it was before COVID-19.  

At the macro level, this means keeping expansionary fiscal and monetary policies. At the micro level, temporary and targeted hiring subsidies — such as those introduced in France, Italy and the United Kingdom — can be a cost-effective way to boost job creation when uncertainty persists.  

The fourth, and certainly not least important, priority will be to pay special attention to young people. 

The youth unemployment rate among EU27 countries was 17 percent in January 2021, almost 10 percentage points higher than in the general population. Even before COVID-19, the careers of many young people were still scarred by the 2008 crisis: 61 percent of young people in the EU were in low-paid work in 2018, for example.  

We cannot afford to repeat the mistake of the financial crisis when young people received too little support too late. We need a comprehensive policy package for youth, including hiring and apprenticeship schemes and training programs. Germany and Scotland, for example, have introduced additional subsidies for employers who take on apprentices made redundant during the crisis. 

As countries prepare to launch massive recovery plans, they would do well to keep these four priorities in mind. Families, job seekers, workers, companies and young people all need continued, targeted support.  

Without a focus on the most needy, countries’ recovery efforts will start on the backfoot, with untold long-term social and economic costs. 

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