Keep wage subsidy until COVID abates: IMF

·2-min read

Governments that can afford to maintain job retention schemes, like wage subsides, should keep them in place until the COVID-19 pandemic "abates markedly".

In a new analysis, the International Monetary Fund says this will help avoid periods of socially costly unemployment and dampen the effects on more disadvantaged worker groups.

"In particular, the findings suggest that the use of retention policies could be linked to the duration and intensity of the pandemic," the IMF says.

The advice comes just days after the Morrison government canned its JobKeeper wage subsidy scheme, a program that had helped to steer Australia through its deepest recession since the 1930s.

The Australian Treasury estimates that 150,000 people could find themselves out of work resulting from the demise of JobKeeper.

The IMF says uncertainties about the pandemic and its path mean that the phase-out of such measures is complicated.

It will require careful monitoring of the pandemic, including the rollout of vaccines, and judgment of the economy's ability to weather a reduction in support.

"The powerful effects of job retention policies in avoiding deeper and more protracted employment deterioration from the pandemic suggest that such measures should be prioritised," the Washington-based institution says.

It says policies could also be designed to target more-affected worker groups, such as increasing wage subsidies for youth or lower-skilled workers, to discourage firms from letting these workers go and reduce the "unequal impact of the shock".

Its analysis says the pandemic recession is likely to inflict sizeable costs on unemployed workers, particularly the lower-skilled.

"While it is not uncommon for workers to reallocate across sectors and occupations after spells of unemployment, such reallocation is costly," the IMF said.

On average, workers finding re-employment in an occupation different from their previous job experience an average earnings penalty of about 15 per cent, through both personal and social reallocation costs.

"Lower-skilled workers experience a triple whammy," it says.

They are more likely to be employed in sectors more negatively impacted by the pandemic and are more likely to become unemployed in downturns.

"Those who are able to find a new job, are more likely to need to switch occupations and suffer an earnings fall," it says.