Extend wage subsidy program, not individual response benefits
July 10, 2020 | 4 min read
Focus Area—Canadian Economics
This op-ed by Pedro Antunes was originally published in The Globe and Mail on July 9, 2020.
The COVID-19 pandemic has caused a sharp contraction to economic activity in Canada. The halt to non-essential activity and physical-distancing measures imposed over March and April were required to slow the spread of the virus, avoid a health care crisis and mitigate the impact on the health of Canadians.
But these measures have left the economy and the labour market operating far below normal levels. Policy makers and business leaders must now deal with a problem they have never faced – how to restore the economy while holding the number of COVID-19 cases at bay.
The normal stabilizers that exist in our economy were not built to withstand its unprecedented seizure. This extraordinary situation called for an equally unparalleled government response.
The two most important features of the federal government’s support response are the Canadian Emergency Response Benefit (CERB) and the Canadian Emergency Wage Subsidy (CEWS). The CERB transfers $2,000 a month directly to individuals and applies to anyone who has lost their employment due to the COVID-19 shutdown. The CEWS is a subsidy to employers that covers 75 per cent of employees’ wages, topped at $847 per employee, provided the company experienced a substantial drop in revenues.
Roughly three million Canadians lost employment in March and April, and millions more worked only reduced hours. According to the federal government, over less than a three-month period from mid-March to June 4, $43.51-billion was paid out from the CERB. The program has been widely praised for its efficiency in getting income quickly to individuals who need it to cover expenses during the crisis.
In May, Canada entered a recovery phase and national employment increased by 296,000. While this is only a tenth of what has been lost, all provincial and territorial economies are indeed in the process of slowly reopening for business.
But for the recovery to become firmly entrenched, companies will need access to workers as capacity ramps up. The CERB as a disincentive for workers to re-enter the labour force is a real risk. Currently, at $2,000 a month, the CERB is equivalent to an average hourly wage of just less than $15 for an average 33-hour work week – well above the minimum wage in most Canadian jurisdictions.
The resulting incentive for workers, particularly those in lower-wage occupations, is to not return to work as the market opens. Keep in mind that less than six months ago, the Canadian economy registered more than 560,000 unfilled positions, or 3.3 per cent of total labour demand.
Accommodations and food services, as well as retail trade, are two sectors that pay lower wages and have been severely affected by the pandemic. In fact, they accounted for more than a quarter of these job vacancies. Employers of all types are already anecdotally facing labour shortages in a period of record levels of unemployment.
Additionally, the effects of operating a business while the novel coronavirus remains a risk is a costly challenge. New health and safety regulations means that many businesses will have to operate well below capacity while those same regulations are more labour intensive. The result is lower revenues and higher costs – a situation that will endure until a treatment or vaccine is found and distributed, possibly taking up to a year or more. In the interim, what support measures can best help lay a path to full recovery?
The CEWS is key to helping business deal with the high costs of running a business while COVID-19 is still a threat. The program has received little uptake so far because businesses are just starting to reopen and because companies have been struggling to interpret whether they qualify.
The federal government initially slated $74-billion for the CEWS but that amount was reduced to $45-billion, despite the program’s extension into August. Yet use of the program will grow, and additional support will be necessary. The CEWS should be extended well beyond August, especially for those industries where a return to normal is much further down the road. Moreover, qualification rules, especially for companies with foreign affiliate sales, need to be clarified.
Shifting funding away from the CERB and into the CEWS would be a good strategy to help lift consumer and business confidence and accelerate the recovery. It will give Canadians an incentive to return to work, and employers the certainty that assistance is available to them until the economy returns to normal.
The CEWS is key to helping many businesses operate and hire in a high-cost environment. And hiring will boost household confidence and spending – creating a virtuous cycle in redressing the economy. Going forward, policy measures must now focus on encouraging businesses to open. We need to move workers off the CERB and back into employment.
Pedro Antunes is the chief economist at the Conference Board of Canada.