OECD urges governments to scale back coronavirus-related wage subsidies

The Organization for Economic Cooperation and Development (OECD) is now asking governments to stop wage subsidies meant to keep workers employed to encourage these workers to move out of shrinking sectors. This is despite the organization still encouraging governments to continue paying unemployment benefits.

Founded in 1961, the 37-member OECD’s job is to stimulate economic progress and world trade. Now, the organization believes that ending wage subsidies will aid this mission by encouraging workers to move out of sectors and industries that are heavily affected by the global pandemic.

Included in the OECD’s membership roster are countries such as Australia, Canada, France, Germany, Italy, Spain, the United Kingdom and the United States.

Subsidies should end to allow labor markets to shift

On Tuesday, the OECD stated that even in an optimistic scenario where the coronavirus remained under control, unemployment among its member states would reach 9.4 percent by the fourth quarter of 2020. This would reach levels not seen since the Great Depression. Based on figures from May, the ongoing pandemic has already pushed up unemployment from the OECD’s member countries up to 8.4 percent, with around 54.5 million people out of work. (Related: The coronavirus crisis has resulted in the worst unemployment spike in American history.)

According to the organization’s annual employment outlook, average unemployment among its member states would be up to 5 percent higher than in 2019. In addition, it expects this to remain above pre-crisis levels through the end of 2021.

“In three months, COVID-19 wiped out 10 years of [job] gains since 2010,” stated the OECD’s director for employment Stefano Scarpetta.

With these numbers in mind, governments around the world now face a difficult decision on how to phase out job retention subsidies and other emergency measures put in place to save their economies when shutdowns began, without worsening unemployment.

The OECD, however, is stating that now is the right time to phase out “massive, generalized support” to allow labor markets to adjust to the new, post-pandemic global economy.

“We have to allow [labor force] mobility,” Scarpetta said. “Some companies will not be viable in the short term and the medium term. We have to allow workers to move into new jobs.”

Scarpetta also said that employers in sectors of the economy that have reopened should carry some of the burdens of existing subsidy schemes. Government support, he argued, should be limited to those sectors that are still closed.

Unemployment benefits should still be extended

Despite calling for an end to wage subsidies, Scarpetta also said that the duration of benefits for those who’re unemployed need to be extended.

“Some countries should extend unemployment benefit duration to prevent job seekers from sliding too quickly into much less generous minimum income benefits,” he said.

Scarpetta’s statement was a thinly veiled reference to the U.S. where debate is currently raging over whether or not to extend a $600 top-up of unemployment benefits that are set to expire at the end of July.

He added that such a move would be necessary should a second wave of infections further restrict economic activity.

The statement adds support to the House Ways and Means Committee’s argument that a “vast majority” of unemployed workers would be “harmed” if the extension is not passed. According to an analysis by the committee, millions of American households are facing an “income cliff,” with their weekly payments decreasing by about two-thirds on average.

The July 31 date itself is also problematic. The date was arbitrarily chosen by Congress in March when the full extent of the pandemic was still unknown.

The Heroes Act, passed by the House in May, does extend the $600 per week benefit package through January 2021. Senate Majority Leader Mitch McConnell, however, said last week that the extended benefit would not be included in the next coronavirus relief package.

Even if the extension is passed, the OECD thinks it might not be enough. The organization says that the ongoing crisis has exposed gaps in social protection, especially for self-employed workers and those in less secure lines of work.

With this in mind, the organization recommends that governments address the issue by these workers to build-up rights to the same unemployment support available to standard employees.

Sources include:

FT.com

WSJ.com

OECD.org

CNBC.com