Secure worker entitlements before passing the JobKeeper corporate subsidy scheme.
By Professor Rabee Tourky and Professor Rohan Pitchford
On Wednesday 8 April 2020, the Australian Parliament will debate and likely pass a form of the JobKeeper scheme, which provides businesses with a subsidy aimed at keeping workers employed. We believe that if the measures do not include provisions that guarantee existing entitlements that have accrued to workers, then the JobKeeper subsidy will make workers and the nation worse off. Parliament should be cognisant of the fact that basic economic principles guarantee that the incidence of the proposed subsidy will accrue to businesses at the expense of workers should existing worker entitlements not be explicitly protected.
Giving with one hand taking away with the other
Workers are creditors to the firm they work in, the firm at any point in time owes workers various entitlements. For example, salaries for work done, accrued leave entitlements, long service leave, and sick leave entitlements. Though it is proposed that workers be paid a JobKeeper cash payment, this is a subsidy whose benefits will undoubtably be shared with employers. Ultimately, employers will want a greater share of this benefit. To achieve this employers may be tempted to draw down their existing debt to workers by the amount of the subsidy, knowing that workers during the pandemic have no outside work option. If this happens, then the net effect of the JobKeeper scheme will be indistinguishable from a straight-out subsidy to businesses, leaving workers no-better off than before JobKeeper. We might as well be subsidising business energy bills, as workers will see no net benefits from the scheme. Thus, it is essential that we prevent businesses from drawing down existing worker entitlements should they wish to take advantage of the JobKeeper scheme.
Workers should be secured creditors during the pandemic
The JobKeeper scheme will not prevent some businesses from going into liquidation. Bankruptcy is an old institution that acts as a safety net for businesses. This is well described by Oliver Hart and Luigi Zingales in their 2008 piece in the Wall Street Journal:
“Take bankruptcy. It is often viewed as a kind of death, but this is misleading. Bankruptcy is an opportunity for a company (or individual) to make a fresh start. A company in financial distress faces the danger that creditors will try to seize its assets. Bankruptcy gives it some respite. It also provides an opportunity for claimants to figure out whether the company’s financial trouble was the result of bad luck or bad management, and to decide what should be done. Short-cutting this process through a government bailout is dangerous. Does the government really know whether a company should be saved?”
In Australia, debt covered by bankruptcy includes employee entitlements. However, as we saw with Queensland Nickel, payment of worker entitlements are not guaranteed when a firm shutters its doors. Worker entitlements are far down the totem pole of creditors when a business is liquidated. If the goal of JobKeeper is indeed to protect workers, then consideration should be given to legislation that protects worker entitlements if a firm participating in the JobKeeper scheme goes into liquidation.
The Australian Parliament will on Wednesday debate a subsidy scheme that has never been tested in the Australian economy. The JobKeeper scheme has limited provenance in economic analysis, we don’t know how its incentives will pan out in practice. Basic principles of economics leaves us convinced that it will quickly deteriorate to a simple subsidy to business, which accrues all its benefits at the expense of workers. It is also akin to a protectionist program, and it may take a long time to wind down the scheme. Indeed, if enacted, it may become as difficult to wind down as other forms of historical trade protection (the car manufacturing industry comes to mind).
There has to be an elaborate set of inbuilt exceptions protecting worker entitlements to such an extent that business will not put up a great fight when the pandemic is resolved and Government seeks to end JobKeeper. We trust that Parliament on Wednesday will take this into consideration, and that it is aware of the significant change they are about to introduce to our exceptional economy. An economy that has thrived for a generation and is the envy of the rest of the world.
Rabee Tourky, is the Director of the Research School of Economics at the Australian National University and The Trevor Swan Distinguished Professor of Economics. His interest has been the operations of markets and market incompleteness.
Rohan Pitchford, is a Professor of Economics in the Research School of Economics, currently working on securitisation and financial stability. He has published papers on the economics of contracts, default and sovereign debt in the leading journals in Economics. He is a graduate from MIT.