Britain’s future is being compromised by the massive increase in long-term sickness among the working age population
When I was in London recently, I noticed an increase in people in the street…
The buzz-word at the moment in Australian government and policy circles is ‘hibernation’ – the government is hoping, that the economy can behave like a crocodile and find some ‘river bank’ and have a ‘good sleep’ until the pandemic is over, at which time, it will burst forth into a new growth phase and unless the virus mutates into something worse in the meantime then all will be well. Their policy interventions to date – while they have been like dragging a chain as their conservative instincts are being dragged very quickly into the demands and realities of real world macroeconomics, which is different to the nonsense that is taught by mainstream economists in our now depleted universities – have been crafted to ensure nothing important changes in a structural sense in our socio-economic lives. The problem is that the existing system, which they are hoping to put into hibernation for a while, is putrid to the core and needs major changes if we are to achieve a socio-ecological transformation. Remember the failings of neoliberalism? Remember climate change? Remember the poles melting? Remember the engineered cuts to workers who rely on penalty rates at weekends to maintain a sense of material prosperity? Remember the 13.7 per cent labour underutilisation rate? Remember the failed public transport and energy sectors, privatised and lacking in investment? Remember the financial markets that were exposed by the recent Royal Commission as corrupt, inefficient and downright dangerous to the our material and psychological prosperity? We don’t need a hibernation. We need the Government to take advantage of the dislocation that is currently occurring to make some basic changes. Like wiping out the gig economy. Like … read on. At present, the stimulus interventions, which are mostly about saving capitalism from itself. We should be demanding much more.
There seems to be some consternation about the use of the term ‘stimulus’ to describe the government fiscal interventions around the world at present.
Sure, they are, to use the most-repeated word at present ‘unprecedented’, unless one goes back in history – history tells us things.
Sure, they are not your usual garden-variety fiscal stimulus to fill the gap left by a slump in business investment expenditure due to a bout of pessimism or a flight to saving by households for the same reason.
The scale is something else. I agree.
And the source of the crisis is quite different.
So we might think of what is going on as a major rescue mission.
But then I hold the view that one job lost anytime due to a lack of overall spending is a crisis and needs a rescue mission.
But if the language is to retain meaning and historical continuity, then what is going on is a fiscal stimulus! Sorry to disagree with those who think otherwise.
A fiscal stimulus is introduced when non-government spending falls (collapses in this case) and non-government economic activity needs to be stimulated.
The hibernation concept is clearly more about maintenance (more on this below) recognising, that for a time, economic activity will be lower by some margin because people cannot work (sickness or otherwise).
But if the fiscal intervention is properly designed then there should be no reason for us to slip into the horror story scenarios that are playing out in the media.
Crocodiles hibernate like other animals. They enter a “state of inactivity” where they reduce their metabolic rate” in order to “conserve energy when sufficient food is unavailable” (Source).
Prior to entering this state, the animals fatten up to ensure they have “enough energy to last through the duration of their dormant period.” That is, they ‘fatten up’ or store up nuts.
The Australian Treasurer has been talking about the challenge for the government is to design a policy intervention which will put the economy into hibernation.
The problems are many both in practical and ideological terms.
First, the economy did not ‘fatten up’ before the crisis. It was already heading towards recession as households started to reduce their consumption spending growth in the context of record levels of debt, business firms were refusing to invest, and government was blindly trying to conjure a surplus out of a train wreck it was creating.
When we entered the GFC, the unemployment rate was 4 per cent and the underemployment rate was 5.9 per cent and the broad labour utilisation rate (the sum of the two) was 9.9 per cent.
So at that point the economy was some distant from full employment and needed stimulus.
Now, the unemployment rate (before the COVID-19 impacts) is 5.1 per cent, the underemployment rate is 8.6 per cent and the broad rate is 13.7 per cent.
And the real GDP growth rate is around 2 per cent, which is, depending on how you measure it, between 1.25 and 1.5 percentage points below trend and the gap is widening.
So before the virus crisis, there was a need for fiscal stimulus of around 1.5 to 2 per cent of GDP, just to get us out of the prospect of recession.
Second, trying to put an economy to sleep implies that all the existing relationships – employee/boss; debtor/creditor; renter/owner; pension recipient/pension fund; and any number of contractual relationships – can be frozen in time and space.
What is actually going to happen is that the state will have to become more dominant as private capital withers somewhat.
Loans to business are largely useless to arrest the collapse. I covered this previously. Firms will not borrow if there are not sales to transact and produce for.
Loading up debt on an already heavily indebted sector, no matter how cheap the funds might be, is not a sound strategy.
Around the world, governments are responding to the likely unemployment crisis with offers, of varying degrees of generosity, of wage subsidies.
The British government is now willing to pay “80% of the wages for a furloughed employee, subject to a cap of £2,500 a month” as long as the employer maintains the relationship.
In addition, the – Coronavirus Job Retention Scheme – will also pay:
… employer National Insurance and pension contributions of furloughed workers – on top of 80% of salary …
The British government is encouraging furloughed workers to volunteer to help the NHS, while their existing workplace is closed. Many retail and hospitality workers are in this exposed group.
A furloughed worker is apparently one that has not been sacked, but, rather, is on unpaid leave from their usual employment.
There also appears to be no limit to the fiscal outlay proposed for this program.
And while I don’t wish to conduct a microscopic critique of the scheme, there are many issues that undermine the efficacy and equity of the scheme. As I understand the detail more I might write something specific about it.
But, overall, there is limited conditionality imposed on the employer. For example, the employer does not need to be paying the additional 20 per cent.
So the risk of enterprise is not borne by the employer – they get 80 per cent of the salary paid by government and the workers take a 20 per cent wage cut.
That appears to be a common theme emerging in all these wage subsidy schemes that even unions are falling over themselves to praise.
The Australian government released Fiscal Stimulus Mark 3.0 yesterday and the centrepiece is the wage subsidy scheme.
They resisted this sort of intervention but the business lobby has pressured them to introduce the subsidy.
And why wouldn’t they?
The details of the scheme are still being publicised but we know that:
1. The federal government will pay businesses a fortnightly subsidy of $A1,500 per employee under the ‘JobKeeper’ program.
2. The projected outlays will be worth $A130 billion and this takes the sum total of the three fiscal interventions, so far, to 10.7 per cent of GDP.
3. Firms would have to pass on the full amount to workers.
4. The scheme will last for only six months backdated to March 1, 2020.
4. To access the subsidy, a firm with an annual turnover of less than $1 million has to have faced a 30 per cent fall in revenue in March 2020. If the turnover is more than a million then the turnover drop has to be 50 per cent. As usual, in these sorts of threshold rules, those on either side of the border are treated quite differently.
4. It differs from the British wage subsidy, which only applies to furloughed workers. Any worker that has already been laid-off would have to be reemployed for the firm to get the subsidy.
5. An advantage of the scheme, is that low income earners will probably receive a pay increase, given they earn less than $A750 per week. The minimum wage in Australia is currently $A740.80 per week.
6. In other words, an employer can hire, rehire, or retain minimum wage workers under the JobKeeper subsidy and get the worker’s efforts for no outlay, courtesy of the government.
7. However, the sunset clause means that things will have to be back to normal by the end of September or else we could see massive layoffs occurring. That typically happens with wage subsidy schemes. When the scheme ends, either overall or for a particular worker, the firms shed the labour.
The following table shows the Median and Mean Weekly Earnings ($A) across the Australian industry structure as at August 2019 (most recent data).
The final columns expresses the wage subsidy as a percentage of the median and mean earnings.
The Treasurer said that:
This $1,500 payment is a flat payment and is the equivalent of around 70 per cent of the median wage and represents about 100 per cent of of the median wage in those sectors most heavily impacted by the coronavirus like retail, like hospitality and tourism.
While that is true, the data in the table is incomplete.
The following facts apply as at August 2019:
1. Median weekly earnings for workers with paid leave entitlements for the nation as a whole were $A1,250.
2. For workers without paid leave entitlements the figure was $A542 per week.
3. The overall total was $A1,110 per week.
4. In that context, the wage subsidy for the median worker with existing entitlements would be only 60 per cent of their weekly pay.
5. For full-time workers, the subsidy will be worth about 50 per cent of the median weekly pay. In their case, the firms will likely lay the worker off.
Another issue of the wage subsidy is that it allows firms that are ‘high-cost, low productivity’ to survive, when many of these might reasonably go broke and their worker reabsorbed elsewhere, given the stimulus measures will support economic growth to some extent.
I am usually opposed to wage subsidies because firms typically exploit them and lay off workers immediately on their termination, or take them for jobs they were going to create anyway.
In this case, though, the playing field is quite, starkly different.
Firms are facing extinction as they are forced into hibernation by the governments – state and federal.
But the fact that many workers will still lose their jobs because the wage subsidy is too low relative to their weekly wage is a major shortcoming of the scheme.
Further, think about the low-wage workers. The wage subsidy is a per head payment independent of hours workers.
So imagine a situation where a firm has several underemployed workers on its books all working a few hours a week each. Underemployment is rife in the sectors that have been forced to close or restrict their custom.
In this situation, the firm could offer more hours to, say one worker, and take them up to, perhaps, full-time work, given that the average extra hours an underemployed workers desires is around 14.
They would likely only be paying the minimum wage anyway, especially as penalty rates in many of the sectors most affected have been cut over the last few years.
In that case they could lay-off a number of workers and save on the administrative costs of maintaining them on the books and pass the wage subsidy onto a single worker working longer hours than before.
That is not a desirable implication.
Moreoever, a firm can only claim the JobKeeper payment for a casual worker as long as they have been contracted for the last 12 months. The very nature of the sectors most exposed to casual work – short contracts – militates against these workers under the scheme.
And what of the gig economy in general. These workers are considered to be ‘entrepreneurs’ as they are legally cast as independent contractors, which is a convenient dodge used by employers to get around paying a host of statutory payments, which would be forthcoming if they were classified as employees.
In this case, the worker is the firm and would only get help under the scheme if their revenue had fallen by at least 30 per cent since the beginning of March. The level of accountability required to establish that may be beyond the capacity of the workers who buzz around our cities these days on scooters delivering all sorts of stuff.
It is also undesirable to impose wage cuts on workers because of the way we enter into financial arrangements in the normal course of our lives. A major commitment that many workers enter into is the purchase of their homes. Further, workers use credit to smooth their consumption expenditure over time. These contractual commitments are always specified in nominal (that is, money) terms. For example, a worker has to pay a certain quantity of dollars per month to service their home mortgage.
In other words, the solvency of the workers is a nominal concept. If they cannot get sufficient money each period to service their nominal contractual commitments then they are in trouble.
In this context, if the general price level rises and the real value of their money wage declines, for a time, they are able to change their budget allocations (perhaps eliminate some non-necessary items of expenditure) and still maintain their nominal contractual obligations. At some point, this becomes impossible but within the usual variations in the real wage this is how households cope.
However, if the real wage was to be adjusted via reductions in the money wage, workers might find they do not have enough money income in a period to service their contractual obligations and they would then have to default and face insolvency.
For all the reasons noted above I am opposed to the wage subsidy scheme.
I don’t think workers should have to take a significant wage cut.
Why are governments only willing to cover a proportion of the wages of workers in the crisis?
Currency-issuing governments clearly have no financial constraints preventing them paying the entire wage bill if it wanted.
In Australia, compensation of employees (wages and salaries) constituted 42.2 per cent of GDP in the December-quarter 2019 or $A212,320 million.
Total individual income tax revenue received by the federal government is around $A230 million or around 46 per cent of GDP. Company tax revenue is about 20 per cent of GDP.
So think about that sort of scale in the context of the 6-month wage subsidy worth $A130 billion.
Given all the anomalies associated with the wage subsidy, it would be much better giving the payments directly to workers.
If the firms were reluctant to retain the services of the worker, the worker would still receive the payment but the firm would receive no productive benefit.
So there is a massive incentive for firms to keep the worker employed and the hysteresis effects of long-term unemployment are thus avoided.
Clearly, not all workers will lose their jobs or even face the prospect of losing their jobs.
In my blog post last Thursday – “We need the state to bail out the entire nation” (March 26, 2020) – I provided some arithmetic assessments of the possible unemployment disaster, based on historical aggregates.
The following Table is conjectural and depends on a lot of unknowns. The government could render it irrelevant if it chooses the right policies.
We started this crisis with 720 thousand unemployed and an unemployment rate of 5.2 per cent (that is, in a much worse state than the period leading into the GFC).
We also have much higher underemployment now than we had then.
|Fall in GDP (per cent)
|Rise in UR (points)
|Estimated UR (per cent)
|Change in Unemployment (000s)
The point is that even if GDP contracts by 10 per cent, the unemployment rate might only rise to 29.9 per cent with an extra 3,106 workers losing their jobs.
I thus advocate that the following:
1. The federal government offers a full-wage payment to any worker who has lost their job since March 1, 2020, based on the last pay slip they received. This would apply to all income recipients.
2. Firms could negotiate with these workers to restore their employment for the duration of the crisis. A sunset clause would have to be a rolling date based on medical advice.
3. Where governmental restrictions were operating on firms – closures etc – the firms could reemploy the worker and the government would continue to pay the wage, while the worker was in social inclusion for whatever reason.
4. Workers unable to perform their current work would be able to participate in a range of activities aimed at advancing public purpose as long as medically-safe working environments could be found.
5. Penalty rates would be restored based on the June 30, 2018 levels and added to the estimated income of workers that the government would pay.
6. Any worker that was previously unemployed (before March 1, 2020) would be offered an unconditional job at a socially-inclusive minimum wage – a Job Guarantee – which would become a permanent automatic stabiliser in the Australian economy. A range of other benefits – social wage (child care, transport subsidies, etc) and training opportunities would be available.
Where there were insufficient medically-safe activities to perform in the current climate, the Job Guarantee workers would be paid their full wage entitlements and maintained in employment, but stood down until it was safe to venture forth.
7. The government would legislate so that all gig economy workers were of the same legal status as employees.
8. The government would pay all entitlements that an employee with entitlements receives to those workers currently without entitlements for the duration of crisis.
The annual publication – Characteristics of Employment, Australia – (most recent release August 2019) allows us to assess the scale of the problem for casual workers without entitlements.
From Table 3. Distribution of weekly earnings for employees by industry we see that:
(a) There were 10,683 thousand employees in August 2019.
(b) 8,081.2 thousand had paid leave entitlements (75.9 per cent).
(c) 2,601.8 thousand did not have paid leave entitlements (24.4 per cent).
(d) The proportions between the ‘haves’ and the ‘have-nots’ in this regard has been relatively stable over the last several years, although the ‘have-nots’ have expanded somewhat in relative terms.
(e) The data only allows us to determine these proportions for employees. It does not include the Owner managers of incorporated enterprises, independent contractors or self-employed.
(f) If we considered employees without paid leave entitlements as a proportion of all workers then the proportion falls to 20.13 per cent.
Thus, the federal government would pay sick pay entitlements etc to those currently not enjoying these benefits, notwithstanding casual loadings (which are insufficient anyway to bridge the gap) that would normally be attributed to a worker the 75.9 per cent of employees.
9. There would not have to be any rental subsidies, or suspension of credit or mortgage debt payments, because there would be no income losses.
The entire concept of hibernation as constructed by the Australian government is to salvage capitalism from itself.
There is no recognition that there was a serious crisis on our hands even before we entered the medical emergency. What the government wants to do is to reduce the scale of the collapse and preserve the status quo so that it is back to business as usual when the virus is contained (if it ever will be).
I reject that logic.
We were facing a socio-ecological crisis even before the medical crisis. The former doesn’t go away just because all of us are now at risk of sickness and death from the coronavirus.
If you think about the way the US stimulus has been designed, it is a wonder any Democrat supported it in the Senate. It is an unashamed handout to Wall Street and the finance sector with a dollop of support for the unemployed.
And the same thing applies to the Australian intervention.
Firms are not required to alter the way they do business, banks are not required to stop being speculative casinos, big polluters can go on polluting, gig economy employers (sorry hirers of fellow entrepreneurs) are not required to improve working conditions or share the risk of enterprise with the workers, and so on.
The firms just get a free kick, particularly if they employ workers at the lower ends of the income distribution scale, for the next 6 months. Party time for them.
Shareholders are not forced to take a hit. The risk is transferred from them to the public purse. The public purse can easily take that risk. That is not the issue.
The issue is if the government is injecting more than 10 per cent of GDP into the economy over the next several months, why doesn’t it use that injection to advance a solution to the socio-ecological crisis?
And I am still worried that the austerity-turn will come sooner than later and we will be back to that again.
We might overcome the virus but the neoliberal infestation continues unabated.
I will consider these issues further in the coming days.
We haven’t yet discussed nationalisation of essential services, transport etc.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.