I am happy with the inclusion of wage subsidies in the larger cushioning/protection policy announced by the government today. I use cushioning/protection because the supply-side context makes the definition of stimulus irrelevant. As announced, the government will implement RM600 per month wage subsidies for 3 months.
However, there is a big but. Is the RM600 per worker per month enough to prevent massive layoffs?
No. It is hard to say yes.
It is so small that it risks becoming irrelevant at preventing layoffs. It fails to protect minimum wage jobs fully, never mind those earning median wages.
In contrast, the government announced a big cash transfer program. From the perspective of protecting jobs and potential, prioritizing cash transfers over wage subsidies seems folly to me. Why?
Three factors I think:
- Wage subsidies are the first line of defense, while cash transfers are a safety net
- Wage subsidies depend on recent data, while cash transfers on last year’s data (recognition lag)
- Wage subsidies protect potential now and allows for faster recovery later
Wage subsidies are the first line of defense, cash transfers are a safety net
When wage subsidies and cash transfers work hand-in-hand, the former functions as a first line of defense with the latter a safety net. If the first line of defense fails, the safety net will kick in. Both need to be sufficiently big to be credible and effective.
To put it another way, the first line of defense (wage subsidies) is a proactive measure designed to protect jobs so that you do not have to rely on safety net. You want your first line of defense to work so that you do not have to suffer bigger and bigger demand for safety net.
Unfortunately from the policy design of the set of measures announced, it feels like we are skipping the first line of defense and going straight towards the safety net.
With only RM600 wage subsidies, I fear companies would have the incentives to fire even workers at the minimum wage. When the lowest earners not protected from job loss, I fear for the rest.
We have a specific statistics to measure the success or failure of this policy: the unemployment rate.
Wage subsidies depend on recent data, cash transfers on last year’s data (recognition lag)
And then there is a question of recognition lag.
When it comes to the labor market, wage subsidies rely on current data. If you have a job now, you will get the subsidy and this will encourage companies not to let you go because employing you is costless during this crisis of cash flow.
In contrast, cash transfers depend on last year’s data. Cash transfers have a one-year worth of recognition lag because it depends on yearly Internal Revenue Board data. If you lost your job this month but was paid wages above cash transfer qualifications, you would not qualify for the cash. This is purely a data and bureaucratic issue. This means cash transfers will be unable to help those in the need now, unlike wage subsidies.
So, it is quite clear wage subsidies address the now in terms of protecting potential.
Wage subsidies protect potential now and allow for faster recovery later
Wage subsidies are important because the labor market is a slow moving animal. The market can suffer immediate shocks, but recovery from the shock will be slow. And the labor market has a big influence on the economy. A post-shock slow-moving labor market will mean prolonged weak economic growth (if it could be called growth) for all of us. A prolonged weak economy means prolonged demand for safety net as jobs are hard to come by. And massive job losses can affect potential negatively in a big way.
Wage subsidies is supposed to preempt that shock and address it now in the short term immediately. It protects the potential now and removes big demand for safety net demand later. With potential protected now, there will be less ground to cover during recovery. That means there will be no need for many to suffer unemployment, and the time needed to find new jobs, go to interviews — all in all the long readjustment period. If wage subsidies are successful, it will allow for faster recovery without having to go thru the painful readjustment period.
But for it to be successful, it has to be meaningful for companies under pressure. Maximum RM600 wage subsidies do not even begin to work.
Meanwhile, cash transfers do not protect those potentials as much. It is designed to help if those potentials have collapsed. But our objective should be to prevent collapse in the first place, not wait for it.
Bigger wage subsidies needed
I have suggested for the government to provide 25%-50% subsidies for workers with wages up to RM4,600 with a joint statement that I wrote.[1] In retrospect (the statement was rushed out and I came on board at the very last minute), it should bigger: minimum subsidy of RM1,200, and beyond that, 25%-50% additional subsidy relative to income in excess of the minimum wage up to RM4,600.
This way, there is less incentive for companies to fire a lot of people. The subsidy size probably could grow bigger, but it may require more analysis to balance other needs.
[1] — Kabinet Rakyat calls on the government to provide larger direct cash transfers worth at least RM1,000 per month to all B40 households, and 25-50 per cent wage subsidies relative to total wages for SME employees earning up to RM 4,600 monthly (roughly 200 per cent of national median salaries) during the April-June 2020 period.
The large cash transfer programme will protect irregular job holders and those in the informal sectors unable to work due to the Movement Restriction Order (MRO), while the wage subsidy will lessen the temptation for SME companies to lay off its workers.
Urgent action must be taken to address the ongoing health and economic crisis. According to a Malaysian Institute of Economic Research (MIER) study, Malaysia’s real GDP may shrink by 2.9 per cent this year, with 2.4 million people losing their jobs. Massive job loss will exert prolonged adverse effects on the economy, as well as the social stability of the country, long after the health crisis is over.
The government has already announced some measures to cushion the impact of COVID-19 and the MCO. This includes cash transfer policies like the Employment Retention Program (ERP) providing RM 600/month up to six months for employees forced to take unpaid leave and a one-off additional RM 150 in Bantuan Sara Hidup (BSH). Meanwhile, Bank Negara Malaysia has introduced a massive monetary stimulus in the form of loan moratorium to address cash flow issues among companies, that hopefully will lessen the need for layoffs.
While these measures are welcomed, they are still inadequate.
The need for cash transfers is clear. Groups working directly with low-income communities have been overwhelmed by requests for cash assistance since the start of the movement control order (MCO).
Furthermore KRI, IDEAS, ISIS Malaysia dan REFSA as well as individuals including Nungsari Ahmad Radhi, Hamdan Abdul Majeed, and Muhammed Abdul Khalid have all argued that the cash transfer measures introduced so far (the ERP and the small increase in BSH) are insufficient. They all recommend additional cash transfers in some forms, by expanding coverage or increasing the amount of ERP or BSH, or both.
Other countries and jurisdictions have also responded to the crisis with substantial direct cash transfers. Hong Kong, Singapore, and Australia for example, have already done so. Concurrently, Denmark and the United Kingdom have introduced massive wage subsidies to protect jobs.
Our response to this crisis must include and prioritise those hit the hardest.
[Tharma Pillai, Yu Ren Chung, Hafiz Noor Shams. More direct cash transfers and wage subsidies needed to assist vulnerable and protect jobs. Malay Mail. March 26 2020]