Shortcomings of the JSS as a permanent solution to the pandemic crisis

The unprecedented health and economic crisis caused by the COVID-19 pandemic has led governments to enact unprecedented economic policies. In the case of Singapore, the Jobs Support Scheme (JSS) has been providing temporary economic relief to firms by helping them to pay the wages of their employees so that they could retain these workers. The government has been paying from 25% to 75% of the first $4,600 of the gross wage of the Singaporean workforce. The JSS was initially set to expire in May, but this policy was extended until next month. In the eve of the last payments of JSS, lingering questions about its continuation remain. Should the government extend once again the JSS? Or should it be terminated since it was always supposed to be a temporary measure and the worst of the crisis seems to be over?

There is still a consensus among economists around the world that governments should continue subsidising labour in the short- to medium-term. The main reason behind this consensus is the understanding that the fallout of the COVID-19 crisis is far from over, even in countries that have successfully controlled the contagion. The economic fragility and risks of additional waves of contagion pose serious risks to economic recovery. Smaller firms and lower-income workers are still particularly vulnerable to the crisis. Thus, removing these policies too early could lead to a widespread rise in unemployment and corporate bankruptcies.

Short vs medium term considerations

But while there has been a lot of favourable views towards these policies, not much consideration has been given to its possible costs. Aside from the burden to taxpayers, what are the negative consequences of subsidising labour? Could these measures help in the short-term and at the same time delay economic recovery in the medium- to long-run?

One of the main goals of JSS is to help firms retain their workers. On the one hand, the JSS might be very effective as a temporary measure, since in the short run, the main consideration is whether to retain or not a worker. On the other hand, this policy might decrease the mobility of workers across firms in the economy. And why may this be a problem in the long-term? Because it may increase the cost or even prevent other firms from hiring workers that are benefiting from this subsidy. In the worst-case scenario, employees could be retained in firms with poor economic prospects. At the same time, they could be used more productively in similar occupations in firms or sectors that have more positive expectations and that were less affected by the COVID-19 crisis. This labour misallocation implies some firms with better performance are subsidising others, which decreases aggregate productivity and economic activity.

Deterring entrepreneurship and labour re-allocation

Another aspect in which labour subsidies might harm the economy is by curbing entrepreneurship and the creation of new firms, for at least two reasons. First, starting a firm is a risky endeavour, especially in these uncertain times. So, workers might be unwilling to trade a relatively stable subsidised wage to become an entrepreneur. Second, the costs of opening a firm may be higher since hiring workers might be more difficult because of the lack of labour mobility. A direct consequence of fewer firms being created is the decrease in innovation and job openings in the economy. During such a paradigm-shifting crisis that affect almost all dimensions of social and labour relationships, innovation is key to developing new technologies to adapt to the new status-quo. Thus, JSS might be creating another implicit subsidy: it is helping firms that may be less innovative or less resilient to the current crisis at the expense of newer and more innovative firms that could be more resilient to the COVID-19 situation.

Overall, while JSS might have prevented further deterioration of economic activity, there are also some downsides to this policy being extended indefinitely. While in the near-future Singaporean firms might still need state support to continue operating, the government should also address the shortcomings of such assistance. This week, the government announced the creation of 92 thousand jobs and training opportunities. Additional measures to improve labour mobility could pass though, for instance, increasing the unemployment insurance benefit for workers that are fired in the first year of their jobs. If this is the case, workers might be willing to accept the risk of moving to another firm since, even if they get fired shortly after that, these workers know they are going to get proper unemployment insurance. Also, firms with good investment opportunities would be better off since they can now have enough workers to sustain their growth.

Scaling back on labour subsidies too soon might have a high economic cost, but this cost might be a bit smaller than initially predicted by policy makers. While policies like the JSS might still be necessary to support low-income workers and smaller firms while the economy is fragile, the government should also think about how to address its unintended consequences.