Was the Covid-19 wage subsidy successful?

Two reports have been released detailing to what extent New Zealand’s Covid-19 Wage Subsidy Scheme preserved employment and supported businesses during the pandemic

Funded by the Ministry of Social Development, Motu Economic and Public Policy Research Trust found that the program was good value for money, helping workers and small business owners more than if there had been no support at all. Their second report also highlights that the subsidy prevented mass layoffs and found no solid evidence that firms did not pass on the subsidy money to their employees.

The Covid-19 pandemic has caused substantial disruption in social and economic activity since

March 2020. The New Zealand Government reacted early, introducing stringent lockdowns to restrict the spread of the virus. At the same time, it introduced a series of economic policies designed to support the health response. The largest was the Covid-19 Wage Subsidy Scheme (WSS).

The WSS was a hightrust policy, giving subsidy payments to firms that expected to have a substantial drop in revenues because of the pandemic. The objectives of the WSS were to: avoid widespread layoffs help firms maintain employment relationships with their workers maintain workers’ incomes to help meet their essential needs during lockdown periods.

The reports analyse the impacts of the WSS on both firm and worker level economic outcomes, adopting a ‘doubly-robust’ estimation approach that uses propensity score methods both to match subsidy receiving firms to similar non-subsidised firms, and to weight the outcomes analysis. The analysis focuses on the first four WSS-waves: the March

2020 (Original), Extension, Resurgence and March 2021 waves.

First, the reports analyses if the WSS reached the intended people and businesses. For the March 2020 wave, subsidised firms experienced substantially greater revenue declines than unsubsidised firms: the modal reduction in revenue for subsidised firms was about 50%. It also observes larger revenue losses relative to a year earlier for subsidised firms in the Extension and Resurgence waves, but revenue changes for the March 2021 wave are confounded by the March 2020 effects. The subsidy payments were tied to firms, so it was less effective in supporting more precarious jobs and workers.

Second, are the effects of the WSS on firm survival and resilience over the short (6 months) and medium (12 months) term. The reports estimate receiving WSS payments positively affected firm survival rates over the following 12 months for three of the four WSS waves. However, subsidised firms experienced slower subsequent employment growth than non-subsidised firms.

Third, the reports analyse the effects of the wage subsidy scheme on worker level outcomes. It estimates positive effects of WSS receipt on job-retention over both the short term (6-months) and medium term (12-months) for the March 2020, Extension and March 2021 waves; and roughly zero effects for the Resurgence wave. It also finds positive employment effects for workers over the short term for the March 2020, Extension and March 2021 waves, and over the medium term for the March 2020 and Extension waves; and slightly negative effects for the Resurgence wave. However, conditional on being employed, the reports estimate workers who received March 2020 wage subsidy payments experienced slower subsequent monthly earnings growth than comparable non-subsidised workers. The estimates for the later waves are more mixed.

There is no compelling evidence the WSS supported non-viable firms. However, the higher survival rate and lower employment growth of subsidised firms suggests the WSS may have kept firms with poorer growth prospects in operation. The reports also find no systematic evidence firms did not comply with and to a lesser degree the Extension-wave.

The value for money of the WSS was calculated using cost-benefit analysis from a societal perspective, encompassing the New Zealand economy as a their obligations to pass on subsidy payments to workers and endeavour to pay them at least 80% of their usual earnings. However, some subsidy receiving firms paid workers at either the parttime or full-time subsidy rate, or at 80% of their prior earnings, during periods of subsidy receipt. This was relatively more likely to occur during the original (March 2020) subsidy wave, whole. The subsidy was treated as a transfer (from the government into the wider NZ economy) and negative transfers (government money repaid or not spent, i.e.–subsidy repayments and unemployment support avoided) were subtracted from this. As analysis was done from a societal perspective, transfers were included as both a cost and a benefit, but with a

20% deadweight burden of raising tax revenue added to the cost side. The cost of administering the wage subsidy was also included.

The quantified benefits of the wage subsidy were increased output associated with people remaining in employment, and the value of the wellbeing they experienced from avoiding unemployment. Outcomes were calculated by employment months gained over the short (6 month) and medium (12 month) term. The March 2020 wave had a favourable benefit-to-cost ratio of 1.20 after 6 months and 1.45 after 12 months. The 12-month ratio was 1.14 for the Extension wave, 0.83 for the Resurgence wave, and 1.63 for the March 2021 wave.

The first report concluded that, overall, the Covid-19 wage subsidy represented value for money. It allowed more workers to remain in employment and more sole traders to remain in business, than was predicted would occur without a wage subsidy. To understand if the effectiveness of the wage subsidy as an intervention remained stable over time, it is recommended an evaluation is done on the August 2021 wage subsidy.

The value for money analysis could only identify direct benefits of the wage subsidy and so was limited to examining microeconomic outcomes. It is recommended an investigation is done of fiscal interventions to mitigate the impact of the Covid-19 pandemic on the New Zealand economy, to determine their effectiveness at a macroeconomic level.