What economist thought up wage subsidies?

March 30, 2020 8:36 AM

The classic Keynes quote: "Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." The Canadian government has announced that it will subsidize 75% of wages for many businesses for the duration of the lockdown. Is there some defunct economist who thought up this idea, or is it, for once, an innovation by "practical men [and women]"?
posted by clawsoon to Work & Money (5 answers total)

I'm not sure about wage subsidy as specific policy but the idea that the government should spend to make up for missing demand in the economy is straight out of Keynes, e.g. "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."
posted by crocomancer at 9:28 AM on March 30, 2020 [4 favorites]

There was an analysis on CBC this morning that explained why subsidizing workers (either directly or via employers; Trudeau also announced there will be large penalties for any business not flowing the funds through directly to employees, although I personally am awaiting further details) is new and different in this crisis.

Normally economic disruptions are more at the supply end. But in this one, the government is actually slamming down DEMAND by forcing businesses to close and people to stay home. So addressing the supply side (trickle-down economics via businesses) will not remedy the problem. That's why you have to infuse cash at the other end.

I don't know which economist may have said this but it might lead you in the right direction.
posted by warriorqueen at 10:26 AM on March 30, 2020 [3 favorites]

Response by poster: (The idea of preserving existing businesses as live entities that won't have to be reconstructed from scratch afterward is the most interesting part of the idea for me, and one that I haven't seen before in my limited economics reading. It seems like a specific recognition of the general problem of the friction involved in firm formation. Put businesses into hibernation so that they just need to wake up in the spring instead of letting them die so that they have to reproduce from the few remaining survivors in the spring. So far, though, I haven't read an economist who said, "And that's why a crisis of this form in the future would benefit from general government wage subsidies," but my modern economics reading isn't very wide.)
posted by clawsoon at 10:58 AM on March 30, 2020

The concept of work-sharing, sometimes called job sharing, has been around for a long time. But it really came into use in 2009 in the Great Recession, particularly in Germany and the Netherlands. (google for work sharing).

Economist Dean Baker was one of the vocal proponents of this for the U.S. back in the Great Recession. This PDF has a discussion of the history and implementation of work sharing programs

The idea is that the employer has to cut back hours because of a loss in market demand for their products. So rather than laying off employees, they cut their hours from, say, 40 hours per week to 20 hours per week. The government then pays the employer to keep paying each employee to make up the difference in their pay. Typically the costs are shared between the government, the employer and the employee. The government might pay 80% of the additional wages, the employer 10% and the employee has only a 10% reduction in wage. So the employee gets 90% of their normal 40 hours wage even though they are only working 20 hours.

This is better than laying the employee off to collect unemployment insurance because they continue to receive their employer health insurance. Plus it keeps the worker attached to their job so that the business can ramp up quickly after the emergency without having to look for and hire new employees.
posted by JackFlash at 1:02 PM on March 30, 2020 [1 favorite]

Some states have had limited work sharing programs for some time, listed here.

They probably have limited use because, even if the state covers some of the wages, it is cheaper to lay off employees because then employers don't have to pay their health insurance premiums.

The CARES Act should be more attractive because it provides money to cover health insurance premiums. There should be no extra cost to the employer to keep reduced hour employees on the payroll.
posted by JackFlash at 4:10 PM on March 30, 2020