How to get companies to hoard labour
A small recap of the previous post: The upcoming recession should be temporary. Large scale unemployment is a problem that must be avoided. To avoid that, companies can retain employees during the downturn as they will be valuable to the company later.
For companies that do have cash on hand, this is possible. For companies that are growing during this recession like Amazon and Zoom, they are actively hiring. But many companies like small restaurants, hotels and airlines have almost no money in the bank now. They can’t hoard labour because hoarding labour requires money. And they have no money.
Nobody wants to go to a restaurant and eat there. (Restaurant bookings have become zero according to data). Nobody wants to go on a flight and travel. And as nobody wants to travel, the hotels aren’t doing well either. It is almost inevitable that they fire employees.
The solution to that: Wage subsidies
Rule #1 of economics: Incentives matter. At this moment, monetary incentives matter the most. Companies are short of cash and are shutting down.
Pay companies to employ people and they will do so.[1]
Here is how a wage subsidy works:
Let us say a company normally pays a worker $3000 a month.
The company loses revenue and cannot afford to pay the worker that much.
The government comes and subsidizes the job. Now they pay 80% of the salary.
The government pays $2400. The company has to pay only $600.
A lot of companies who could not pay wages now can pay wages.
Now the labour is 80% cheaper. It costs less to hire workers, and so companies hire more of them (or don’t fire them). So more people stay employed, and they can meet their bills. That avoids a lot of the problems of mass unemployment.
But, this isn’t going to save all the jobs. The company still has to pay whatever the government isn’t subsidizing. The $600 is still on their dime. The company may have lost 100% of its revenue and have no cash in hand. [2]
One problem is that there are many other reasons why companies lay off employees besides not having money to pay the employee. They may need that money for other important things like rent, loans and electricity bills.
A wage subsidy reduces one cost for a company: wages.
It does not deal with the other costs a company may face like rent, loans, and utility bills. If they cannot pay rent, they shut down and are forced to lay off all the employees. Or if they cannot pay their loans, they have to shut down.
The wage subsidy is not a perfect mechanism. But given the constraints (both economic and political) governments have to meet, its is probably the highest return for money.
[1] A more general principle is the idea of incentives: Pay people to do X, and they will do X.
[2]You may ask why not have a 100% wage subsidy and protect all the jobs. I’m not entirely sure of this. One reason might be that they don’t want too many failing businesses to be propped up. In a business cycle some companies have to go, because they have outdated business models like physical newspapers or companies that sell CDs. One plausible hypothesis behind a wage subsidy that is below but close to 100% is that it makes an entry barrier to getting the subsidy. In other words, if you can’t even pay 20% of your employee’s wages, why are you even still a business?