Governments urged to scale back pandemic-related wage subsidies

Governments need to start scaling back emergency wage subsidy schemes introduced to cushion their economies from the coronavirus pandemic, in order to encourage workers to move out of shrinking sectors, the OECD has said.

The coronavirus crisis has pushed up unemployment across the organisation’s member countries to 8.4 per cent, with 54.5m people out of work, figures for May showed.

Even in an optimistic scenario in which the virus recedes and remains under control, unemployment across OECD members will reach 9.4 per cent in the fourth quarter of 2020, exceeding all peaks since the Great Depression, the Paris-based group said on Tuesday.

Average employment is set to be up to 5 per cent lower than in 2019, and will remain below pre-crisis levels by the end of 2021, it forecast in its annual employment outlook.

“In three months, Covid-19 wiped out 10 years of [job] gains since 2010,” said Stefano Scarpetta, the OECD’s director for employment.

Chart showing unemployment rate

Governments around the world face difficult decisions about how to phase out job retention schemes and other emergency support measures put in place as lockdowns began, without triggering a surge in long-term unemployment that would hit the young, women and low-paid workers hardest.

But the OECD said it was now time to phase out “massive, generalised support” so that labour markets could adjust to the changing shape of the global economy.

“We have to allow [labour force] mobility. Some companies will not be viable in the short term and the medium term. We have to allow workers to move into new jobs,” Mr Scarpetta said.

Employers in sectors of the economy in which activity has resumed should carry some of the cost of the subsidy schemes, he argued, while government support should be more clearly targeted in sectors that are still shut.

The winding down of job retention schemes should be coupled with new support to help people into work and support new hiring, including career advice, help with job searches, vocational training and financial incentives to hire young people, the OECD said.

In a thinly veiled reference to the US — where there is a fierce debate over whether to extend a $600 top-up to unemployment benefits which is set to expire at the end of this month — Mr Scarpetta said “some countries should extend unemployment benefit duration to prevent jobseekers from sliding too quickly into much less generous minimum income benefits”.

This would be “even more necessary in the case of a second wave of infections and renewed restrictions to economic activity”, he added.

The crisis has exposed gaps in social protection — particularly for self-employed workers and those in less secure forms of work — which governments should address by allowing people to build up rights to the same kind of out-of-work support available to standard employees, the OECD said.

 The pandemic has accelerated the polarisation of the labour market between high-skilled and low-skilled jobs, with opportunities reducing for those with a moderate level of skills. Mr Scarpetta said a long-term shift towards home working could accentuate this trend if it reduced demand for office support staff.