There are better ways of helping the economy than CEWS

In the Trudeau government’s recent mini-budget, Finance Minister Chrystia Freeland threw so many large numbers at us that Canadians might be forgiven for missing some important announcements.  Here’s one number to bear in mind: $99.6 billion. That’s the new projected cost of the Canada Emergency Wage Subsidy (CEWS) through June. CEWS is now the largest component of Ottawa’s pandemic response, outstripping even the Canada Emergency Response Benefit (at $81.6 billion) and its successors. So, what are we getting for all this money?

The cost-effectiveness of CEWS subsidies

When the pandemic hit, the Trudeau government was right to act quickly to introduce sweeping economic measures to help families and businesses get through the crisis. However, as time goes by, it is important to evaluate the efficacy of various programs to determine how much they are actually helping, or whether the money being spent on them might be better used elsewhere. As the largest component of the government’s pandemic response package, CEWS should be subject to close scrutiny.

The idea behind CEWS could make sense. By lowering the cost of retaining workers for struggling businesses, the program should help to reduce unemployment and keep incomes flowing. But at what cost? The problem is that CEWS payments are paid for all workers at affected businesses, not just those facing the prospect of lost earnings. Most of the jobs funded by CEWS would still exist in the absence of the subsidy. For this reason, CEWS is an expensive way of protecting vulnerable workers.

Perhaps recognizing the problems, Ottawa implemented reforms in September to reduce the subsidy rates and phase out the program over time. Examining the impact of the September reforms on claims allows us to develop an estimate of just how many jobs the program has saved overall.

The reform had a substantial impact on program costs. Figure 1 shows the average subsidy paid per employee supported for each claim period (month) through October, the most recent available in the public CRA data. The average subsidy paid reflects the average wage of those who are supported, as well as the impact of the subsidy changes, but it is a good measure of the impact of the reform. The average subsidy dropped from $1,661 in August to $1,039 in September, a decline of about 37 per cent.

If the subsidies were playing a big role in preventing large-scale job loss, the September cuts to the per-employee subsidy shown in Figure 1 should have led to layoffs at assisted firms and therefore a drop in the number of workers supported by the program. But the aggregate data show that the impact on claims was small.

Employers apply retrospectively for the subsidies after the end of each period, and there is no deadline for applications in respect of prior periods. So, data on applications for each claim period accumulate only gradually, and a larger percentage of the final total has now been received for earlier than later claim periods. These reporting lags make CEWS claims appear to fall over time, when they are actually quite stable. To deal with the problem, we compare total claims for each period after the same number of reporting weeks. For example, we compare Period 7 claims on Nov. 28 to Period 6 claims on Oct. 25, the same number of weeks after reporting began.

Figure 2 shows the number of employees supported in each week after the start of each reporting period for claims in July through October. The claims have followed the same pattern closely in all three periods, with the number of workers supported falling only slightly in September and October, relative to July. This suggests that the September subsidy cuts did not result in large-scale layoffs of workers at CEWS-assisted businesses.

Of course, other things were happening in the economy at the same time, so knowing the exact impact of CEWS is impossible. But the similar pattern of claims in all three reporting periods suggests there were no other sharp changes occurring at the time of the reform.

At present, the total number of employees supported for the September claim period is on track to be just 4.2 per cent below the number supported for August, despite the 45 per cent decline in the average subsidy rate shown in Figure 1. Put differently, each 10 per cent decrease in the subsidy rate leads to just a 1.1 per cent decrease in employment at affected firms.

Extrapolating from the September experience, we conclude that most jobs supported by CEWS subsidies would still exist even if the subsidy were eliminated. Very little of the funds spent go to saving jobs at risk. Based on the estimate, we calculate that CEWS subsidies cost the government about $14,500 for each job saved per four-week period, or about $188,000 per job per year. (For a detailed description of the methods used to produce this estimate see this commentary.)

CEWS is paid to businesses, not to workers. If CEWS funds are not saving many jobs, that means they end up instead in business revenues, and maybe even profits. That could help the hardest-hit businesses weather the storm of the COVID crisis. But here too, CEWS does not effectively target those most in need. Recent stories in the media have documented a number of large companies that have received CEWS while paying extraordinary dividends or repurchasing shares from shareholders. A recent report for Finances of the Nation also documents the list of CEWS-recipient companies owned by billionaires and by large multinational enterprises. While this evidence is anecdotal, it does illustrate the failure of the program to target companies most in need of financial support.

The way forward

CEWS is an expensive and ineffective policy because it is not targeted to the jobs that are most at risk during the lockdown. As noted above, a conservative back-of-the-envelope calculation tells us that the government has been spending $188,000 per year for each job saved by the CEWS program. There are far better ways to assist the recovery.

Other countries have recognized the problems with wage subsidies and have made reforms. The United States offered similar support in the spring of 2020 through the Paycheck Protection Program, albeit only to smaller businesses. Researchers found it had virtually no impact on employment and it has since been wound down.

Ireland and Australia also operated similar wage subsidies in the early months of the pandemic. Both countries reduced subsidies and tightened eligibility in September. The result is more cost-effective programs, better targeted to the hardest-hit businesses.

Most European countries do not offer general wage subsidies to businesses. Instead, they offer “job retention” schemes that encourage employers to put workers on shorter hours instead of laying them off. That targets assistance to the jobs that are most at risk, exactly as Canada should be doing.

A few weeks ago, Finance Minister Freeland praised the European approach, calling it “something that Canada should be paying a lot of attention to.” She’s right, and sooner would be better than later.

Photo: Shutterstock, by Visual Generation.

This article first appeared on Policy Options and is republished here under a Creative Commons license.