‘Wishing doesn’t make it so’: The gap between the reality of Canada’s wage subsidy program and Ottawa’s portrayal

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The federal government has described its wage subsidies for businesses as a program targeted to those hit by the pandemic, intended to cover payroll expenses and designed to protect employment.

The Canada Revenue Agency makes those assertions at the top of the web page for the Canada Emergency Wage Subsidy, one of several such statements from the government in the months since the program was launched. “As a Canadian employer who has seen a drop in revenue during the COVID-19 pandemic, you may be eligible for a subsidy to cover part of your employee wages, retroactive to March 15, 2020. This subsidy will enable you to rehire workers, help prevent further job losses, and ease your business back into normal operations,” the preamble states.

But those numerous other public statements describe a program that doesn’t exist, for the most part. In reality, the CEWS program is not tightly targeted to companies suffering from the effects of the pandemic – applicants simply need to show revenue has declined, and don’t need to show why. That’s how more than 100 cannabis companies were able to collect tens of millions of dollars in CEWS payments, even though analysts that The Globe and Mail interviewed said the industry’s revenue was softening before the pandemic – and many firms’ revenue surged later in the year.

Also, CEWS payments don’t need to go toward wages; the funds are disbursed well after salaries are paid, and companies are free to use the money as they wish. Companies aren’t barred from laying off employees after receiving wage subsidies. And there is growing evidence that the tens of billions of dollars in CEWS payments are having a muted impact on preventing job losses.

It adds up to a significant gap between how the government portrays CEWS and how the program actually functions. “Wishing doesn’t make it so,” University of Toronto economics professor Michael Smart says.

In a statement, the government did not directly address the discrepancy, but said the CEWS program “has helped four million Canadians stay on payroll.”

There is more than semantics and politics at issue. The changes that the Liberals introduced in the summer, and carried forward as the wage-subsidy program was extended until June, broaden the base of companies that can apply for payments, since smaller degrees of revenue loss now qualify. And those changes have made the CEWS program less targeted, at a time when economists, including Prof. Smart, are arguing that the government should more tightly focus the program.

Business groups lobbied hard for those changes, however, making the case that there were many companies suffering from the effects of the pandemic that were unable to qualify for wage subsidies. Reverting to the old formula now would cut off those companies from wage subsidies, as well as disqualify them from other programs limited to CEWS recipients, says Dan Kelly, president and chief executive officer of the Canadian Federation of Independent Business. “There will be a large number of dominoes,” he warns.

The core of that argument against CEWS as it exists today is that it is scattershot, a shotgun blasting out billions in subsidies when what is needed is a program that is targeted to at-risk jobs. To demonstrate that, Prof. Smart and Ben Eisen, an economist and managing editor of Finances of the Nation, analyzed the pattern of CEWS applications in a recent article for Policy Options magazine.

They start by dispelling the misconception that the use of CEWS, as measured by the number of employees supported by subsidies, is sharply declining over time. That might look to be the case if you simply look at the weekly CEWS statistics released by the CRA. As shown in the graph below, those raw numbers appear to show a sharp drop since August, the month before Ottawa changed the program to reduce subsidy levels.

But those raw numbers don’t take into account a central fact about the CEWS program: It’s retroactive, meaning that companies can apply for subsidies – really, rebates – months after incurring payroll expenses. (The deadline for applying for subsidies running through March to August of last year is Feb. 1, for instance.) That means that the number of employees supported in any given month increases as time goes by, as more employers submit retroactive applications.

The two economists took that into account by comparing the number of employees supported in the weeks that followed the end of the August, October and September claim periods. The result is the graph below, which shows the change in the number of employees supported for subsidy applications, broken down by weekly increments after the claim period in question ends.

As you can see, the mirage of a rapidly shrinking program disappears. Instead, the pattern of claims for the three periods are largely aligned, with October actually outpacing the earlier two claim periods by Week 4. Another way to look at the data is to calculate the cumulative number of employees supported, and how that changed over time. The chart below does that, displaying the cumulative total for the respective five weeks following the end of each claim period.

There is a gap, to be sure, with the cumulative total for August running slightly above that for September and October. But that decrease is significantly smaller than the drop in subsidy levels.

The two economists say that discrepancy is significant. If the CEWS program was indeed needed to avoid mass layoffs, declining subsidy levels should have led to significant job losses – and therefore a big drop in the number of employees being supported as payrolls shrank. But that didn’t happen. The authors calculate that the number of employees supported in September is likely to end up being 4.2 per cent lower than in August. But the average subsidy rate declined 45 per cent in that same timeframe.

And that results in their key finding: A decrease of 10 per cent in the subsidy rate led to a 1.1-per-cent decline in employment at companies applying for wage subsidies. (The reverse is also true, Prof. Smart said in an interview. If subsidies were to be increased by 10 per cent, that would increase employment by a relatively smaller 1.1 per cent.)

Why is that? It comes down to a lack of targeting, both within a company and between companies. Once a company qualifies under CEWS, it receives wage subsidies for all of its employees, not just those at risk of being laid off. That is inefficient. Prof. Smart has calculated that it costs the annual equivalent of $188,000 to preserve a job under the CEWS program. But that inefficiency also creates a cushion for companies. Even if subsidy levels fall, they are receiving payments for salary costs they would have incurred in any case. And a lower subsidy for those jobs won’t affect employment.

But there is also a lack of targeting between companies, an issue exacerbated by the CEWS changes that Ottawa made over the summer and that took full effect in September. Previously, the federal government set a threshold of a 30-per-cent decline in revenue to qualify for CEWS payments. Despite the government’s messaging, companies never had to prove that the revenue decline was caused by the pandemic, although the program itself was clearly put in place because of the resulting economic turmoil.

Under the original CEWS rules, those companies that met that threshold got the full subsidy level. Those that did not, got nothing. The revised program reduced subsidy levels, but also lowered the bar to allow companies with less severe revenue declines to qualify. Now, companies with even a 1-per-cent drop in revenue can qualify, although the subsidy rate would be correspondingly low. Still, that means companies running into what would be normal volatility in revenue could legitimately apply and receive CEWS payments. The CEWS program isn’t limited to pandemic-related revenue losses, despite the government’s messaging to the contrary.

Prof. Smart says the lack of targeting, combined with the emerging evidence of the mild impact of CEWS on preventing job losses, argues for a major rethink of the program, including a speedy return to a higher revenue threshold for claiming benefits.

Mr. Kelly at the CFIB opposes that change, but says he is open to other ways to focus subsidies without depriving vulnerable companies of needed support. One option he points to: Adapt the work-sharing provisions of the employment insurance program to preserve jobs while lightening the payroll costs for employers. “There are absolutely ways to pivot,” he says.

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