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Examining the economic data of 2020, there’s no question that the federal government’s emergency income-replacement programs were a critical lifeline for Canada during the pandemic. We would have plunged into a much deeper economic hole without them, would have recovered from the spring lockdowns much more slowly and would be in much worse shape heading into 2021.

But now that the smoke has cleared a bit, there are some legitimate questions about the role those programs have played in positioning the economy for the next phase – especially with the country facing another slowdown, as rising COVID-19 infection rates have forced new lockdowns. In particular, it’s important to understand the impact the two biggest income supports – the Canada Emergency Response Benefit (CERB) for laid-off workers and the Canada Emergency Wage Subsidy (CEWS) for businesses – have had in holding the economy together.

A recent paper from the Bank of Canada’s research department illustrates the critical role wage subsidies will play in 2021 to limit longer-term damage from the crisis.

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The paper – a collaborative work by researchers at the Bank of Canada, the Federal Reserve of St. Louis, the Federal Reserve of New York and the University of Melbourne – examines the relative effectiveness in a pandemic of expanding unemployment benefits (à la CERB) versus subsidizing employers’ wage costs (à la CEWS). It found that, when taken in isolation, wage subsidies provide the more valuable economic support. While CERB-like income supports serve a vital role in containing the pandemic by keeping people at home, CEWS-like wage subsidies serve to maintain the links between skilled workers and their employers; if those links were allowed to break, the result would be serious long-term damage to the economy.

Still, the researchers found, an even better result comes from applying both unemployment benefit enhancements and wage subsidies. It’s not a matter of choosing one over the other.

“The two policies are complementary, catering to different rungs of the productivity ladder,” the authors said. “UI provides additional insurance to job losers who fall off the job ladder, whereas payroll subsidies preserve workers’ positions along the ladder.”

Fortunately, Ottawa didn’t choose one over the other. Estimates contained in last month’s fall economic statement show that the government has invested heavily, and almost evenly, in the two supports for the 2020-2021 budget year: $90-billion on the CERB and its successor, the Canada Recovery Benefit (CRB), and $83.5-billion on the CEWS.

There’s little doubt the CERB was vital in bridging the economy over the severe impact of the spring lockdowns and fed the rapid resurgence in consumer spending that led the postlockdown rebound. The benefits, it turned out, actually more than replaced the wages lost to the shutdowns, providing critical fuel for consumption.

But that could only take us so far. We arrived in the fall with the rebound waning, the economy still running roughly 5 per cent below its prepandemic pace and roughly 600,000 jobs still missing. The nagging long-term risk is the degree to which these jobs and production aren’t returning – how much capacity has been destroyed by the ruptures of the pandemic. That risk will only deepen with the new round of shutdowns.

For the labour market, the danger lies in business failures and permanent job cuts, which would snap those critical worker-employer ties and can take a very long time to rebuild. It destroys what the Bank of Canada paper refers to as “match capital” – the matching of labour skills and training to a specific job and employer, which builds and deepens the longer the employer and employee are together. This destruction will leave the economy with not only elevated unemployment but skills mismatches on a large scale, making for an inefficient use of labour that could damage productivity and hold back the postpandemic recovery.

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“The lost match capital results in persistently low average labor productivity and low post-containment output, as the newly formed jobs are low-productivity ones. Payroll subsidies achieve the opposite, by preserving existing matches because they allow financially constrained firms that would otherwise engage in layoffs to continue operating. The preservation of match capital softens the decline in employment, productivity and output, and the economy recovers faster,” the authors wrote.

It’s incumbent, then, to sustain those bonds beyond the latest wave of the crisis, as they represent the best chance for both workers and employers to return to full health and thrive in the recovery. As jobs gradually return and fractured businesses and industries try to mend the damage, the government’s wage subsidy program will go a long way to determining just how far and how fast this economy can come back.

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