A lone person walks past closed businesses in Kensington Market in Toronto on April 15, 2020.The Canadian Press
Michael Smart is professor of economics at the University of Toronto, and co-director of the Finances of the Nation project.
In the past six months, Ottawa has paid billions to businesses through its controversial pandemic wage subsidy program – with billions more to come this year. After recent reforms to the program, The Globe and Mail reported that some companies are leaving the program, citing complexity and declining subsidy rates as the reason.
In fact, the problems with the wage subsidies go much deeper than that. The subsidies are not a cost-effective way to help workers hurt by the pandemic, because they are not targeted in the right places. And the recent reforms create a new hurdle for businesses looking for growth to recover. It’s time for a hard look at this program.
Since March 15, the Canada Emergency Wage Subsidy (CEWS) has paid up to 75 per cent of wage costs for businesses hurt by the pandemic, at a likely total cost of $70-billion this year. CEWS was designed to work together with its sister program, the Canada Emergency Response Benefit (CERB), which makes payments directly to laid-off workers. In contrast, CEWS goes to employers, not individuals experiencing earnings losses.
By lowering the cost of retaining workers for businesses hit by the lockdowns, 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 earnings losses.
Most jobs for which CEWS is paid would still exist, even if the program were cancelled. That makes CEWS a very expensive way of helping workers hurt by the lockdown.
We don’t yet have reliable evidence on how many jobs would have been lost had CEWS not been introduced. But we can make informed guesses. Based on past research on how business hiring responds to wage costs, I estimate that each job saved through CEWS has cost Ottawa about $25,000 in subsidies a month, or $300,000 over a full year.
Similar evidence is emerging for the pandemic wage subsidies in the United States, which parallel CEWS. According to one recent study, the US$517-billion spent in the first four months of the U.S. program saved only about 2.3 million jobs – at an average subsidy cost of US$224,000 a job.
By either calculation, that is far too high a cost to keep workers with their employers. To assist workers hurt by the pandemic, and to aid the recovery, the cash should flow to those who lost jobs or saw earnings decline. That’s what CERB and an enhanced employment insurance program are doing.
Of course, CEWS also helps by providing liquidity to hard-hit businesses. But, in this respect, too, CEWS does not effectively target those most in need. Those considerations won’t change the basic conclusion: CEWS is too poorly designed to save jobs in a cost-effective way.
Ottawa is no doubt aware of these problems, and the September reforms to CEWS sought to reduce the program cost by reducing the subsidy rate for most employers. Under the new rules, as business revenues recover to prepandemic levels, their CEWS payments automatically decline.
This “clawback” of subsidies from growing businesses acts like a tax on revenues, and it creates a disincentive to expand business operations during the recovery. It could also force businesses to increase retail prices, passing on costs to consumers.
And the effect is substantial. For a typical retail business, they mean that a $1,000 increase in revenues will result in a $480 reduction in CEWS payments. That’s a 48-per-cent tax rate on revenues that struggling businesses must pay, in addition to their normal business taxes.
Of course, a 48-per-cent revenue tax is bad policy, whether in good times or in the course of a fragile economic recovery. But Ottawa has slipped one into its wage-subsidy program, apparently without much discussion.
Ottawa has announced CEWS program parameters through December of this year. The program should not be renewed after that date. If wage subsidies are tried again in future, they should be targeted to businesses that rehire all workers laid off during the recession. That requirement is part of business assistance programs in other countries, and it is time Ottawa tried it as well.
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