Supporting jobs and companies: A bridge to the recovery phase

 Support sectors and workers that continue to be severely impacted by the health crisis

Workers, including the self-employed, who have been durably impacted by the health crisis as well as companies in sectors still subject to closures or administrative restrictions, need to continue to be supported while ensuring that they have the right incentives to restart the activity as soon as possible.

General and encompassing job retention schemes have been essential to cushion the impact on the labour market in the first phase of the COVID‑19 crisis (OECD, 2020[1]; 2020[3]). At their peak in Q2 2020, up to a third of workers were on a job retention scheme (JRS) in several OECD countries (Figure 1). As companies reopened in the post-confinement phase, the share of workers on JRS also significantly decreased. However, recent data suggest that the take‑up was again increasing in November and December as countries were facing the second pandemic wave. In 2020, the take up of JRS, even in the post-confinement phase, dwarfed what was experienced at the peak of the global financial crisis in 2009 (Hijzen and Martin, 2013[12]).

 

Figure 1. Participation in job retention schemes is well below the Q2 peak but still sizeable

Share of dependent employees, latest available data

Note: Take‑up rates are calculated as a percentage of dependent employees in Q1 2020. Note: Peak date refer to April/May for most countries (October for Hungary and Japan). Japan, the Netherlands, Portugal: Stocks are estimated as 3 months cumulative flows. Italy: Latest data are provisional estimates. the United States: Refer to Work sharing benefits.

Source: OECD calculations using national sources.

As the COVID‑19 crisis evolved, JRS appeared to respond quickly and effectively to the large negative shock to the labour market. As countries keep fighting against the pandemic, they remain an important tool to support companies and workers. In the current phase of uneven opening of economic activities across sectors and regions, the focus should be on jobs that are likely to return viable.1 Discriminating between viable and unviable jobs is inherently difficult, especially in sectors still affected by mandatory restrictions where market signals about the viability of firms and jobs is very weak. Moreover, the reallocation process is likely to remain largely subdued until there is a significant increase in business and job creation. However, countries can use a number of levers to gradually enhance the targeting of support towards jobs more likely to survive and to workers in jobs that remain at risk, in particular by differentiating support between sectors that remain subject to mandatory restrictions and the rest.

Firms in sectors not subject to mandatory restrictions could be asked to bear part of the costs of short-time work schemes or introduce limits to the maximum duration of job retention schemes. In the case of firms that remain subject to mandatory restrictions, it is very difficult to assess their future viability and support should remain largely unconditional. Further targeting within the most affected sectors is possible, by tailoring the eligibility conditions to the strictness of the mandatory restrictions.

In all scenarios, it is essential to promote the mobility of workers from subsidised to unsubsidised jobs by requiring or allowing workers benefiting from job retention schemes to register with the Public Employment Service (PES) and benefit from their support, and/or by promoting the participation of workers on reduced hours in training. In the Netherlands, for instance, employers applying for JR support have to declare that they actively encourage training since June 2020, while the government has taken additional measures to make online training and development courses freely available. In France, workers have a clear financial incentive to take up training as, in this case, the JRS benefit increases from 84% of their net pay, to 100%. Survey data by the French Ministry of Labour (DARES, 2020[13]) show that, in the Q3 2020, around 15‑20% of workers employed in a company making use of JRS were undertaking some form of training. The share was somewhat higher in large and medium-sized enterprises.

Organising training in such a way that it can be combined with part-time work and irregular work schedules while maintaining physical distancing is clearly challenging. However, training is essential to prepare workers on JRS for the recovery, even more now that JRS have been in place for several months. Incentives (or requirements) to register with the PES and reskilling/upskilling similar to those of classical unemployment benefits would help JRS to protect workers without hindering the reallocation of employment towards expanding firms and sectors.

As the crisis lasts longer, claimant numbers for “last-resort” minimum-income benefits may rise, as workers who lost their jobs and incomes in the initial phase of the crisis exhaust their unemployment benefit entitlements or run down on their savings. A number of countries have temporarily increased benefit amounts, relaxed means testing, or introduced one‑off payments. As they consider rolling back these concessions, countries could review and simplify entitlement criteria and application procedures with a view to making minimum-income benefits more reactive and accessible to encourage take‑up. Effective targeting is important, but countries need to ensure that those in urgent need continue to receive support. For example, countries could gradually reintroduce income tests to allow households to adjust their expenditure, while keeping asset tests relaxed (e.g. exempt family homes or any business assets) as long as job opportunities remain scarce. Countries may also want to expand these programmes to improve the coverage of young adults, who may have not worked long enough to be eligible to receive unemployment benefits, but have worked above the threshold to meet the income criteria of social assistance.

 Encourage business creation and avoid bankruptcies of high performing but over-indebted companies

Massive support measures taken by public authorities as well as and temporary changes to insolvency procedures have been successful in putting business failures on hold during the COVID‑19 crisis. Data show that firms’ closures declined on average by 30% in the OECD in 2020 (OECD, 2021[14]), despite the unprecedented fall in GDP.2 Without government support, bankruptcy rates would have probably doubled for SMEs compared with 2019 (Gourinchas et al., 2020[15]). Accommodation and Food Services, Arts, Entertainment and Recreation, Education, and Other Services are among the most affected sectors. However, business creation has also fallen to record low levels (even compared to the 2009 crisis) and, within the companies created, the riskiest projects with high growth potential are not seeing the light of day. The risk of a large number of bankruptcies is very high without a substantive reallocation to new and growing firms.

A process of creative destruction is necessary to allow resources to be (re)allocated from least to more productive activities to sustain economic growth as well as good employment and earnings prospects for workers. However, the return to a ‘normal’ creative destruction process will be gradual as business creation takes time and the burden of increased corporate debt may not lead to efficient outcomes. In the next few months, there are at least two risks to manage. The first is a risk of high performing but over-indebted companies going bankrupt or reducing their innovation and investment efforts in order to pay off their debts due to a phenomenon of “debt overhang”, i.e. high levels of debt curtailing investments and leading to an underinvestment problem3 (Demmou et al., 2021[16]). The second is a risk of saving low-performing companies (the so-called zombie companies) that were unviable before the crisis but were able to survive thanks to public support. In both cases, aggregate productivity, which was already a concern before COVID‑19 started, would be negatively affected (Adalet McGowan, Andrews and Millot, 2017[17]).

In the short term, the first type of risk would be probably more serious than the second, in particular for employment. In order to avoid massive defaults by companies, particularly SMEs, that were viable before the crisis, it will be necessary to deal with high levels of corporate debt and the high numbers of bankruptcy proceedings, which in some cases may require the restructuring of debts contracted during the crisis.

For the moment, public support is essentially focused on existing companies, but the creative destruction process can only start if business creation resumes. The impact of a “lost generation of firms” can be very substantial. Sedláček (2020[18]) has estimated that in the United States, had firm entry remained constant during the global financial crisis, output would have recovered four to six years earlier and unemployment would have been 0.5 percentage points lower even ten years after the crisis.

Moreover, a substantial body of evidence shows that new companies account for a large share of job creation (Criscuolo, Gal and Menon, 2014[19]; Haltiwanger, Jarmin and Miranda, 2013[20]). It is therefore essential to support start-ups – notably the more innovative ones – and encourage start-up creation in order to avoid the loss of an entire generation of new firms. It is also advisable to offer appropriate protection to self-employed workers, such as offering unemployment insurance to self-employed in those countries where this is not available or relaxing eligibility conditions for setting up businesses in the next few years. This would make it possible to limit the risks associated with setting up a business in an already high-risk environment. Social partners can also play a role in promoting the creation and growth of new firms by tailoring the provisions of sectoral/branch agreements to the needs and risks of small and young firms.

 Promote hiring and adapt support for jobseekers and recruiters

There will be no way out of the crisis without a substantial rebound in job creation, which remains well below the pre‑pandemic levels (Figure 2). Jobs lost since the outbreak of COVID‑19 will not easily return. Hence, the priority is to create new jobs. The recovery plans that many OECD countries are preparing will play a key role in this. However, their full rollout will take several months or years.

In the short term, fiscal and monetary policies need to remain supportive – see the latest OECD Economic Outlook (OECD, 2020[3]). At the micro level, temporary and targeted hiring subsidies can be an effective tool to promote job creation and a number of OECD countries have recently introduced or renewed such schemes (for instance, Australia, France, Italy and the United Kingdom). Evidence from the global financial crisis suggests that hiring subsidies can boost job growth and be cost effective (Cahuc, Carcillo and Le Barbanchon, 2018[21]). Direct job creation can also be envisaged, in particular to support the logistics of testing and vaccination. The creation of “youth corps” – or more generally public health job corps like the one envisaged in the United States – to help delivering vaccines, contact priority people, carry out administrative tasks, and manage flows in vaccination centres is an option to be considered.

 

Figure 2. Job vacancies are still below the pre-pandemic level

Percentage change in the total number of unfilled job vacancies since January 2020, seasonally adjusted

Note: The bars represent the percentage change in the stock of unfilled job vacancies in the reference month compared to January 2020. Latest data refer to January 2021 for Austria, Germany and Hungary, December 2020 for the Czech Republic, Finland, Luxembourg, Norway, Poland, Sweden and Switzerland and November 2020 for, Portugal and the United Kingdom.

Source: OECD Short-Term Labour Situation database.

While the volume of job openings remains well below the pre‑pandemic level and the second pandemic wave has led to a fall in job openings again after some improvements during the summer of 2020, there is a significant heterogeneity across sectors and occupations (Figure 3). High frequency indicators of online job postings show that, in December 2020, while labour demand in accommodation and food services was 45% lower than the pre‑pandemic level, in transport and storage services online job postings were 30% higher than in January 2020. Similar heterogeneity is found when looking at the occupational level: online job openings for hospital workers, employees of food retailers and warehouse personnel remained the same or increased compared to the pre‑pandemic period (OECD, forthcoming[22]).

These data suggest that, even if job opportunities remain limited and switching jobs is not necessarily easy (in terms of skills required but also geographical distribution), there is scope to reallocate some workers from sectors and occupations where demand is likely to remain low for some time to sectors and occupations where demand is recovering faster. Hence, assistance to find new work remains essential even during a pandemic to help workers seize on job opportunities and upskill or retrain, though physical-distancing requirements reduce the scope of in-person training courses on offer. In particular, countries need to scale up active labour market programmes (ALMP) that have proven particularly effective such as job search support and counselling.

 

Figure 3. Job postings remain depressed in some sectors while they are recovering in others

Percentage change in online job postings since January 2020

Note: Based on online job postings in Australia, Canada, New Zealand, the United Kingdom and the United States.

Source: OECD calculations based on data from Burning Glass Technologies.

Moreover, PES can also provide effective help to employers, not just jobseekers. The results of a large‑scale randomised experiment in France where the PES offered free recruitment services to small and medium enterprises suggest that a shift in the pre‑screening and filtering burden of the recruitment process away from the firm to the PES counsellor can have a substantial net effects on job posting and hiring (Algan, Crépon and Glover, 2020[23]).

To face these multiple challenges, PES need additional resources (either through direct hiring or, in the short term, through external support by engaging private‑service providers). Some OECD countries, for instance the United Kingdom, have already started increasing PES staff. Absent new resources, existing schemes and services will be overburdened by a surge in demand, which, most likely, will also lead to a marked decrease in the quality of the services offered.

In the aftermath of the global financial crisis, resources for training, job placement, and recruitment support did not increase enough while unemployment was soaring. In 2007‑10 the number of unemployed increased by 54% while ALMP spending increased only by 21% on average in the OECD area. As a result, the average amount spent per jobseeker actually decreased by 21% at the time when the need was strongest (OECD, 2011[24]). This time, addressing the COVID‑19 labour market challenges will require substantial additional investments in ALMPs and PES. However, increasing resources may not be effective if PES face capacity constraints in terms of personnel, space or material. PES can also free up some resources by suspending non-essential activities, scaling down job-search monitoring services and relaxing application procedures for benefit claims (OECD, 2020[25]). Moreover, countries with modernised, proactive and digitally advanced PES are in a better position to provide affective and agile support to jobseekers, employers and workers, through the use of profiling tools, digital tools and services and good co‑operation practices with key partners.

Finally, it is of paramount importance not to lose contact with young people who recently lost their jobs or left school without finding employment – see Box 1. More vulnerable young people often do not get in contact with the PES, because they are not entitled to income support, lack trust in public authorities or are simply not aware of the support they can receive. Rapid and proactive outreach – in collaboration with schools and youth organisations and through social-media campaigns – may be particularly important in the current crisis.