Posted: 25 Mar. 2020 6 min. read

It’s all in the maths: a wage guarantee would be better

Covering lost wages, as Britain is doing, is not cheap but – compared with the cost of a deep recession – it’s worth it

What a topsy-turvy world we find ourselves in – everything seems the same one day, the next everything has changed. In just a few short weeks, we have shifted from a sluggish economy to one in which recession is not even up for debate, from the booming spectacle of women’s cricket to football with no crowds and now no games.

Our governments tell us that all is in hand one day, then Bondi Beach is shut the next. How did this come to pass? Why were things so normal and then not, seemingly overnight? The answer lies in the maths.

Australia had a sluggish economy before it got whacked with a global health crisis which, in turn, is now grinding our economy to a halt by fuelling fear and uncertainty. Underpinning the health crisis is a series of unknowns: the genetics of the virus, its transmission rates, its impacts across the population, or how this virus mutates.

Underpinning the economic crisis is confidence in freefall. Now the maths comes into play.

COVID-19 infection rates display exponential growth – where the growth rate is proportionate to the number of people affected. It’s why, after a slow start and a sense of being on top of things, the infection rate seems to now be visible and suddenly skyrocketing (doubling every three to four days).

The dynamics of exponential growth are driving us now. It’s time to go really hard on the health response. Social distancing works best early on when pandemic infection rates are low; that ship has nearly sailed and the clock is ticking.

And it’s time to go really hard on the economy – protect businesses, protect jobs, support incomes. The federal government’s latest package is a good step but more needs to be done, more quickly. Fundamentally, we need to shift from partial labour-cost subsidies to wage guarantees as whole businesses, industries and markets become unviable, simultaneously.

Because we are not playing an incremental or marginal game any more. The consequences of a health crisis on our economy are growing at an exponential rate and far greater than our linear models forecast. A wage guarantee, coupled with fiscal measures to support business cashflows, spark some investment, address broken supply chains to get goods to market, and support those on existing income support, can be a powerful policy prescription even as we battle to flatten the curve.

The cost is not cheap but – in comparison with the cost of a deep recession – probably worth it.

Consider the cost of providing a wage guarantee to the most vulnerable sectors in our economy that are being impacted right now, as opposed to a partial labour-cost subsidy paid to only small and medium-sized business as announced by the government.

Some 3.3 million workers are at severe risk, including large proportions across the sectors of arts and recreation, air transport, accommodation, cafes and restaurants, wholesale and retail trade, manufacturing, construction, education and other services.

If we guaranteed those workers 80 per cent of average weekly earnings (a proxy for a living wage), the quarterly fiscal cost would come to about $43 billion or 8.6 per cent of our quarterly GDP. But the benefit is huge as it ensures these 3.3 million workers remain employed and ready to contribute as soon as demand for their services picks up again.

For these same workers, the British model would cost the budget about $29 billion for a quarter.

A wage guarantee provides certainty for employees, a much-needed confidence boost in our economy. It also starts us thinking about the nature of markets (big and small businesses) when we come out the other end.

You see, it’s all in the maths. A crisis with exponential growth characteristics needs a response equal to those dynamics. The longer we wait, the more you will have to do and your actions will be less effective.

A wage guarantee provides certainty for employees, a much-needed confidence boost in our economy. It also starts us thinking about the nature of markets (big and small businesses) when we come out the other end.

The choice is ours. The clock is ticking. It’s time to rebuild confidence and restore calm by taking strong action quickly – it will set us up well for our economy and our health on the other side. Dr Pradeep Philip is the head of Deloitte Access Economics and Kristian Kolding is its lead partner, macroeconomics.

First published in the Sydney Morning Herald,  Thursday 26th March 2020.

More about the author

Dr Pradeep Philip

Dr Pradeep Philip

Lead Partner, Deloitte Access Economics

Pradeep is the Lead Partner for Deloitte Access Economics. He has had a long and successful career in public policy, with deep expertise in economics and proven leadership experience. Pradeep has been a senior bureaucrat, working at the highest levels of public policy, across three jurisdictions in Australia. Pradeep’s experience includes: Director of Policy in the Prime Minister’s office, Secretary of the Department of Health and Human Services in Victoria, CEO of LaunchVic – a company established by the Victorian Government to promote start-ups and entrepreneurship – and Associate Director General of the Department of Premier and Cabinet in Queensland. He holds a PhD in Economics and Bachelor of Economics (Hons) from the University of Queensland.