How Will We Wean Ourselves off Coronavirus Job Subsidies?

by Paul Oslington
7th September 2020

The coronavirus will be with higher education for a long time and we need to work out how to wean ourselves off the job subsidies that are in place in many countries.  They were devised hurriedly to deal with an emergency, and gave employers and workers some breathing space as well as sharing the burden somewhat around the community.[1] They now apply to over 50 million workers across the world, including probably about half a million in higher education.[2]  Such subsidies are unaffordable over the long term and also block the restructuring in the university sector and elsewhere that is needed for an economic recovery.  When they end this will be a huge challenge for higher education managers.  And if policy makers get this wrong it will be our young people who will bear the burden.


To understand how job subsidies might be targeted and tapered lets look at the economic arguments for them:

1. Protecting workers from a descent into poverty when their jobs disappear. In higher education this especially applies to sessional and adjunct teachers, and researchers on short-term contracts. But this is why we have unemployment benefits, and if the level of benefit or the eligibility conditions need revision then lets do this. And lets make sure people don’t fall through the cracks of our welfare system – especially the less educated and those with less political voice. 

2. Protecting society against the social costs of additional unemployment. This is a perfectly valid argument economics for employment subsidies, but nothing new in the coronavirus world except the scale of job loss, and perhaps increasing average social costs as more jobs are lost. I’ve investigated the private and social costs of job loss in a recent paper.[3]

3. Protecting institutions against bankruptcy so they can return to normal operations quickly when the coronavirus emergency subsides. This argument is strongest where there are specific skills in their workforce or capital that will be lost if the existing employer goes bankrupt and a new employer has to rebuild those specific skills later. The big disadvantage of paying the wages of workers who are no longer needed is that it prevents them moving to other more productive opportunities. This is a particularly so for workers with skills that are easily transferable to other activities. If an institution and its workforce does not have a viable post-coronavirus future then best recognise this now and release the labour, capital and other resources for use elsewhere.

4. Maintaining effective demand. This argument has force, but the same demand sustaining result would be achieved with less damage to efficiency and innovation through generous unemployment benefits and other payments directly to people adversely affected by the coronavirus.


All this means ongoing subsidies are more likely to (and should from an economic point of view) be targeted at institutions and workers that have a clear post-coronavirus future, and where there are institution specific or higher education specific skills which will be lost if the firm closes.

How will this targeting be done when government bureaucracies lack the information and incentives to target subsidies according to these principles.  

An idea for a solution comes from the Australian response to the infant industry argument for tariff protection.[4]   In the 1970s Australia had many subsidy and tariff protected industries that claimed one day they would be able to grow up and compete in international markets.  Problem was that while any grandparent would have been delighted to see so many large and pudgy infants, it was hurting Australian taxpayers and consumers, not just through higher prices for goods and higher taxes, but through resources being locked in unproductive industries and killing incentives for innovation.  The Australian response was to cut the subsidies and tariffs to these so called infant industries so those that had a profitable future could borrow to finance their infant industry investment phase, and those that could not make a credible case to the bank rightly went out of business.  Of course financial markets are imperfect – though a different set of problems in the 1970s to now – but the right response remains fixing financial markets –supplemented perhaps by carefully focused government schemes for limited cases where financial markets cannot deliver what is needed.


Building on this Australian response to weaning infant industries off tariff protection, I suggest that the key to targeting post-coronavirus subsidies is make use of the private information employers and their bankers have about their post- coronavirus prospects.  If a firm or higher education institution can convince their bank that a loan to get them through the crisis will be repaid then they stay in business, and if not they rightly go bankrupt and release the resources for other uses. The private information employers and their bankers possess includes information about the specificity of their labour force and other resources, which will be reflected in the estimated costs of restarting operations and that will be part of their case for a loan.  If there are to be job subsidies these should follow the loans that employers are able to obtain from banks. Financial system regulators and the central bank have a role in making sure there is the financial the capacity to make the loans that are required.


These arguments apply just as much to higher education institutions as they do to firms in other industries. Universities and colleges without a credible post-coronavirus should disappear, releasing workers for more productive uses elsewhere. Universities and colleges with a credible expectation of future income streams from students (including income from government funding arrangements) and research are perfectly able to borrow to get through the crisis. Any government job subsidies need to be carefully focused on those areas of teaching and research where skills and equipment are highly specific- so for instance there is a greater case for supporting highly specialised medical research capacity than jobs in mass undergraduate business programs. Another group with a strong case is the cohort of young academic researchers and on-line teachers whose specific skills will be greatly damaged by a break from higher education. The arguments of the armies of bureaucrats and senior managers that have invaded higher education in recent years that their skills are generic should disqualify them from assistance. And perhaps their supposedly stellar skills could be tested in convincing the banks to continue to fund their activities.  Even aside from the arguments made in normal times about social benefits from certain higher education activities exceeding others.

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