New job subsidies scheme has its work cut out

 

ANALYSIS:The softening of criteria for employers will get more of them into the subsidies system, but questions remain over the scheme’s usefulness

MARY COUGHLAN to “vulnerable but viable” exporters: here’s €9,100 to help you pay the wages, as long as you commit to keeping as many as 10 staff for every subsidised job.

Exporters to Mary Coughlan: thanks, but, um, that’s not especially helpful.

The announcement by the Minister for Enterprise, Trade and Employment in August of a €250 million scheme to “protect up to 27,400 vulnerable jobs in the productive sector of the economy” hasn’t exactly been met with ecstatic whooping by employers; this week the Tánaiste admitted she was “surprised” by the low take-up of the scheme.

With the first round of applications yielding approved subsidies of a more modest €68 million (supporting 7,478 jobs over 15 months), Ms Coughlan’s department now plans to broaden the eligibility criteria.

But do wage subsidies actually work or are they just a temporary – and costly – sticking plaster?

While employees whose jobs are supported by such schemes may feel more secure in the knowledge that their employer is receiving State support to pay their wages, critics of wage subsidy schemes argue that they pose a “deadweight” loss to the economy: in other words they pay for jobs that would otherwise not have been lost.

Fergal O’Brien, economist from employers’ group Ibec, believes the Government’s priority must be to preserve as many jobs as possible, despite the risks. “I think it is inevitable that there will be some element of deadweight with these schemes, but I think the rationale is still strong, because the cost of unemployment is so great,” he says.

O’Brien has some sympathy with what the Government was trying to do when it set up its original eligibility rules, which were designed to eliminate deadweight. But they went too far, he argues.

“It was so restrictive in terms of the criteria. Anyone with less than 10 employees were excluded, for a start,” says O’Brien.

Crucially, the food and drink sector came a cropper because the conditions stated that, to receive a subsidy for an employee, an employer had to keep a certain number of full-time jobs until the end of 2010.

“Food and drink exporters, who have been affected by the global commodity price collapse, would have a high number of seasonal employees – permanent, but seasonal. So they found they were not eligible,” O’Brien notes.

The figures released by the Government this week suggest that it is generally larger companies who were approved in the first round.

The 453 approved employers will receive support for an average of 16 employees, for which they have committed to retain a total of 35,283 jobs, or 77 employees per company. This indicates that companies chose a ratio of five committed additional jobs to every one for which they wanted a subsidy.

The more jobs that the company committed to retain for each subsidy, the higher the points they scored. This made the scheme biased in favour of larger employers – arguably the kind of companies most likely to have enough reserves to survive an economic crisis and most likely to be able to absorb the cost of firing and rehiring.

But the scoring system also made it difficult for companies who really did need the cash to make a call on how many jobs they needed to promise to keep. And the clawback conditions meant that these couldn’t simply be empty promises.

As the winners in the first round were only informed this week, we are some way off discovering whether the subsidies will work.

Critics argue that subsidies are simply a very visible way for the Government to look like it’s doing something about the jobs crisis. However, the lessons from Germany, which has experimented with different schemes to varying degrees of success, is that these schemes can work if they are structured correctly.

As director of Forschungsinstitut zur Zukunft der Arbeit (Institute for the Study of Labour), German economist Prof Klaus Zimmermann has seen both the merits and flaws of wage subsidies.

“Global wage subsidies to entire industries or all companies to encourage new employment are very expensive and provide no substantial employment effects,” he says. But subsidies granted to individual companies to hire unemployed people have been effective, especially when combined with job-related training.

Although it is aimed at full-time workers, the Government’s Employment Subsidy Scheme has some things in common with Germany’s successful Kurzarbeit, or short-time work programme, in the sense that the cost of paying existing employees is shared, Prof Zimmermann says.

“The programme is very effective, since it mainly applies to the high-quality workers from the export-oriented industries,” he explains.

“These high-skilled workers are of value; the firms are anxious to keep them since they are afraid they cannot find such workers after the crisis is over.”

But the schemes are not without risk, Prof Zimmermann adds.

“The danger is that such programmes delay necessary structural adjustments, and in general they are not justified for normal economic periods,” he says.

“From all this, I find the Irish model to have a high potential to function if applied to the export-oriented companies. But I am less optimistic if applied to companies in general and for a long time.”

The Tánaiste will give details of the softened criteria for the subsidy scheme, which is co-ordinated by Enterprise Ireland, next week, and has already said it will be extended to non-exporters.

At Ibec, O’Brien believes this time around there will high demand for the scheme from non-exporters. But he would rather see those exporters who were put off by the original application process prioritised, alongside companies in the sub-supply sector (who supply goods and services to exporters), employers in seasonal sectors and employers who have been hurt by cheaper imports.

The debate about how good wage subsidies are at spurring economic growth will continue as budgets tighten. In the meantime, the message from the Government to employers seems to run a little like this: Come and get it if you think you’re hard enough (but can also prove you’re having a rough time of it right now).