Last week, the Federal and South Australian governments announced a $2.4 billion rescue package for the Whyalla steelworks. The steelworks employs 1,100 people directly, making the cost of the package around $2.2 million per worker. In a cost-of-living crisis and with government budgets firmly in the red, why are governments so quick to spend such large sums of money on such a small group?
A key reason is the obvious one—job loss is costly. It comes with worse economic (e.g. lower incomes) and non-economic (e.g. poorer mental health) outcomes for those affected. And, in regional areas—like Whyalla—a major employer can account for a large chunk of the area’s employment, with workers having limited outside options.
Previous e61 research analysed the cost of job loss for workers in sectors at the coalface of decarbonisation. It found that workers made redundant from any job see their income decrease by 43% in the following year. But workers made redundant from coal-fired power plant jobs saw a significantly larger decrease in their income of 69%. This differential impact persists over time (Figure 1).
Figure 1: Earnings after redundancies
The non-economic costs of job loss can also be significant, for example the mental health drop associated with losing a job is estimated to be the same as sustaining a serious injury.
These show significant and long-lasting costs for those affected. So, it is understandable that governments want to assist those potentially affected by job loss, such as the workers at Whyalla steelworks.
However, we’ve seen this movie before.
It was less than a decade ago that the Whyalla steelworks was last put into administration. At that time, the initial preferred buyer was eventually gazumped by GFG Alliance (the owner recently put into administration) due to the latter’s commitment to local investments, decarbonisation and ease of federal approvals.
We’ve also seen Australian governments of all stripes provide tens of billions of dollars to the domestic automotive manufacturing sector. But that support couldn’t halt the sector’s decline, and instead left workers under-prepared for what came next.
Keeping workers at dying firms stops them from transitioning to more productive jobs—and may even hurt them in the process. The repeated decision by governments to bailout failing firms incentivises workers to stay working in these firms and stops them from finding new opportunities. It also prevents productive businesses access to the workers they need.
And these kinds of government support packages are expensive. If we take the government’s estimate of potentially affected downstream jobs from a Whyalla steelworks closure, the total number of affected workers could have been as large as 3,100. This puts the cost of government assistance at around $800,000 per worker affected.
This raises the question—is there a better way governments could spend $800,000 per worker to support workers, including facilitating productive transitions rather than tying workers to failing firms?
Given limited Australian evidence on the drivers of the costs of job loss, policymakers need to look to global evidence about the nature and drivers of these costs. This highlights three key channels:
- Human capital: Spending time out of a job may see a worker’s skills become “rusty”. This is especially hard for people in dying industries, whose existing skills may have become less valuable.
- Match value: Finding the employer that “best matches” with a worker is a difficult process that takes time. A rushed return to work, or one done with limited information, may increase the wage loss.
- Firm effects: After the loss of a job someone may go to a firm that is seen as safer, or certain types of firms may hire unemployed workers because they believe they can bargain down the hiring wage of someone without a job (due to asymmetric information).
International evidence highlights that the third channel—firm effects—explains a large proportion of observed wage losses. This tells policymakers that retraining and unemployment benefits aren’t silver bullets to support worker transitions—but that the real value comes from helping people find their next job.
The benefits of assisting people in finding their next job, and the right job for their skills, was shown in e61 work on income losses during the Global Financial Crisis. There were significantly different income losses depending on re-employment timing (Figure 2).
Figure 2: Wage losses moderate for those who quickly find sustainable work
Workers who find permanent re-employment within 5 years see their wages fully recover after 10 years, while those who find re-employment after 1 year return to their previous income trajectory after 4 years.
So how do we help people find their next job? That’s the $800,000 question.
A start would be to focus on employment services, and other mechanisms that help employers and workers identify each other and come together quickly, including through improved information. By focusing on propping up failing businesses in the short-term, policymakers are failing to plan for the future needs of the workers at those very same business.
Matt Nolan
Matt is a research manager at the e61 Institute and a sessional lecturer at Macquarie University. His research is focused on analysing income distributions using microdata, with a focus on how taxes, transfers, and changes in labour market settings influence the distribution of income. Matt previously worked at the Inland Revenue Department of New Zealand and as a teaching fellow at Victoria University of Wellington. He holds a PhD in Philosophy (Economics) from Victoria University of Wellington.
Lachlan Vass
Lachlan is a Research Manager at e61. He leads work at the intersection of economics, data and public policy, with a current focus on firms and productivity. Lachlan’s work experience spans the private and public sectors, both in Australia and internationally In these roles he led teams bringing economics and novel data together to help inform, advise and solve policy issues across a range of policy areas, including social policy, financial markets, trade and labour markets. Lachlan holds a Bachelor of Commerce (Economics) and Honours (Economics) from the University of Melbourne.
