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What’s Behind the Victorian Recovery Roadmap

Medical authorities have praised the Andrews government’s recovery roadmap but the business has slammed it as an over-reaction. The Prime Minister has said that he hoped the Andrews’ plan is the worst-case scenario. He has said that NSW is the gold standard with the economy re-opening while contact tracing is used to control the spread of the disease.

The federal government believes that the slow recovery plan proposed by the Andrews government will inflict unnecessary damage on the national economy. However, there is evidence that government restrictions are a minor factor in the current pandemic induced recession. A bigger factor is consumer confidence based on the public perception of health risk.

University of Chicago economists Austan Goolsbee and Chad Syverson, for example, have analysed consumer behaviour in neighbouring regions with different social distancing restrictions in the US. They found voluntary changes in behaviour to reduce risks of catching COVID-19 were the major driver of lower economic activity. Government-imposed restrictions, they calculated, accounted for less than 12% of the total effect.

Analysis, by Professor Jeff Borland from Melbourne University, of the situation in Victoria confirms that perception of the health impacts is more important than restrictions. The analysis shows that Victorian employment was tracking along the same curve as the rest of Australia until the second wave occurred. Then, before restrictions were imposed, unemployment rose as the prevalence of disease increased. Once COVID-19 re-emerged in late June, job losses in Victoria accelerated. By early August Victoria had lost about 4% more jobs than other states.

The businesses that are likely to be affected first are accommodation and food services and arts and recreation services because they involve high levels of personal contact. The big question is to what extent the effect on employment in those sectors has been due to government rules or consumer behaviour.

Analysis by Professor Borland shows Victoria’s jobs changes in these two sectors were relatively consistent with the rest of the country until June. (Arts and recreation did slightly better, food and accommodation slightly worse.)

The situation began to worsen in June with Victoria’s second-wave outbreak. This happened even before the Victorian government imposed stage 3 restriction on July 4.

In the two weeks prior to going back to stage 3, Victoria went from an average of about 16 new cases a day to 72 cases a day. Over the same period, the number of jobs in Victoria in accommodation and food services fell by 3%, and in arts and recreation services by 4.7%, compared with the rest of Australia.

Professor Borland concludes:

“After the imposition of stage 3 restrictions the pace of decrease in jobs in Victoria was relatively steady. It matched the rise in COVID-19 cases (to an average of more than 450 a day in early August). Job losses do not seem to have been bunched around the dates restrictions were imposed, as might be expected if those restrictions were the main explanation for job losses.

All of this suggests that while the Victorian government’s path to remove restrictions will undoubtedly influence the level of economic activity in the months ahead, relaxing restrictions immediately would not bring the economy back to where we were in March.

It would only make the road to full recovery much slower and more uncertain.”

The Victorian premier’s strategy is that eliminating the virus will lead to a faster economic bounce back than simply suppressing the virus. Time will tell if this correct.

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