The Effects of COVID-19 and JobKeeper on Productivity-Enhancing Reallocation in Australia

The consequences of the pandemic for potential output will partly hinge on its impact on productivityenhancing
reallocation. While recessions can accelerate this process, the more ‘random’ nature of the
COVID-19 shock coupled with policy responses that prioritised preservation could disrupt productivityenhancing
reallocation. Our analysis based on novel high-frequency employment data for Australia shows
that labour reallocation (and firm exit) remained connected to firm productivity over 2020 and 2021.
However, outside of the initial acute phase of the shock the relationship weakened significantly compared
to history. Australia’s job retention scheme (JobKeeper) initially reinforced the connection between growth
and productivity, supporting more productive firms. But it became more distortive over time and as the
economy recovered.