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Using monthly firm-level survey data, this study examines the effects of the three major government support measures on labour costs of Japanese SMEs during the COVID-19 pandemic. Policy measures were useful for supporting troubled SMEs to mitigate the effects of the economic downturn. However, they may have supported not just otherwise viable corporations, but also unprofitable but still operating corporations – often referred to as ‘zombies’. Our empirical results suggest that policy measures have heterogeneous effects on corporate activities. ‘Employment adjustment subsidies’ and ‘COVID19 subsidies’ had persistently mitigated the decline of labour costs, suggesting that employment and wage adjustments might have been inappropriate for improving labour productivity. On the other hand, ‘funding supports’ by banks, which were accompanied by the obligation to repay the principal in the future, had a negative and persistent impact on labour costs. The results suggest that, unlike the other support measures, funding supports were policies that may have improved labour productivity by reducing labour costs during the pandemic.

The impacts of policy measures on Japanese SMEs during the pandemic