Impacts of COVID on employment: a comparative perspective
Matías Lioni1
All dimensions of daily life have been affected by the coronavirus pandemic. One of the most significant has undoubtedly been the dimension of work. Disruptions in production chains have consequences in all countries of the international system, albeit in different ways. Contrary to assumptions that linearly link greater easing of quarantine measures with less economic impact, the effects on labor relations are felt regardless of the degree of social distancing and its mandatory nature.
To illustrate this, a comparison between the Scandinavian countries can be helpful, given their similar social structures, yet their differing approaches to the pandemic. Sweden and Iceland, while implementing more flexible measures regarding urban mobility, have experienced similar levels of economic disruption to Denmark and Norway, which have implemented stricter restrictions. What is the result of these different approaches to mobility? Sweden has the highest number of deaths per capita, while Iceland has used a policy combining mass testing with quarantine to keep deaths low despite keeping businesses and schools open.
Because different countries have designed different political and economic responses, shaped by their respective regulatory frameworks, there is enormous variation in the data sources that reflect the impacts, preventing a clear international comparison with uniform indicators. This will remain the case at least until the lag that official statistics from each country typically experience with respect to, for example, the labor market, is overcome. Nevertheless, it is interesting to examine the available information, and, taking these particularities into account, it is possible to conduct certain analyses.
Taking a brief look at the actions taken by governments in response to the crisis, we find that the average fiscal response in G20 countries was 8% of GDP; however, the amount varies considerably among these countries. Just five countries account for 81% of total spending on fiscal stimulus packages among the world's 20 largest economies. Among them, the package implemented by the United States is more than four times larger than the second largest, Japan's. This reflects the vast difference in fiscal capacity between developed European and US economies and those of countries like Mexico, Argentina, Brazil, or South Africa.
This structural inequality deepens during times of crisis, when developing countries' currencies devalue as a consequence of the largest capital flight in history, increased volatility, and pressure on their sovereign debt. Undoubtedly, this aspect is crucial when rethinking the configuration of the post-pandemic world, seeking to move towards one with smaller gaps in structural inequality.
However, a crucial point to consider is the effectiveness of channeling the money from these aid packages to the population segments that truly need it. One of the biggest challenges in designing public policy is creating the necessary channels to reach the intended population. On the one hand, in the United States, 14,8% of the workforce has filed for unemployment benefits, a historic record that impacts the lives of Americans and breaks all previous records. On the other hand, Germany has experienced a decrease in the proportion of workers who have applied for unemployment insurance. This not only highlights the disparate design of their respective social safety nets but also a very different political approach to addressing the same problem.
In this regard, economist Joseph Stiglitz was consulted by the website "Foreign Policy" about the US measures, and he expressed concern about the serious problems the program could cause for the economy, mainly because the resources are not being channeled appropriately. The federal government is offering loans with the possibility of forgiveness in exchange for not laying off workers; however, there is no real guarantee of debt forgiveness, and employers consider it "cheaper" to lay off workers, with the added problem that the resources are not reaching the most vulnerable population.
In terms of volume, Germany allocated a stimulus package equivalent to a quarter of that of the United States, although in terms of GDP they are similar: 14% and 11%, respectively. However, beyond the magnitude of the measures taken, their quality is crucial for effectively addressing the problem. The qualitative difference in the “German model” of response is that the government's measures were channeled through the existing employment system, aiming to preserve jobs and reaching households through employers. In other words, transfers and loans were made to companies to prevent layoffs, maintain the economy's productive capacity, and enable them to pay wages. Furthermore, a moratorium on social security contributions was implemented for the most vulnerable companies. In contrast, the “American model” relaxes the eligibility requirements for unemployment insurance, which necessarily implies the termination of a previously existing employment relationship.
This not only creates comparability issues for those of us seeking to study the problem in near real-time, but, more importantly, it shapes a dissimilar framework of social relations of production when considering a way out of the pandemic. In this sense, the diverse economic and social structures are a fundamental aspect to evaluate: housing conditions, the degree of informality in the economy, and the sophistication of manufacturing production have a significant impact and imply a need to adapt crisis response policies to local characteristics and needs.
Argentine situation
The approach taken by Alberto Fernández's government is very similar to that seen in Germany and European countries in general. Argentina has been grappling with a crisis since April 2018, exacerbated by an unpayable external debt—a heavy legacy of the Macri administration—which is deepening the external constraint at this critical juncture. Consequently, 35,5% of Argentina's population lives below the poverty line, 8 percentage points higher than at the end of 2015. In this context, it is imperative to design redistributive measures, such as a wealth tax, to secure funding for the programs implemented in response to the pandemic. Looking at the situation in Spain, Italy, the United Kingdom, Switzerland, Brazil, France, or Russia, we see that other countries with even fewer financial constraints than ours are considering similar taxes.
Beyond contextualizing the specificities of the recent local economic dynamics, the economic impacts of the pandemic do not differ substantially from those in other countries: the projected crisis far exceeds the declines experienced in 2008. ECLAC estimates the largest drop in output in our region's history; the estimated 5,3% decline is comparable only to the years 1914—the outbreak of the First World War—and 1930—the Great Depression. This unprecedented situation warrants a response commensurate with the current challenges, while remaining mindful of existing limitations.
Therefore, the assistance provided by the national government is the most significant in contemporary history. According to a report by the Center for Production Studies (CEP), 89% of households now receive income from the government.
To mitigate the economic impact, Argentina issued Decree 329/2020, which prohibits dismissals and suspensions without just cause throughout the country, with the primary objective of preserving jobs and national productive capacity. As a complement to the decree, two major programs were implemented: the Emergency Family Income (IFE) and the Emergency Assistance for Work and Production (ATP).
The first program consists of a cash transfer for informal workers, the self-employed, domestic workers, and the unemployed: so far, it has reached 8 million people. Ultimately, the IFE (Emergency Family Income) aims to reach the most vulnerable population to mitigate the loss of income resulting from the pandemic. The second program, ATP (Emergency Assistance for Work and Production), aims to reach SMEs and their employees. These types of businesses employ more than 60% of the country's workforce. To date, 98,7% of the companies participating in the program have fewer than 100 employees. The program consists of a package of measures to reduce costs for companies affected by the quarantine: a reduction of up to 95% in employer social security contributions, zero-interest loans for small businesses, and a subsidy for payroll. According to data from the General Directorate of Gender and Equality of the Ministry of Economy, 420 companies registered to receive this benefit (approximately 80% of the total number of SMEs in the country), of which 160 were selected, thus reaching 1,2 million workers, 20% of the active workforce.
Given the specific characteristics of the national economic structure, in which between 35% and 40% of the economy operates through informal channels, the integration of both programs is necessary for the measures to reach a broad and effective audience. This is a significant difference from the German program and highlights the importance of adapting measures to local conditions: the German economy is almost entirely concentrated in formal channels, meaning that implementing measures through this type of relationship allows for reaching the target population. In contrast, in Argentina, both the ban on layoffs and the ATP program apply to the formal sector of the economy, which does not exceed 65% of the total. Because the primary objective is to maintain the economy's productive capacity, the implementation of the IFE (Emergency Family Income) and zero-interest loans for self-employed individuals and registered taxpayers allows for the measures to reach a broad audience.
Thinking about what comes next
The fundamental difference between the European and Argentine policy approaches vis-à-vis the American approach is the pursuit of preserving existing social relations of production. Preserving employer-employee relations is fundamental for several reasons.
First, the predictability it provides workers regarding job security allows them to make consumption and savings decisions with a longer-term perspective while preserving their social security benefits. Second, the contributions made by the formal employment sector to the social security system are fundamental to its financing. Third, the loss of workers from their jobs implies a significant loss of intangible assets such as the knowledge of how to perform the specific tasks they carry out within the company—known in technical literature as "know-how." This is crucial because, when seeking to fill these positions in a post-pandemic scenario, the cost of the learning process, both for the company and the effort required of employees to adapt to new routine tasks, is considerable.
One final point to highlight is that several European countries, both individually and within the institutions of the European Union, are analyzing the possibility of increasing state participation in certain companies in key sectors to safeguard sovereign interests. This is unrelated to transfers and loans to maintain employment relationships, but rather involves rescue operations for struggling companies and/or the purchase of assets from strategic companies that are currently trading at historically low prices. For example, the German government and the airline Lufthansa reached an agreement on a €9 billion rescue plan that will make the German state the largest shareholder with 20% of the total capital.
On the Argentine side, the possibility of replicating this approach has been mentioned in some circles, for example, with companies like Vicentín. This firm, which has been operating across the entire agribusiness value chain for over 90 years and filed for bankruptcy at the end of last year, has the National State as one of its main creditors through Banco Nación. Beyond this case, in which no progress has been made, there have been no other known cases where a bailout with equity participation has been considered. However, we believe it is at least appropriate to conduct a thorough evaluation of each of Argentina's strategic value chains.
In short, the unprecedented nature of the current pandemic creates a climate of uncertainty in which measures are being taken without the ability to use past experiences as benchmarks for success. All societies and states worldwide—subnational, national, and supranational—are analyzing and implementing extraordinary measures. Among these, we can discern significant differences mediated by institutional frameworks, economic structures, and fiscal leeway. However, a fundamental political consideration when addressing this problem is the need to protect productive capacity through the continuity of labor relations. Without preserving this crucial aspect of society, the path to recovery will be even more arduous.
1- Economist (UBA). MBA from Beijing University and Member of OCIPEx. Note published on 31-5-2020 in https://ocipex.com/author/matias-lioni/
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