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A new ‘actor’ invisible to the naked eye – coronavirus – has appeared in the labour market. In a few days, it brought significant changes to the economies of all leading countries. Instead of cooperation – a necessary ingredient of economic activity – it forced everyone to practice ‘social distancing’, which is leading to a recession and threatens to destroy millions of jobs. Unfortunately, such treatment has no alternative, and we must think about how to mitigate its economic impact.
The coronavirus is not here to stay, but what will be left when it has gone? Many experts have already started to actively discuss what life might look like after coronavirus. But there are long-term prospects, and there are short- and medium-term prospects. The strategy and tactics for ending mass self-isolation require thorough thinking now. Although we will only be able to fully assess the consequences after quarantines have been lifted, many problems are already evident today and action must be taken now, too.
Scope of the problems
The crisis is spreading unevenly across regions and activities. There may even be winners, such as food retail with delivery or technology companies providing remote work. But they will be few. All types of commercial services (non-food trade, hotels and restaurants, transport, recreation, culture, sports, tourism, etc.) are at obvious risk of temporary stoppages due to consumer self-isolation. They account for about one third of all jobs in the country. But some actors in the industry and construction will also face a strong blow, as a knock-on effect.
The unconventional nature of this crisis requires unconventional measures. The main challenge in the labour market is to enable those who have lost their jobs and income to survive this crisis and then quickly return to paid work. Preferably, the jobs they had before the crisis. Mass destruction of the specific human capital created by years of work and investment cannot be allowed. A rapid subsequent recovery is only possible on the foundation of the physical and human capital that already exists.
This means that the potential of existing business must be preserved at all costs so that it can return to normal functioning once the epidemiological restrictions have been lifted. If business disappears/goes bankrupt/liquidates, subsequent recovery will be much harder, and mass and prolonged unemployment may become a sad and lasting reality. Therefore, by helping business, we help people.
Experience of past crises
Each new crisis is different to the previous one. However, this does not mean that past experiences have no lessons to be learned. Russia has survived a series of severe crises (1992, 1994, 1998, 2009, 2015) while avoiding high unemployment. And all highs and downturns in employment ended up being moderate and short-lived. What helped then, and is that applicable today?
For all previous troubles, the flexibility of the Russian labour market helped to contain unemployment. This is a special flexibility – a kind of ‘reverse flexibility’, when companies are not allowed to make their employees redundant, but are not prevented from reducing their salaries. In the ‘turbulent’ 1990s, administrative leave and employer-initiated cuts in hours, as well as salary delays avoided massive layoffs. Labour costs fell by about a third after each shock. On the one hand, it shifted all costs to employees, but on the other hand, it minimized layoffs by buying time to create new jobs. Large enterprises received various types of support from the government: subsidies, tax and other benefits. Not everything was honest and fair, but mass unemployment was avoided. In 2009 and 2015, there were no wage debts at all, and administrative leave became rare. Nevertheless, the flexibility of wages by juggling the rises and bonuses that make up the variable part of wages generally remained.
Many of those who lost their jobs at large enterprises gradually moved into the low-paid segment: salespeople, drivers, security guards and the informal sector. The latter should be thanked separately, as it gave millions of people work and income. This redistribution replaced paltry unemployment benefits and supported the generally high level of overall employment.
Can we use this formula today? I think so, but only in part. Our past experience shows that in a crisis environment wage flexibility is a serious advantage and must be preserved. In this situation, to fight against flexibility is to fight against jobs. Employees are not interested in the bankruptcy of their employers and will prefer some losses in earnings to a total loss of employment. Being able to manage work time flexibly in such emergency conditions helps retain employees and avoid layoffs. All experts say that it is important to keep employees connected with their employers during a crisis.
Another market
On the other hand, the structure of employment has changed greatly in recent decades. In the 1990s, the majority worked in large and medium-sized enterprises, for which the changes in the number of jobs is strictly regulated by the state. At the same time, they have more room for wage manoeuvre than small businesses. Currently, about 32 million people are employed in the public sector, as well as in all large and medium-sized enterprises of the country, where half are state employees. Not all of them have a cloudless life, but state companies and public sector employees will be paid in any case.
And where are the remaining 40 million? These are individual entrepreneurs and those who work for them, employees of small enterprises, as well as those who are called self-employed, including those working informally. The work of many of them is related to the provision of the very services that we cannot physically consume today while ‘self-isolated’. In such small and microscopic businesses, the safety margin is minimal. If it closes for a week or two, it risks never reopening. And no administrative restrictions on layoffs work here. All this means that job cuts may be huge.
Lines of defence
What do we do? It seems to me that there are two lines of defence and it is necessary to use both.
The first is to support the income of those who have lost their jobs or income (imagine: a restaurant has temporarily closed, nobody has been dismissed, but there is no salary). People must be able to survive this difficult time.
The second is to support the business that has completely stopped through no fault of its own. This business will be extremely necessary and especially important when the epidemic is over. Not only will its services will be required, but also its salaries and taxes. If in past crises the main decline was in industry and construction, now the service sector.
The amount, speed and scope of support are critical. First, nobody can be lost: freelancers and the self-employed are also our citizens and may also need as much help as others. Secondly, it is not enough to have the resources: we need the technological tools to get this help to everyone, simply and quickly. We should not forget that the employment situation (the size of the enterprise, the type of employment relationship, and whether it is for hire or not) varies greatly. At the same time, our labour legislation is not adapted to this situation at all. The question arises: what tools are there?
Support for those who have lost their jobs and income. Loss of work and income means that there is nothing to eat and nothing to feed your children with. Savings, if any, will be enough for many for a while. The most obvious support tool is unemployment benefit, which is administered by the Employment Service. However, these services are, first of all, institutionally and resource weak: after being transferred completely to regional subordination and after many years of extremely low registered unemployment, they are no longer a significant player on the labour market and are unlikely to cope with the flow of applications. Secondly, the benefits themselves are very small in size - now, the maximum is 12,130 rubles (about $165), and the minimum is 1,500 rubles (about $20). Many categories of citizens can only claim the minimum benefit, the amount of which discourages them from applying to the employment service: the low unemployment rate in recent years is largely explained by the amount of benefits, as those who lost their jobs preferred to apply for any available, including informal, employment.
Moscow city and regional authorities have recently decided to increase unemployment benefits: up to 19,500 rubles in Moscow (about $265) and 15,000 rubles in Moscow Region (about $200). But access to them also depends on compliance with certain conditions. Supporting different groups of self-employed people, including individual entrepreneurs, is a more difficult problem: all of them can only count on a minimum benefit of 1,500 rubles.
Another group in need of support includes those who have not been made redundant but are laid off without pay. In other words, there is formal employment, but no income. Do they deserve help? In my opinion, they certainly do. Migrants – internal and external, who have lost their jobs and are unable to return home – also need help.
Some countries – the USA, for example – are prepared to give money to a fairly broad category of their citizens and do it quickly. The vast majority of taxpayers will receive full federal aid ($1,200 for each with an annual income less than $75,000, plus $500 per child; those who earned more than $75,000 last year will receive less, and those who earned more than $99,000 will not receive payment). More importantly, a small and medium business assistance package has been adopted, which is rightly considered the foundation of the American economy and political stability. Of course, all this may not be very effective and not very fair, because not all recipients of such transfers are in dire need of it. However, a more targeted approach suggests that we can quickly identify everyone who really needs help. And if we can’t? Then the targeted approach is neither effective nor fair.
Supporting business. A special problem is saving medium, small and micro businesses. It seems to me that this is a fundamental thing. Its destruction would impede the subsequent recovery of the economy (employment and income) and bring the threat of high and long-term unemployment. If the state (perhaps?) knows how to help large companies and with what, then supporting this heterogeneous population is a much more difficult task. The set of potential measures is widely discussed; it includes tax holidays, interest-free loans, reduction and postponement of rent payments, etc. A business that has lost turnover cannot pay its salary, rent, taxes or interest on loans. Then the state should look for ways to at least partially cover or write off these expenses as well. Follow the path of paying part of wages to employees if employers agree not to make them redundant. A special point is minimizing control and supervision measures, many of which would be blatantly damaging in the current situation.
The question arises: how much would a rescue cost, and at whose expense? It costs a lot, and there is only one bill here, which is to the state. In the U.S., the amount of emergency and unconditional aid alone is 5.5% of GDP, while in Western Europe it is less, but also goes on a percentage of GDP. As for the full package of measures, which includes, in addition to direct payments, deferrals of various mandatory payments and government guarantees to maintain liquidity, the amounts are already measured in tens of percent of GDP. These are preliminary estimates, and the scale of aid may even increase.
The Russian government has reserves in the form of the National Welfare Fund, which is more than 7% of GDP, much larger than the average direct fiscal stimulus (supporting payments) of the US and European countries. The NWF was created as a rainy-day insurance fund. This day has come. There are no such reserves in regional budgets, and attempts to solve the problem at the expense of the population or at the expense of sinking businesses will not help and would only undermine both the economy and the trust in the state for years to come.
