Covid pandemic and economic crisis: Why does the impact on labour markets vary?

Workers at a re-rolling factory in Dhaka	—FE Photo Workers at a re-rolling factory in Dhaka —FE Photo

Although the adverse effects of economic crises get transmitted to labour markets quickly, the results vary from country to country. While such variations have their roots in the systems and structures, public policy also plays an important role. Hence, from a policy point of view, it would be useful to look at the variations and their underlying features.

DIFFERENCE BETWEEN THE TWO SIDES OF THE ATLANTIC: Before the pandemic struck (in February 2020), unemployment rate in USA was 3.5 per cent -- a level that is regarded as reflective of full employment. When the country started recovering from the Great Recession of 2008, unemployment rate also started to come down, and in 2019, went below 4 per cent -- a figure that was not seen in many years. On the other hand, unemployment rate in countries of western Europe, e.g., France, Germany and U.K. did not decline to such a level.

But retrenchment of workers started in the USA immediately after the imposition of lockdown as a measure to fight the pandemic, and as a result, the unemployment rate also started to go up. Compared to February 2020, the rate almost quadrupled by April. On the other hand, unemployment did not rise so much in France, Germany and U.K. despite lockdown. 

The rate of unemployment in the USA started to go down as soon as economic activities were allowed to resume, although it remained almost double the pre-pandemic level even after several months. In fact, the number of new jobs created on a monthly basis declined gradually, and the figure was very small in some months (like in December). Even after the recent improvement in numbers, the overall rate (6 per cent in March 2021) has remained way above the pre-pandemic level.

Of course, the countries of Europe mentioned above have also not been able to keep their unemployment rate from rising throughout the year. While in Germany and UK the rate crept up gradually, the rise in France was sharper and greater in magnitude. 

The key question in the context of the experience mentioned above is how one can explain the differences - especially the basic difference between the two sides of the Atlantic. One notable characteristic of the US labour market is that both hiring and firing can be done easily. Many jobs are such that employees can be retrenched on short notice or without notice. When the lockdown was imposed in order to slow down the rate of COVID infection, many enterprises retrenched workers almost immediately. Of course, there is an unemployment allowance, and one of the measures adopted at the beginning of lockdown was to extend the duration of unemployment benefits. Also, rehiring started when lockdown ended and businesses started to reopen.

On the other hand, labour laws in Europe - especially in countries of western Europe do not allow such easy retrenchment. Moreover, in several countries, measures adopted to support the economies when lockdown began included mechanisms to save jobs by preventing retrenchment. In this context, it would be appropriate to mention Europe's "social model", the main characteristic of which is to establish a welfare-oriented society through decent work and social protection. In this model, emphasis is given to stability and quality of jobs. 

Among the countries that follow welfare oriented social model, UK and Denmark are notable examples of how retrenchment was prevented during the current pandemic-induced crisis. In those countries, economic support programmes were adopted simultaneously with lockdown which included furloughing workers with partial payment and providing credit for enterprises to meet the cost of doing so.

THE CONTRAST BETWEEN CHINA AND INDIA: The impact of the pandemic on labour markets varies in the developing world as well. In that context, it may be useful to contrast the experiences of China and India. Monthly unemployment rates in these two countries for 2020 show interesting variation.

The unemployment rate in China was slightly higher (5.3 per cent and 6.2 per cent) in January and February of 2020 compared to the rate (5.2 per cent) prevailing before the pandemic. Although the rate started to fall after February, it did not go back to pre-pandemic level until August. The picture of India was different. The unemployment rate tripled (from 7.2 per cent to 23.5 per cent) during the period of the first lockdown (in April and May), but started to decline in June and returned to almost the pre-pandemic level by August-September.

Two possible explanations of the difference between China and India may be suggested. First, the pandemic in China was basically limited to one province and in one big city. So, its impact at the national level was not so visible. Second, the government, despite the adoption of some aspects of a market oriented economic system, maintains careful control on the economy and does not let the unemployment rate go up too much.

On the other hand, in India, the first lockdown covered the entire country and was very strict. As a result, all economic activities came to a standstill. When economic activities cannot be undertaken in a market-based economy and there are no alternative means of keeping workers in place, unemployment is inevitable. Although India also adopted an economic recovery programme, that came after a considerable amount of time following the imposition of lockdown. As a result, the adverse effect on the labour market could not be prevented.

One may naturally ask why unemployment increased so much during the lockdown and how it went down so quickly after the lockdown ended. The first question arises because India is known to be a country where labour laws are considered to be pro-worker and are thought to provide protection to workers against retrenchment. It needs to be noted in this context that over 80 per cent of the employed labour force in the country are engaged in the informal sector, but labour laws are by and large applicable to the formal sector. In that situation, the sudden imposition of lockdown resulted in the closure of millions of small and micro enterprises and those engaged in them went out of work. However, once lockdown ended, those enterprises (or most of them) may have been able to return to business, and workers engaged in them were also able to return to work.

WHAT IS HAPPENING IN BANGLADESH: The experience of Bangladesh may have been somewhat similar to that of India in some respects, although there are significant differences in the structure of the two economies. As for similarities, a high proportion of employment in the informal economy and in agriculture are notable. One significant difference is in the structure of the manufacturing sector. While India's manufacturing sector is quite diversified, that in Bangladesh is highly concentrated in one sector, viz., ready-made garments (RMG) which is also almost entirely export-oriented. Furthermore, Bangladesh depends a good deal on overseas employment - more than a third of the annual addition to labour force depending on this source. These three features of the economy of Bangladesh had significant implications for the manner in which employment was affected by the pandemic-induced crisis.

The informal economy returned to some kind of life out of compulsion because in the absence of any alternative sources of livelihoods one has to somehow eke out a living. Even there, questions remain because of shortfall in the implementation of the government's economic support programme meant for cottage, micro and small enterprises. In the manufacturing sector, the major industry (viz., RMG) is yet to return to full life; and what is happening to employment in the sector is anybody's guess. On the external front, 2020 was basically a lost year, and we are yet to see a resumption of overseas jobs. On the whole, the employment situation looks far from normal. 

Loss of jobs is not the only way in which labour markets are affected by an economic crisis; real wages also face downward pressure. And that is happening in Bangladesh as well. Overall wage growth has been declining throughout 2020, and the rate of decline was quite sharp for manufacturing. For construction and fisheries, the growth rates of money wage rate are well below that of the inflation rate - thus implying a decline in real wages.

While the above-mentioned evidence is indicative of a soft labour market, with the "strict lockdown" imposed in the face of the second wave of the virus, the labour market is bound to suffer again. 

PUBLIC POLICY MAKES A DIFFERENCE: Public policy has made a difference to the variation in the performance of the labour market - be it between the two sides of the Atlantic or between countries in the developing world. As outcomes are influenced by policies and strategies pursued, if any government is serious about improving the employment and labour market situation, it will have to act accordingly.


Dr Rizwanul Islam is an economist, and former Special Adviser, Employment Sector, International Labour Office, Geneva. This article draws on his recently published book "Coronaghatay Orthoniti O Shromobajar" (Baatighar, Dhaka). [email protected]


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