With much attention on the impact of the COVID-19 pandemic on labour markets, Nicholas Apergis, Professor of Economics at the University of Derby, explains how important it is for firms to maintain their labour force.
No matter how deep the coronavirus crisis is, and how far off it may go, there will definitely be an ‘end’ period. Both economies in general and firms, in particular, have serious concerns about a potential negative economic impact due to the coronavirus outbreak. This illness pandemic can be easily considered as a negative supply shock hitting the economy, expected to lead the world economy into a deep recession (if not depression) since economic contagion is now spreading as fast as the disease itself. As all supply shocks, this one will also cripple the economies’ supply side.
There is a long history of similar (supply) crises, such as the 2008 financial crisis and, dated back, the 1929 real economy crisis. Both of these previous examples almost devastated the world economy, which recovered very slowly in the former case and only after a world war in the latter. But the COVID-19 pandemic crisis has a very unique idiosyncratic characteristic: if it lasts long (say, beyond summer 2020), this could disrupt not only capital formation (i.e., investments), but also labour participation and productivity growth. Unlike the example of financial crisis, an extended freeze will definitely damage the supply side of the economies and there may be no turning point even with a huge intervention by policymakers.
Focusing on the labour market, although at the beginning firms restricted visitors to their offices and encouraged remote working, later, many of them considered layoffs to ensure they make it through the pandemic crisis. However, basic macroeconomics mentions that one of the crucial drivers of economic growth is labour. Therefore, when the economy enters the recovery phase over the post-virus crisis, it is highly crucial that this labour force is still there.
Impact on economic sectors
Nevertheless, a cost-cutting reflex is understandable. CEOs usually make responsible decisions to keep their firms afloat. But those who manage the economic effects of this crisis in a compassionate way, create more value for their firms and will come out of this pandemic stronger than before. Thus, prior to announcing deep lay-offs, it is imperative they consider these measures first. Many CEOs assume that if they admit that a firm is facing turbulent times, it will scare away their best employees. This is incorrect. We are all aware that our planet is going through a global pandemic. Certain economic sectors are already getting hit hard by changes in consumer behaviour, leading to a serious slowdown in many parts of the economy and increased uncertainty expected to impact firms’ activities, including profitability. This can be illustrated by how certain airlines responded to the aftermath of 9/11. While many experienced huge financial losses, those who developed closer and more compassionate relationships with their personnel, especially amid the crisis period, emerged successful, demonstrating remarkable resilience. The literature identified the reasons behind this miracle. Evidence indicated that one of the key factors accounting for this resilience was the maintenance of positive employee relationships. Fostering relational reserves with your staff and avoiding lay-offs seems crucial in order to recover from any crisis.
Transparency is key
Hence, it is advisable that CEOs, instead of forcing their employees to second-guess what might be in store for them, be clear about the financial health of their firm and what goals are prioritised. These goals should not communicate empty statements they know that are not true, because these can be counterproductive when people are worried about their jobs. It is more realistic if they clarify that they priorities decisions on job security over other, slower changes. Therefore, the question that arises is what firms should do with their labour force in the midst or after the crisis?
What happens after the crisis is over?
The answer potentially involves a number of drastic steps: if firms go ahead with pay cuts to save job losses, they first must lead by example and make pay cuts that impact their own day-to-day activities, otherwise, there is the danger that their staff will take it very negatively. In addition, the staff should get a commitment for a pay cut from their senior leaders themselves. For example, several airline CEOs have been are temporarily forgoing salaries or taking pay cuts amid looming cutbacks for the industry. Next, before layoffs, firms must consider all their non-obvious options for reducing costs.
For instance, a four-day working week for roles where they have excess capacity or the option of the opportunity for unpaid leave can substantially help the cost reducing process. By making it clear that one of the overriding goals is to avoid lay-offs, firms might find that employees are amenable to the personal sacrifices inherent in activities, such as salary-increase freezes, bans on overtime, pausing of payments into retirement funds, reduction of vacation days, and other similar measures.
Finally, firms must recognise that, as bad as things look, government and central bank assistance is on the way (as it is widely happening around the globe. We should keep in mind, however, that both arsenals to combat the crisis can be easily exhausted in a prolonged crisis period). Businesses that find themselves struggling to secure financing should file applications to both types of policymakers to lending schemes offered.
In addition to gaining access to such borrowing facilities, firms can benefit from lower initial repayments, since governments have stated that it would cover the interest payments for a certain time span (e.g. six months), while these firms remain liable for the capital repayments. Businesses should apply to the lending schemes in the normal way they would apply for a loan facility. Even in cases and under certain criteria that in normal times the firm is not entitled to secure such a loan, in these uncertain times these businesses can secure financing (based on a sound borrowing proposal).
Overall, the public is more likely to be supportive of economic stimulus packages in the current case where the downturn is hard to blame on one particular industry. Economic aid might also be targeted towards firms that can prevent layoffs.
This virus crisis can teach many important lessons. One common misconception is that many primarily look out for themselves in turbulent times. In contrast, the firm’s experience can be that during a crisis like this one, individuals overwhelmingly prefer to make sacrifices if it means that their firms can help more of their colleagues and themselves to keep their jobs.