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Labor Market Responses of Firms to the SARS-CoV-2 Induced Economic Slowdown
November 13, 2020

Opinion: Samarth Gupta, Bornali Bhandari, Ajaya Sahu and K S Urs 

 

A Retrospective on H1: 2020-21.

 

In the September Quarterly Review of the Economy, NCAER had forecasted that GDP would contract in H1: 2020-21, although the rate of contraction would moderate in Q2: 2020-21 compared to Q1: 2020-21.   In such times, cost-cutting is a common response of firms.  These typically take two forms — (i) layoffs: firms reduce their workforce and; (ii) pay-cuts: firms implement pay cuts. While the former has a dual impact of aggravating unemployment & reducing consumption, the latter reduces consumption. Of course, both of them will have a wider multiplier impact on the macro-economy.  Understanding the nuanced variation in the responses across firm-size and type of workers can, thus, have key policy implications.

 

We use the June and September 2020 Rounds of NCAER Business Expectations Survey (N-BES) to analyse firms’ responses to SARS-CoV-2 in terms of their employment and wages decisions about their permanent and temporary workers during H1: 2020-21. Wherever relevant we use data from previous rounds too.  The N-BES has been conducted on a quarterly basis since 1991 and includes 500-600 firms across six Indian cities. Temporary workers are typically low-skilled with contract duration of less than one year and limited social benefits, if any. Permanent workers are engaged in specialised core tasks of the firm.    

 

Layoffs

The share of firms which responded that they had reduced temporary workers over the last three months went from 7.5% in March 2020 to 44.7% in June 2020 to 30.9% in September 2020.  The corresponding numbers for permanent workers were 2.6%, 30.2% and 23.2There are important distinctions between responses of small (Annual Turnover ≤ Rs 100 crores) and large firms (Annual Turnover > Rs 100 crores).

 

In June, while 30% of small firms said they had laid off some permanent workers in the last three months, only 24% of large firms had done so (Figure 1). Similarly, 41% of smaller firms responded that they had laid off temporary workers in the duration between April and June compared to 35% of larger firms. Unsurprisingly, firms were more likely to terminate the employment of temporary workers, compared to permanent workers, owing to the skill premium of the permanent workers.

 

By September, however, the likelihood of lay-offs across firms had declined substantially. Further, the distinction across the two types of firms and workers had nearly vanished. Between July and September, nearly 20% of small and large firms were likely to terminate employment of permanent workers. The corresponding figure for temporary workers were 18% for small firms and 24% for large firms. 

 

As the economy has recovered, the propensity of firms to use lay-offs as a cost-adjustment measure lessened.  

 

Pay-cuts

Nearly 49% of firms said they were levying pay-cuts for their permanent workers in June 2020 compared to March 2020 levels. By September 2020, this ratio fell to 35%. For temporary workers, 59% of firms in June 2020 and 57% in September 2020 responded they had reduced wages.  

 

In the early aftermath of the crisis, small and large firms were similar in the likelihood of levying pay-cuts on their permanent workers. Nearly half of the small firms imposed pay-cuts on their permanent workers compared to March levels, whereas the proportion for large firms was 44%. Just as for layoffs, firms were more likely to reduce wages for temporary workers—61% of small firms and 51% of large firms said they have reduced wages for their temporary workers. 

 

However, during the subsequent recovery, small and large firms become distinct in their usage of pay-cuts for permanent workers. While 42% smaller firms continued with pay-cuts for their permanent workers compared to the levels in March, only 20% of large firms did so. Likelihood of pay-cuts by firms for temporary workers remained nearly unchanged between the two rounds. 

 

Thus, compared to small firms, large firms have been faster in restoring wages of their regular staff, and temporary workers remain subject to lower wages—a clear sign of dual speed recovery among businesses.

 

Implications for Policymaking 

First, labour markets in terms of retrenchment of workers eased in September 2020 and compared to June 2020. Further sentiments about hiring workers improved during the same period. The lower likelihood of employment termination for all types of workers eases pressure on the calls for urban employment guarantee schemes.

 

Second, persisting pay-cuts for temporary workers may have second order effect on lower purchasing power of households. Given that temporary workers make up nearly 80% of the urban hired workers  (PLFS), lower consumption by such a large proportion may translate into a slow recovery. In this context, wage support programmes may appear tempting, but intervening in reallocation of resources for short-term gains may not be advisable. Instead, government may focus on pushing a targeted fiscal stimulus for sectors which employ low-skilled temporary workers.  A complementary policy would be to develop a voluntary Social Registry system which can protect people from similar future vulnerabilities.

 

The above analysis also has micro-economic implications for the Indian labour market. Smaller firms are more likely to impose a pay-cut, and temporary workers are more likely to receive one. Given that permanent workers are more educated, this will increase the skill premium and inter-firm wage inequality in the Indian labor market. In the long term, reskilling & up skilling programs may shield workers in case of similar shocks.

 

Views are personal

 

Published in: QRIUS, November 13, 2020