Why it may be better for govt to pay firms to retain their staff

The global economy continues to suffer as lockdowns and restrictions remain in place around the world. Governments have announced stimulus packages, with varying degrees of effectiveness, to counter the economic impact of the pandemic. While the US and Europe have adopted specific measures to help protect workers, India has taken an innovative approach that critics argue is inadequate and will not help revive demand.DIRECT TRANSFERS AT CENTRE OF US STRATEGYThe American stimulus model is a combination of measures, including direct cash transfers to individuals and wage subsidies for businessesDirect Transfers: The US govt began sending one-time payments of $1,200 in March to adults earning less than $75,000 a year, which is a vast majority of households. Families with children under 16 get another $500 per child. As household income increases, the aid reduces.Wage subsidies: The US govt is providing loans of up to $10 million for businesses with less than 500 employees — primarily small businesses — under the Payment Protection Plan (PPP) to primarily fund payrolls. Companies are required to use at least 75% of the loan on salaries, retain employees and rehire those they’ve let go. A portion of the loans doesn’t have to be repaid if the conditions are met within two months. medium76105295BUT, US RESPONSE HAS ITS FLAWS PPP has faced flak for its rollout. IMF economist Paolo Mauro told BBC the direct payments haven’t been enough. “The discretionary response is very large but... more needs to be done in the US because the social safety nets are smaller.” 76105341Nobel-winning economist Joseph Stiglitz called it “disastrous” and said the “most vulnerable people are not getting the money.” Investigations found 94 publicly traded companies, some valued at over $100 million, received loans and only 29% of small businesses’ applications were approved.INDIA'S APPROACH IS DIFFERENT, BUT IS IT EFFECTIVE?The govt has announced Rs 20 lakh crore in economic measures, a large number of which are expansions of existing programmes. But, unlike the US and Europe, India’s attempts hasn’t been focused on direct cash transfers or wage subsidies.Under the PM Garib Kalyan scheme, about two-thirds of the population will receive free food assistance and 80 million families under the Ujwala scheme will get free LPG cylinders.The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) workers’ minimum wage has been hiked, amounting to an additional Rs 2,000 over the year. In terms of direct cash transfers, about 30 million senior citizens, widows and disabled people will receive Rs 1,000 over the next three months, and 200 million women Jan Dhan account holder will receive Rs 500 per month for three months In the organised sector, The govt’s assistance is primarily through the Employees Provident Fund by easing withdrawal restrictions and raising the govt contribution. A major chunk of stimulus has been dedicated to liquidity measures through RBI, amounting to Rs 5 lakh crore. About Rs 3 lakh crore in loans has been extended to MSMEs.EUROPE IS GIVING MONEY TO COMPANIESAs compared to the US, advanced European countries generally have stronger unemployment benefits and worker rights vis-a-vis layoffs and the aim amid the pandemic has been to ensure workers retain their jobs. One approach has been to help companies retain workers on smaller shifts or duty hours with the government picking up the bill for the reduced hours of work. medium76105784Germany’s Kurzarbeit programme, on which such schemes are based, enables workers to make at least 60% of their basic pay as companies access a government fund to support short-time work payouts. Kurzarbeit is credited with helping Germany shake off the impact of the 2008 crisis faster than US and other European countries. Other countries like The Netherlands, is offering to cover as much as 90% of wage bills and France is paying 84% of workers’ gross wages and up to 100% for those earning minimum wage. UK is paying for 80% of earnings of furloughed staff up to £2,500 per employee per month for at least three months.boxcontent medium76105471What is KuzarbeitKurzarbeit is German for “short-work”. The scheme aims to help workers who are impacted by loss of income, due to lesser number of hours at work. The short-term allowance is called kurzarbeitgeld. Though rolled out during 2008, it traces its origins back to after World War I. This helps employees sustain themselves for up to a year.WHY IT PAYS TO RETAIN WORKERSIn April, when EU created a €100 billion fund to help member states pay for short-time work schemes, it noted that such schemes “help sustain families’ incomes and preserve the productive capacity and... the overall economy."boxcontent 76105986EC's 100 billion euro fundThe European Commission in April launched a new €100 billion fund. The fund seeks to help those who have been left out of work, and companies who are unable to pay workers. The scheme called SURE (Support to mitigate unemployment risks in an emergency), will see member states provide guarantees for the funding. A Brookings research paper argues that for an economy, furloughs with some income available and reduction of work hours are “far better than outright termination” not least because employers and employees both have to invest time and resources for the latter to be “as productive as workers with experience.”Though, Johns Hopkins University faculty Filippo Taddei argues that the impact of unemployment is not just on incomes, but also on “workers’ skills and education, even on their health — people who are unemployed become sicker”. A country’s human capital, the skills of its workforce, decay due to job loss.But experts say that paying companies to retain workers is a strategy that works only in the short term, delaying some job losses, especially in a scenario like the Covid-19 pandemic when there is uncertainty over when things will be back as before. Joblessness reportedly jumped in Germany in April despite Kurzarbeit, leaving 373,000 more unemployed over a month.Source: NYT, BBC, Foreign Policy, KPMGGraphics: Sajeev Kumarapuram