Protecting workers and firms in times of crisis: key labour market policies for low- and middle-income countries

Covid-19 has affected economies, firms and workers all over the world. What started out as a health crisis soon developed into a pandemic with severe economic and labour market impacts worldwide. By August 2020, around 70% of countries had mobility limitations in place that affected businesses and livelihoods (University of Oxford, 2020). The global economy has been hit very hard, surpassing previous crises (ILO, 2020): working hours decreased, unemployment rates soared, incomes were lost, and businesses closed. Economic impacts are particularly severe in low- and middle-income countries (LMICs) for vulnerable groups like informal workers, women and youth, and also for small and medium-sized enterprises (SMEs).

This situation calls for labour market and social protection policies in LMICs during the three distinct phases of crisis response: assistance, reorganisation, and resilience building. The following policy options are based on evidence from academic literature and are set in relation to the current response by German development cooperation to support firms and workers in LMICs.

Early assistance measures should ease the immediate impact of the public health measures for otherwise competitive firms by reducing liquidity constraints and retaining employment levels. Liquidity injections should be designed to enable crisis-affected firms to continue paying workers and their access to financial means should be eased by issuing (and subsidising) new lines of credit. For informal firms, microfinance institutions can be used to provide liquidity. Wage subsidies and temporary reductions of other labour costs such as social security contributions have proved to be successful in averting job losses. Reaching the most vulnerable firms and workers is challenging in LMIC contexts, particularly in rural areas. Digital solutions such as digital payment systems using mobile phones or digital registries can help and should be explored if feasible.

Workers who lose their jobs need income protection to see their livelihoods secured. Among the most widely used instruments for quickly helping households in crisis are social assistance programmes, most prominently cash transfers to households. By September 2020, 156 of 188 countries had planned, undertook or ended a crisis-related cash transfer programme (Gentilini et al., 2020). There is a large evidence base demonstrating the positive effects of cash transfers on livelihoods, such as reducing poverty, improving health, connecting people to jobs, helping to manage economic and climatic crises, and generating economic multipliers for consumption smoothing (e.g. Tripathi et al., 2019; Garcia and Hill, 2010; Kabeer and Waddington, 2015).

Emergency policies need to be replaced with tailored support for workers and firms in the phases of reorganisation and resilience building. Programmes should not inject liquidity into a broad range of firms but rather into those that are viable and innovative as they adapt to the new normal. Here a focus should be on green jobs or jobs in support of sustainable structural transformation. Furthermore, in low and lower-to-middle-income countries household enterprises and micro-enterprises would benefit from specially targeted interventions as most workers are employed in such arrangements. Existing microfinance networks could provide a way of channelling such funds to these enterprises.

Active labour market programmes can support the adaptation of policies to the shifting nature of the crisis from easing the initial impact to the restructuring phase. Information from past labour market programmes can be used to devise new ones, adapted to a medium- and longer-term perspective. Public works, for example, played an important part in the recovery from previous shocks like the financial crisis of 2008–10 (Azam et al., 2013). Given the nature of Covid-19, adaptations to labour-intensive public works are nonetheless needed. Programmes must ensure that participants maintain physical distancing and wear protective equipment. Investing in skills and training, especially with a focus on digital solutions, can be a viable long-term investment. Investments in skills are another key policy intervention during an economic crisis as they are typically more effective (Card et al.,2018) and  opportunity costs of investing into reskilling and training are lower.

Extending the coverage to vulnerable populations is crucial for future social protection programmes. In LMICs, the scope and scale of worker and social protection measures need to be expanded for higher resilience in future crises. This is true for vulnerable workers, such as low-income, informal and low-skilled workers, as well as women. At the same time, a new generation of young jobseekers – the so-called “Covid-19” generation – should be another main target for policies to avoid long-term “scarring effects” (see, e.g., Gregg and Tominey, 2005).

A tailored mix of labour market and social protection policies is needed to mitigate the economic and social impacts of Covid-19, staggered along three stages of the crisis: assistance, reorganisation, and resilience building. During lockdowns, it is important to support workers and firms with financial means. The response should be swift and pay attention to vulnerable groups, including informal workers. After an initial phase of assistance, programmes need to adapt to the “new normal”, where some initial restrictions are loosened while others remain intact. This could be achieved by better targeting viable firms adapted to Covid-19 in sectors contributing to the SDGs. . Active labour market programmes adapted to a changed environment – such as modified public works or skills training systems – can be another key element of crisis mitigation policies. For resilience building, it is important to improve worker protection for future crises. This implies the broadening of social protection systems to cover more, and especially vulnerable, workers and households. Given the unique nature of the pandemic, the response will also hinge on taking new routes. In order to obtain evidence on the effectiveness of new or modified programmes, rigorous testing and evaluations can help improve social protection and jobs policies (Haushofer and Metcalf, 2020).

This post is a condensed version of a policy brief by the BMZ and DEval published on 2 October 2020 and last updated in September 2020.