COVID-19 will lead to higher unemployment in Ukraine

The lockdown measures have hurt both the Polish and the Ukrainian economy, but the strength of the impact is not the same. The long-term effects in the two countries will also be different. Unemployment may turn out to be the biggest problem in Ukraine.
COVID-19 will lead to higher unemployment in Ukraine

PublicDomainPictures, Pixabay, Public domain

Things won’t be easy, and the instruments used to mitigate the effects of economic crises thus far are not as effective as expected — such conclusions can be drawn from this year’s experts’ debate, which took place as part of the “Labor market and monetary policy” conference organized jointly by Poland’s central bank NBP, and Ukrainian central bank NBU.

The lockdown has led to a sharp decline in global economic growth. The most affected by COVID-19 is the labor market. According to the estimates of the International Labor Organization, in the Q2’20 the number of hours worked will be reduced by a total of 10.5 per cent, which is equivalent to 305 million full-time jobs. The 1.6 billion people working in the grey economy, which accounts for almost half of the global workforce, will also be significantly affected. In the opinion of experts from the Center for Economic Policy Research the past pandemics and crises increased social inequality. The current crisis associated with the coronavirus pandemic is unlikely to be an exception and could possibly lead to an even greater deepening of inequality than the previous ones, because it has a much broader scope.

The main enemy — unemployment

According to the economists studying the COVID-19 crisis, we should not forget that some of the effects may be more long-term in nature than it seemed at first glance. Recessions not only affect the labor market, but also harm technological development and productivity. As a result, the expansion of the global economy hasn’t even come close to the potential that it exhibited prior to the outbreak of the global financial crisis. Although economic growth has been relatively stable, the initial losses were never made up for, which means that this crisis continues to affect the global economy. In the United States the financial crisis set back the development of the economy by 9 years. According to a study presented by Yuriy Gorodnichenko from the University of California, the current pandemic will likely also have long-term consequences.

Unemployment is now emerging as the number one problem. Its consequences can be felt both at the macroeconomic and the political level. An increase in unemployment results in a decline in consumption, which means that growth is not stimulated. Losing one’s job is dangerous in itself, even if it’s temporary, because after re-employment the employee’s wages and, consequently, his capacity to consume, remain lower than before the job loss for many years. David Berger from Duke University pointed out that according to studies the reduction in the level of consumption, even after the given person finds a new job, can reach 15 per cent. Mr. Berger believes that the governments should focus on maintaining employment, even if this leads to higher inflation, because the negative long-term consequences for prosperity are smaller than the effects associated with an increase in unemployment.

The impact of COVID-19 on the labor market can be compared to a hurricane. The previous recessions were relatively short-lived, but the current one has brought long-term unemployment. A persistently high level of unemployment may cause fear in the labor market. In order to rebuild confidence in this market we need to use fiscal policy in a skillful manner, and it still isn’t certain that we will be able to reach the levels recorded prior to the crisis.

Whether workers will return to their jobs still remains an open question, because many companies may go bankrupt or launch lay-offs. Analyses show that in the US up to 40 per cent of the people who have lost their jobs due to the pandemic might remain unemployed for a long time. In addition, we will see a complete reconstruction of the labor market and the ways in which we think about it — many employees who started working from home will probably continue to do so in the future. Companies and countries also face a high risk of uncertainty, as investors will put their investments on hold. Such a bleak picture of the “coronavirus” reality was presented by Christopher Erceg from the International Monetary Fund.

Sergei Guriev from the Paris Institute of Political Studies pointed to the negative impact of the crisis on human capital. In a typical, non-crisis situation, when a person loses their job, they may be trained in order to better adapt their skills to the labor market and the needs of the employers. But now companies are focused on surviving and may not be willing to deal with employee training. In addition, those who are just entering the labor market will not be able to obtain the salaries that were available prior to the recession.

COVID-19 and the economic crisis that it triggered go far beyond the realm of the economy and translate into a crisis of confidence, which breaks down the foundations on which the global economy is based today — the level of public trust in the politicians and the authorities is declining in the United States and in Europe.

According to Mr. Guriev, the workers who have lost their jobs blame the state authorities. The loss of work affects the public sentiment negatively. This is not limited to those who have become unemployed, but also concerns those who have kept their jobs. The crisis creates a widespread sense of insecurity. The result is a chain of negative events — in conditions of high unemployment people do not trust the authorities, the lack of trust leads to protests, which result in a change of government and a decline in GDP. Mr. Guriev pointed out that the pandemic has affected the developed countries, which account for 95 per cent of the global economy. This means that if we see political turmoil, the slowdown of the global economy could last up to 15 years.

What happened in Ukraine and what happened in Poland?

According to Paweł Szałamacha, a Member of the Management Board of NBP, Poland entered the crisis with a well-balanced economy, a proper fiscal policy, as a result of which the national debt was reduced and the budget deficit reached a historically low level. Economic growth was at its maximum potential, and the economy was preparing for a “soft landing” amid the adverse external conditions. “The strong macroeconomic fundamentals of the Polish economy allow for a smooth passage through the shocks associated with the outbreak of the pandemic and at the same time give us the necessary space to ease the fiscal and monetary policy,” said Mr. Szałamacha, while describing the current situation.

The government took on the burden of new expenditures aimed at mitigating the effects of the pandemic and introduced a huge package of support measures. These include loans for micro, small and medium-sized businesses, the exemption of self-employed persons as well as micro and small entrepreneurs from social security contributions, as well as one-off stimulus payments for the self-employed and for people working under civil law contracts. In total, the amount that was allocated for this purpose exceeds 5 per cent of the GDP. At the same time the central bank acted in a proactive manner by loosening the monetary policy and weakening the reserve requirements. “We believe that such actions of NBP will give a positive result in the conditions of the fight against the effects of COVID-19 in the labor market,” assessed Mr. Szałamacha.

Compared with Poland, Ukraine’s situation looks bleak

NBU predicts that in the second quarter the unemployment rate will reach 11.5 per cent (compared with the rate of 8.2 per cent recorded last year). The authorities in Kiev hope that the easing of the quarantine restrictions and the gradual unfreezing of the economy will lead to an improvement in the second half of the year, but it will not be possible to return to last year’s levels of economic activity. The Ukrainian labor market is in a fortunate position — several million Ukrainian migrant workers decided to wait out the pandemic abroad, hoping to return to their previous jobs or finding new ones.

“In Ukraine the problems caused by the lockdown overlap with the unsolved systemic problems, which have been building up for years,” commented Jakiv Smoliy, the former Governor of the NBU. These include, among others, the mismatch between the employers’ needs and the qualifications of the people entering the labor market. Because of this unemployment remained at a fairly high level, and companies were not able to grow because there was a shortage of workers. According to the data presented by the State Statistics Service of Ukraine, up to one-third of employees with higher education worked in jobs that do not require such qualifications. This is one of the highest percentages in Europe.

In spite of this, productivity remained low. According to the International Labor Organization, Ukraine was not even among the world’s top 100 most productive countries, and the overall productivity of its economy, primarily oriented towards extracting rent from whatever was left of the Soviet Union, was lower than in other post-Soviet states.

At the same time, Ukraine is ranked 12th on the list of countries with the fastest-shrinking populations. As a result, in Ukraine 10 employees currently support 11 retirees. The associated high tax burdens on wages has led to the development of a persistent and vast informal sector of the economy. According to data of the NBU, in 2019 one in five Ukrainian employees worked in informal employment.

This has led to mass emigration — in 2019 up to 2.5 million Ukrainians worked abroad. If we were to take into account the turnover of seasonal workers, the actual number of emigrants is even higher. Labor migration drains the Ukrainian labor market of the most dynamic and skilled workers, while the economy becomes dependent on the money they are sending back.

According to the data presented by Yulia Sviridenko from the Ukrainian Ministry of Economic Development, Trade and Agriculture, as of the end of May 509 000 people obtained the status of an unemployed person, including 242 500 since the announcement of the national quarantine by the Ukrainian government. That’s a lot, if we take into account that these data come from a labor market drained by emigration and do not include people who worked in the informal sector and have now lost their jobs. In relative terms, the number of the unemployed increased by 60 per cent compared with the same period of 2019.

“We finished last year with pretty good figures. The unemployment rate officially decreased. Ukrainians earn some of the lowest wages in Europe. When we talk about the outflow of employees, this primarily relates to students and graduates who see no prospects for themselves in the country. The problem lies in the mismatch between the supply and the demand. The level of education does not match the needs of the labor market, and the share of employment in the grey economy is very high. We want to reform the job placement and employment promotion system in order to match the skills of the workers with the needs of the employees. But this was before the pandemic,” admitted Ms. Sviridenko.

It seems that Poland is coping much better than Ukraine with the challenges that the pandemic creates for the economy. Over the past few years the Polish economy suffered from a shortage of workers. As a result, the inevitable rise in unemployment caused by the lockdown starts from a much lower base level. The Polish anti-crisis assistance program also looks much better in comparison with the measures undertaken in Ukraine.

PublicDomainPictures, Pixabay, Public domain