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Covid-19 and the underclass


May 1, 2020

The writer is an Islamabad-based columnist.

As a rule, every crisis leaves the rich better off and the poor worse off. The scheme of things that stratifies economies, societies and the world into units of varying size and strength also apportions the capability to cope with arduous situations differently. The socio-economic impact of the Covid-19 pandemic is no exception to this rule.

Of all the factors of production, labour has been hit hardest by the pandemic. This is hardly surprising, as Covid-19 is transmitted from humans to humans. It is fundamentally a medical crisis. Economic repercussions arising out of disruptions in supply chains and slump in demand are its by-products. This is what sets Covid-19 or the ‘Great Lockdown’ apart from the 2008 global economic crisis, or the Great Recession as it’s called, which set off bankruptcies, company closures and layoffs all over the world.

The novel coronavirus has forced governments to lock down cities or otherwise restrict the movement of the people. Labour-intensive enterprises and industries were doomed to bear the brunt of the infection. They were the first to shut down and will be the last to pull the shutters up. These enterprises had to close down or restrict their operations as workers were forced to stay at home. As a result, output levels scaled down. The Great Lockdown, to begin with, precipitated a supply shock. But it was only a matter of time that it would unleash a demand-side crisis.

In the market economy, workers are useful to an enterprise because they contribute to the production of goods and services. In case a worker doesn’t turn up at the workplace or is not needed because production has contracted or come to a halt, she loses her usefulness and is thus either laid off or asked to accept much lower wages. In such a situation, the only thing that can save workers is their ability to supply labour from home – e-business as it’s called.

But industries and economies differ in their ability to conduct their operations on-line. As a rule, advanced economies offer a greater scope for on-line transactions than developing economies. Likewise, it’s easier for capital intensive, tech-savvy enterprises to switch to e-business than for labour intensive firms or those doing business in a traditional way. Hence, labour intensive enterprises are more vulnerable to shut down and thus fall in output than others. Hence, although the retail sector has been hit severely by the pandemic, the outlets which were already engaged in e-commerce have seen their sales balloon up.

Thus Covid-19 is poised to give rise to wide-scale unemployment. According to the ILO, sectors facing a severe fall in output employ 38 percent of the global workforce. As per ILO estimates, close to 25 million people may be rendered jobless, resulting in loss of income to the tune of $3.4 trillion.

As the output for labour intensive industries fell, the demand for labour also fell. In countries where lockdowns have been relaxed, workers who are willing to return to work are finding it difficult to get jobs. Rising unemployment vulnerability drove down incomes thus setting off a demand shock.

As a factor of production, labour has some peculiar characteristics. One, labour is perishable. If a worker doesn’t get work, say for a day or a week, his labour is lost forever. The cost to both the individual and society is a sunk cost. Two, labour can’t be separated from the labourer; labour service is produced where a worker is present – on-line or off-line. Thus a worker can supply labour from home but only if the labour can be put to use.

Three, labour is less mobile than capital. People, because of their physical limitations or social preferences, just can’t move as conveniently as capital does. The pandemic has only added to the immobility of labour. Four, even a most diligent worker can’t work like machines. They need rest and leisure and want self-respect and a safe workplace. Even in a normal situation, all these features combine to place workers in a weak bargaining position and make them highly vulnerable to demand or supply shocks.

With enterprises not willing to retain redundant workers, the only way their jobs can be saved is for the government to step in. In the wake of the coronavirus, governments all over the world including Pakistan have announced special incentives for enterprises, such as concessionary credit and exemption from social security payment, to encourage them to retain their workforce.

However, the effectiveness of such packages depends on two factors: one, do the incentives exceed the cost of retaining workers? And, two, do the governments have the will and the capability to ensure that the businesses just don’t walk away with the incentives without keeping the workers on the payroll. In the case of several developing countries, not only is the fiscal space available to the government narrow but the authorities’ willingness or ability to enforce its decisions leaves much to be desired. In either case, workers are the losers.

Among workers, daily wage earners or those working in the informal sector have been hit harder by Covid-19. This class of workers, which lives on the margins, gets paid or earns as they work – no work, no pay. The fact that most of them live in crowded places in extremely unhygienic conditions makes them highly susceptible to catching coronavirus. If by a stroke of luck they avoided the virus, they would be crushed by the lockdown. Here the government’s social safety nets come into play.

Neoliberal economics and public policy, which put its complete faith in allocation of resources by the market, look down upon such handouts as a disincentive to work. Assuming that governments are willing to step up pro poor expenditure, they will be restricted by the size of their purse. So if you have a triple whammy of being a daily wage earner, living in a poor country and facing a lockdown, you should batten down the hatches.

If among the factors of production, labour is the major economic casualty of Covid-19, among businesses micro and small enterprises (MSEs) are up the creek. Such enterprises have peculiar characteristics, which make them highly susceptible to supply or demand induced shocks. First, because of capital scarcity MSEs tend to be labour intensive. If the required number of workers is not available, such firms will be forced to close. Two, MSEs have little or no savings to draw upon in crunch times.

Three, banks and other financial institutions generally hesitate to give credit to such enterprises because they can’t offer collateral to the satisfaction of the creditors. Four, because of their meager political or bureaucratic clout, MSEs are hard pressed to avail themselves of the fiscal and monetary stimulus announced by the government. As a result, they have to largely fend for themselves.

Compared with capitalists, workers are an underclass; compared with salaried people, daily-wage earners are an underclass; compared with corporations, MSEs are an underclass; compared with businesses, consumers are an underclass; and compared with rich and advanced nations, poor and developing economies are an underclass. Hopefully in a few months, the pandemic will be controlled and normal business activity resumed. But the new normal will have different things in store for the underclass and the dominant class.

Buoyed by the governments’ fiscal and monetary stimulus, big, capital intensive and technology-savvy corporations will grow fatter in every part of the world, while thousands of smaller, capital or technology deficient enterprises will be forced to leave the market. With mergers and acquisitions, monopolies and oligopolies will run amok as the pervasive form of market organization. The bargaining power of capitalists relative to workers will increase manifold with the result that wages will spiral down.

In a word, the dominant class will prosper at the expense of the underclass. Regrettable, the underclass will not join hands to overthrow the dominant class. Technology will continue to be the agent of revolution.

Email: [email protected]

Twitter: @hussainhzaidi