C Gopinath

The US has moved to soften the Covid-19 blow

C Gopinath | Updated on April 12, 2020

Businesses and the government have announced programmes to help impacted employees through the crisis

The fog of the virus’ impact clears a bit now and then to show some businesses booming, while many more are in a deep slump. Even those establishments that are functioning deal with random disruptions. Consumers are getting used to new habits that may cause a permanent shift in their buying patterns. Trying to keep businesses afloat in the face of shrinking revenues has resulted in hard decisions about layoffs and compensation for employees. Unemployment has risen from about 3.3 per cent to about 15 per cent.

It is certainly noteworthy that a few large corporations have finally done what many small businesses often do in the face of a crisis — begin by cutting the pay at the top. Many US companies including Occidental Petroleum, Disney, Hyatt and McDonald’s have announced temporary cuts in the pay of salaried employees from 10-30 per cent and the pay at the top 50-60 per cent.

Such cuts, though they may not significantly impact their lifestyle in the short run, are a welcome demonstration that these executives are prepared to feel some of the pain. Those most affected, of course, are the workers at the lower end of the totem pole who do not have work due to the shutting down of their places of work, hourly-wage earners, or the self-employed whose work has vanished.

Companies have resorted to a variety of responses, that includes laying off, paying part salary, or furloughs. In a furlough, the worker stays on the rolls of the organisation and can enjoy benefits such as healthcare but is not assigned any hours of work, and so does not receive any pay.

This is where the US federal government’s rescue plan helps. The Cares Act that was recently passed by the US Congress provides benefits for those hurting during this crisis. It adds $600 (about ₹45, 600) in weekly payments for a four-month period to the currently available state unemployment benefit of $400 (about ₹30, 400). For a person at the minimum wage of $7.25 (about ₹5,50) per hour, this almost doubles their earnings.

Conservative economists worry that the incentives spread over four months are too generous, and will be a disincentive for workers to get back to work once the rebound starts (if within four months) as it pays more than the average hourly wage rate. They also worry that companies may use the benefits of the Act to subsidise their layoffs or furloughs, which is already happening. Auto manufacturers such as Nissan and Honda have announced furloughs while others have resorted to layoffs. Macy’s, the department store chain, reportedly put 1,25,000 of its workers on furlough because of the enhanced federal benefits. Depending on their situation, some companies are offering their employees a voluntary layoff, if the employee feels he or she can benefit from the federal programme.

Another provision is meant to help small businesses maintain their employment by offering grants of up to $10, 000 (about ₹76 lakh). Under a proposed Paycheck Protection Program, which is still being debated in Congress at the time of this writing, companies with less than 500 employees can take a loan up to $10 million (about ₹76 crore) which can be forgiven if they keep their workforce intact.

Complaints aside, these are all moves in the right direction. A sharp focus on alleviating the drop in earnings is not only humane but also helps to maintain demand in the economy. It is, however, not helpful to compare these measures with the kind of stimulus that one sees at the time of a recession. In addition to effects of unemployment, people are facing unusual stress and rising prices of basic requirements of food and medicines. The uncertainty of when the conditions would allow commercial establishments to limp back to normalcy makes planning at the individual and business level very difficult. Any support that softens the blow will help survive till that rebound.

The writer is a professor at Suffolk University, Boston

Published on April 12, 2020

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