Impact of the Pandemic on Employment and Wages

Three essential questions: Interview with Maryna Tverdostup, Economist, Vienna Institute for International Economic Studies

In the fourth issue of short interviews with important researchers and practitioners from Central and Eastern Europe on burning questions concerning labour and social policies, we talked to Maryna Tverdostup, Vienna Institute for International Economic Studies. We asked her about the uneven impact of the pandemic on employment and wages.

News | 16 November 2021

1. Why do some countries of the region show high employment losses while other countries only saw a marginal reduction?

Uneven effect of COVID-19 on employment in the region is largely explained by sectoral divergences, as impacts of the pandemic on employment varied drastically across industries. The pandemic-induced recession is caused by limited economic operations due to imposed restrictions, difficulties in supply chain operations, and increased health risks. Some sectors were more resilient to these threats or even managed to turn them into opportunities, while other sectors were hit heavily. Consequently, employment changes reflect the sectoral impacts of the pandemic.

Accommodation and food services, manufacturing and transportation incurred the most drastic employment losses, largely due to a decline in sectoral labour demand, restrictions on human mobility, and strict social distancing measures. A negative contribution of accommodation and tourism to an overall employment slump is particularly vivid in Bulgaria and Montenegro, both highly dependent on tourism. A massive collapse of supply chains caused an overall downturn in transportation and manufacturing, with a resulting sharp drop in employment being most pronounced in Czechia, Estonia, Hungary and the Slovak Republic.

Several sectors managed to survive well, or even thrive, through the pandemic. Information and communication technologies (ICT), and professional and scientific activities are among the industries which saw an economic growth and employment upswing in 2020, as they reaped the benefit of raising demand for digital and highly technological solutions. The pandemic fuelled a massive tailwind for digital transformation, which will boost sectoral employment in the upcoming years. This trend is most evident in Estonia, which pioneered transition to e-economy and succeeded to attract massive investments in high-tech industries even on the verge of the overall economic recession.

The disproportionate effects of the pandemic on sectoral employment may prove lasting – people may not return to the previous sectors when the pandemic fades. This raises the question of structural changes on regional labour markets and persistent decline in employment in sectors heavily hit by the pandemic.


2. You observe wage increases across the region in 2020, which seems to be counterintuitive for a crisis year. How do you explain this?

Indeed, average wages grew in the majority of the countries in the region, despite the theory of economic recession, which would predict the opposite. Two factors may explain this discrepancy between theory and reality.

Firstly, the COVID-19 recession is not a “usual” recession – it is highly specific in the way it interferes with economic performance, as the main threats are posed by enforced restrictions and disturbances in usual economic operations. With different jobs and economic sectors having different degrees of immunity to imposed restrictions, and different ability to adjust, wages evolved unevenly across the economy. Secondly, various wage subsidy schemes introduced to preserve workers’ income and support private demand cushioned wage reduction in several countries, including Estonia, Poland and the Slovak Republic.

One observation is highly consistent across countries – wage dynamics in 2020 mirrors the heterogeneous effects of the pandemic on sectoral employment. Unsurprisingly, the most affected economic sector – accommodation and food services – saw a major wage decline, which accompanied an employment drop and massive reduction in workhours. However, what appeared truly surprising is the magnitude of wage upswings in several sectors. Wages of healthcare workers rose dramatically in all countries of the region. The pandemic showcased the immense risks of the vulnerable healthcare system, and boosted unprecedented labour demand in the sector. The latter trend appeared most striking in the countries with severely underpaid healthcare employees, e.g. Ukraine, Belarus, Republic of Moldova. Yet, the healthcare sector is not the only one when it comes to wage increases. Wages boomed in the ICT sector, public administration, education, professional and scientific activities in response to looming sectoral labour shortages and thanks to high teleworkability of jobs in the sectors.


3. What role did job retention schemes play and have you seen any other interesting innovations to protect jobs and income?

Job retention schemes (JRS) – short-time work and furlough schemes – were an emergency response to offset negative effects of the pandemic on employment and earnings. Design, implementation, and workforce coverage differed drastically across the region, from 15% in Croatia to 3.5% in Poland. As employment recovery appeared faster than expected, with several countries (e.g. Croatia, Latvia, Hungary, Poland, and Slovenia) reaching pre-crisis levels in the first half of 2021, the positive role of JRS is not a question.

The design of JRS largely explains why the schemes proved highly effective in combating unemployment. The underlying feature of JRS was to retain contracts with current employers even if work was fully suspended – this is an innovative step aiming at quick employment revival once the pandemic fades. Prioritizing jobs preservation over employee’s reallocation indeed helped to prevent vast unemployment upswing and fostered rapid job recovery, particularly in sectors experiencing major employment slump during the lockdowns in 2020. Furthermore, JRS were tailored to support mainly low-wage workers experiencing workhours cuts and to provide income protection much more generous than standard unemployment benefits. As a result, living standards of workers were preserved and income inequality rise was restrained.

Yet, the most unprotected workers – those unofficially employed – were left behind the protection schemes, as only officially employed workers were admitted to JRS support. Thus, in the countries with high shares of unofficial employment JRS did not cushion employment decline among the unofficially employed – largely concentrated at the lower end of income distribution and occupying low-level jobs. Unofficial workers may experience long-lasting job deterioration, paving a way to a wider income inequality.