ILO Policy Brief on COVID-19

Pillar 1: Stimulating the economy and employment

COVID-19 affects both the demand and the supply sides of the labour market and has huge implications for full employment and decent work, pushing many families into poverty, and increasing existing inequalities.

Last updated: 18 May 2020

The COVID-19 crisis impacts on both the demand and the supply sides of the labour market, and it has major implications for the goal of ensuring full employment and decent work. In particular, the crisis is pushing many families into poverty and increasing existing inequalities.1 

Tackling the economic, employment and social consequences of this crisis calls for judicious policy sequencing. First, immediate stimulus packages are needed to strengthen the health sector while mitigating the impact on economies and labour markets through the provision of financial relief for enterprises (particularly micro- and small enterprises) and of income support for workers. Ideally, these policies need to be informed by rapid and reliable assessments of the impact of the lockdowns on economic activity, jobs and households.2  Sectoral variations should be carefully analysed so as to facilitate sector-specific responses.3  The measures taken should include the provision of support for workers and enterprises in all the sectors affected so as to prevent further contractions in consumption and investment. One important lesson learned from earlier crises is that support for employment and social protection must be a core element of stimulus packages.4 

Secondly, once the spread of the virus has been contained and normal activity slowly resumes, a demand-led employment strategy for a medium- to longer-term recovery of jobs and incomes will be required. This strategy should include promoting employment creation in strategic sectors; restoring a conducive business environment and reinvigorating productivity growth; diversifying the economy and encouraging structural transformation; and making best use of technological advances. The rate at which restrictions may be eased without endangering public health, along with the very real possibility of restrictions being reintroduced if the infection rate starts increasing again, is likely to lead to cautiousness in spending on the part of consumers and to low investment by firms. The combined effect of the latter will probably be weaker demand and lower production and employment levels. These behavioural changes are likely to be long-lasting. It is important to consider the adoption of measures to restore consumer and business confidence, both of which are essential to prevent an economic depression and accelerate the recovery.5  While households and the private sector are likely to continue to be cautious, governments can play a decisive role by boosting demand in the construction sector through infrastructure-based stimulus packages, as has been done after other crises in the past. From a recovery perspective, the construction sector has a number of key advantages: it is relatively labour-intensive; its activities can be targeted at geographical areas with particular economic problems; and, in most countries, this sector has a large share of local inputs. It is also able to absorb workers from other sectors relatively easily.

Not all countries are equally prepared to meet the above-mentioned challenges. In addition to suffering the impacts of lockdowns and lower global demand, developing economies are seeing their already limited fiscal space shrink further because of falling fiscal revenues and rising capital outflows. This results in higher borrowing costs and currency devaluations, undermining debt sustainability.6  Countries experiencing fragility, protracted conflicts, recurrent natural disasters or forced displacement of certain population groups will face even greater challenges.7  Global support for national stimulus packages is necessary to save lives in these countries, bolster their economies and labour demand, safeguard enterprises, jobs and incomes, and protect workers in the workplace.

Fiscal and monetary policies must support employment and social protection

The timely and coordinated implementation of fiscal and monetary policies can save lives, prevent people from losing jobs and incomes and companies from suffering bankruptcy, and facilitate a sustainable recovery.

Accommodative monetary policies are already enabling governments to adjust their fiscal policies in support of the economy, making large amounts of public money available to enterprises, workers and households to help them overcome the immediate negative impacts of the economic recession induced by the response to the COVID-19 pandemic. Monetary policy tools must continue to be used to ease financial conditions and alleviate liquidity constraints, thereby giving governments the fiscal space that they need to support business continuity and household income.

Available fiscal policy tools include higher spending and forgone revenues (e.g. through tax exemptions), public sector loans and equity injections, and loan guarantees. Fiscal support is also provided by “automatic stabilizers” — features of the tax and benefit system that stabilize incomes and consumption, such as progressive taxation and unemployment benefits. All these tools are already being used in the response to the economic and social impact of the pandemic. Advanced economies can draw on a wide range of instruments on the spending, tax and liquidity front to support people and businesses. For example, several European countries have introduced liquidity lifelines, such as affordable loans or guarantees, to ensure business continuity for small enterprises and self-employed entrepreneurs.

Emerging market and developing economies typically have less leeway in their budget to respond to crises. Debt relief and temporary suspension of debt service payments are necessary to help such countries channel more of their scarce financial resources into emergency medical efforts and other forms of assistance for their citizens. The poorest countries should not have to choose between honouring their debt obligations and protecting their populations, which altogether comprise two-thirds of those living in extreme poverty worldwide.8 

Investing in public employment programmes can be an effective part of the crisis response in developing countries, especially if such programmes are adapted to mitigate the health risks associated with COVID 19 and deployed only when the public health situation allows. In the absence of a strong social protection system, these interventions can provide work and income for large numbers of unemployed and informal workers affected by the crisis, enabling them to remain economically active. Moreover, public employment programmes can address various multi-sectoral needs, such as care work, environmental restoration and community infrastructure.9 

The ongoing first wave of stimulus packages is not enough. Countries will need macroeconomic policies geared towards a medium-term recovery. Direct government intervention will be necessary after the most acute health emergency and containment phases are over. The effect of the crisis on commodity prices, capital flows and trade and supply chains will make it harder for many countries to recover better. Therefore, international financial support and coordinated fiscal and monetary policies will be absolutely essential to drive a global recovery that benefits the weakest as well as the strongest economies. Even after the immediate health crisis has subsided, it is imperative that countries continue their support for enterprises (especially micro-, small and medium-sized enterprises),10  expand their labour market interventions to get people back into work, and sustain social protection measures and social spending. Social expenditure has a larger positive multiplier effect on the economy than other measures (e.g. tax reductions for higher income earners, extension of tax credit for first-time homebuyers and some corporate tax provisions), and can help to promote social and political stability.

Sectoral Policies

Short-term sectoral policies11 include immediate financial support for investments in sectors that have been hit particularly hard by the crisis. Such targeted support may take the form of financial relief, bailouts, bridging loans or grants. To save lives, governments should finance additional health and emergency services regardless of expenses. Investments in the health and social care sectors are essential in order not only to expand treatment and limit the number of deaths but also to improve the employment conditions and earnings of health and social care workers.12  Additional fiscal resources are required to strengthen health systems, as are improved coordination, service distribution and delivery, with a central role being accorded to public provision. To maximize their effect, such investments need to be sustained, expanded and anchored in legal and financial frameworks. Global coordination can help to channel support to countries with health systems of limited capacity, including humanitarian aid, medical resources and concessional emergency financing. Moreover, public emergency services, essential infrastructure, utilities, education and many social services must be maintained or scaled up. Lastly, support must be provided to selected sectors so that they can secure primary and intermediary inputs for production through global supply chains.

The lack of fiscal space, along with borrowing constraints, in many emerging market and developing economies means that a careful balancing act is required to shift expenditure towards the health sector while safeguarding social protection expenditure and vital public services (transport, energy, communications, water, sanitation and security).
Funding should also be made available for strong active labour market policies to accompany the above-mentioned sectoral interventions. Such policies can ensure that the necessary investments in workers’ skills are made to facilitate relocation or re-employment. They can also be used to provide job-search assistance and intermediation support to workers and employers, ensuring that workers can be recruited rapidly in the sectors that are expanding as a result of the pandemic (e.g. health, food and beverages), and also that workers are able to relocate to expanding production units in companies.

1 ILO Monitor: COVID-19 and the world of work. 1st Edition ( March 18, 2020), 2nd Edition (April 7, 2020), 3rd Edition (April 29, 2020)
2 ILO: Rapid Diagnostics for Assessing the Country-Level Impact of Covid-19 on the Economy and Labour Market (May, 2020)
3 ILO: COVID-19-Sectoral impact, responses and recommendations (April 2020)
4 ILO: Social protection responses to the COVID-19 crisis-Country responses and policy considerations (April 23, 2020)
5 ILO Monitor COVID-19 and the World of Work, 3rd Edition (April 29, 2020)
6 UNCTAD 2020
7 ILO: Coping with double casualties: How to support the working poor in low-income countries in response to COVID-19 (April 29, 2020)
8 Forthcoming policy brief: Financing Social Protection in Developing Countries
9 Forthcoming policy brief: The role of Public Employment Programmes in the early recovery
10 Mario Berrios: Which policies can help small businesses withstand COVID-19 (ILO, April 16, 2020)
11 See ILO COVID-19 Sectoral Impact, Responses and Recommendations, (April, 2020) provides detailed policy recommendations on both essential sectors and some of the most hard-hit sectors.
12 ILO: COVID-19 and the health sector (April 19, 2020)