Can Argentina’s labor market survive the lockdown?

2nd April 2020

By Martín Trombetta

Can Argentina’s labor market survive the lockdown?

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The labor market is breaking down around the world, and Argentina will be no exception. The lockdown is currently preventing millions of people from working, which not only implies huge losses for companies and investors, but also dramatic reductions in household income.

US weekly jobless claims have taken the headlines recently, skyrocketing to 3.3 million last week and 6.6 million on the current one after years of staying below the 500,000 mark. In Argentina, our most optimistic estimations show that around 5 million workers will be put in an extremely vulnerable position, with little to no income during the lockdown, in addition to the almost 2 million unemployed seen before the pandemic. This new group will require rapid state assistance so that lives saved from the pandemic will not come at a massive economic cost for those most at risk.

The profound heterogeneity of the Argentine labor market has never been a greater challenge. We have long known that workers in the country suffer from harsh inequalities, whether in terms of wages, benefits, stability or labor rights. In such extraordinary conditions as these, this might mean business as usual for some and misery for others.

Formal wage-earners will likely get by

The labor market can be divided in three very different groups: formal wage-earners, informal wage-earners and self-employed workers.

The first group consists of workers who have signed a legal labor contract that ensures all labor rights apply to them. It comprises 47% of the labor force. Since the “double severance” decree of December 2019 is still in force, such workers are strongly protected—firing them would be very costly for their employers, as would be simply not paying them, for it would certainly trigger a waterfall of lawsuits. (In addition, the Presidential decree yesterday making most firings illegal during the next 60 days will only make employers more fearful of the labor courts)

Of course, that does not mean these workers are 100% safe. Some sectors have special regulations that greatly reduce severance payments, such as construction, where labor contracts are naturally temporary and usually do not include the right to severance. That is why Techint, one of the biggest companies in the country, let go almost 1,500 construction workers last week.

Registered housemaids could also be at risk. Their employers are not known for their strict adherence to labor laws, with only 370,000 of the 1.4 million workers in the sector formally registered. It is doubtful that even the small fraction of registered housemaids will be paid on time and in full in the middle of a massive recession and amid government orders to stay at home.

Finally, many lawyers have pointed out that labor contract law stipulates that severance payments can be reduced by half (thus compensating the effects of the decree) if the layoff is due to “force majeure”. Does the combination of a world pandemic, an unprecedented lockdown and a catastrophic economic crisis fit the legal definition of force majeure? That is up to labor courts to decide. But one can imagine more than a few businessmen litigating for that interpretation.

The other half of the market

The situation looks much worse for informal wage-earners and self-employed workers, who make up 25 and 27% of the labor market, respectively.

Informal employees would probably have a hard time demanding payment from employers who have not registered them. Of course, one important question here is whether they are actually working right now. 30% of total workers belong to sectors which are considered exempted from lockdown in the regulation—essentially, energy, food, transportation, commerce and health. If a person is going to work as usual, one can assume he is also getting paid as usual. The remaining two-thirds among the unregistered, however, are likely to struggle.

Things are even grimmer for self-employed workers, whose income depends solely on them. A few self-employed might be able to go on with their jobs thanks to modern technology, making use of work from home (WFH) modalities. We do not know exactly how many Argentine workers have access to WFH, but different estimations range from 25 to 35%.

It might also be assumed that self-employed workers who hold a college degree (or similar educational credentials) can find a way to make money from their homes even if their usual activity cannot be done that way. Tutoring students remotely, translating texts, even teaching through digital platforms might be feasible income sources for the more educated among the self-employed.

But even in the most optimistic scenario, assuming that both informal wage-earners and self-employed workers will keep their income flow constant as long as they work in an exempted activity, have access to WFH or hold a college degree, this would leave us with almost 5 million workers (roughly a quarter of the country’s labor force) with little or no pay, a situation that can only be deemed horrifying.

Temporary solutions

It is clear that poverty would skyrocket without quick government intervention, as almost 2.5 million Argentine households would suffer a striking reduction in their income based on these estimates.

Despite a considerable fiscal hole that is bound to get much worse in the following months, the Fernández administration is attacking the crisis with heavy ammunition, providing minimum-pension retirees and family stipend beneficiaries with a 3,000 pesos bonus each. Furthermore, a specific instrument has been created for the occasion—the emergency family income (IFE), a 10,000 pesos bank deposit for unemployed, informal and low-income own-account workers, which even the unbanked will be able to retrieve from their nearest ATM.

Optimistic estimates argue that these benefits might be able to make up for the reduction in household labor income, containing the poverty hike. Even if such forecasts turn out to be overly rosy, there is little doubt the social situation will be less desperate thanks to these transferences.

But we know there is no such thing as a free lunch, and social policy is certainly far from one. With these measures, the aid package rose to 2 percent of GDP, which will have to be financed through money printing, as no other alternatives are available. But the package is growing in size by the day, with the government confirming earlier today another big program to help businesses pay their registered workers during the downturn.

The government is walking on thin ice here. Limited as they may be, policies such as IFE will be the only thing stopping poverty figures (and possibly, social conflict) from soaring beyond control. But how far can the recession be trusted to tame inflation if the government monetizes large fiscal deficits? What is more, how long can the economy go with most businesses closed for quarantine? The dichotomy between saving lives and saving the economy is definitely a false one, but finding ways to soften the lockdown might prove inescapable to protect the most exposed in Argentina’s labor market.

Martín Trombetta

Martin Trombetta holds a PhD in Economics from Universidad Nacional de La Plata, a research grant at the CONICET institute, and teaches at the Universidad Argentina de la Empresa (UADE). His publications have focused on labor markets, income mobility, gender gaps and other topics.