Unemployment risks and the pandemic: how will enterprises respond?

Back to Poverty and Social Development Committee

Salma Ahmed El-Nashar
Al-Feshawy & El-Shazly Law Firm in Association with SAP Law, Cairo
sae@sapegyptlaw.com

In recent times, many businesses have suffered severe economic hardships and difficulties due to a lack of liquidity and cash funding, which has led most of them to lay employees off and reduce salaries considerably. Millions of people around the planet have lost their jobs due to the pandemic. According to Statista figures,^[1] in June 2020, US$22.14bn was paid out in unemployment compensation in the United States, while in March of the same year a fraction of this amount (US$3.89bn) was paid. According to Eurostat, the statistics office of the European Union, 14.36 million men and women in the European Union lost their jobs in May 2020. Likewise, in the Middle East and North Africa region, unemployment rates have increased greatly, alongside a significant decrease in gross domestic product (GDP) growth rates. However, there are currently no accurate figures.

Unfortunately, those measures have not only affected the lives of former employees and their families, they have also had a great impact on societies and economies all over the world. Since the individual’s gross output (GO) is considered to be one of the key measures of a country’s total economic activity, and that’s why it is demonstrable that unemployment negatively affects economic growth, the country's GDP has also suffered as a result of increased unemployment. Moreover, it is also known that unemployment is a major reason for illegal immigration, particularly among the lower socioeconomic classes. Not only that, the loss of sources of livelihood may push some to secure their needs through illegal means, particularly through organised crime, which is why the relationship between unemployment and crime has been the subject of a long debate among economists. Steven Raphael and Rudolf Winter-Ebmer have analysed the relationship between unemployment and crime, using US state data, and found significant positive effects of unemployment on property crime rates. They also found that a one percentage-point decrease in unemployment leads to a one per cent reduction of auto theft and a 2.1 per cent reduction of burglary. However, this does not mean that it is only unemployed individuals who commit crimes: white collar crimes are mostly committed by individuals who are employed in high-paying professions.

While the relationship between unemployment and crime has been the subject of long discussions and debates, the connection between unemployment and poverty is more obvious. Among the factors that often contribute to poverty are unemployment and underemployment (alongside other variables) which can be seen through both the direct and indirect effects experienced by many economies around the world. It is not surprising that there is a strong correlation between the ability to earn income and the state of poverty, as with joblessness comes the loss of income, which makes it hard to cover basic living expenses.

However, the question that must be asked is: are corporations responsible for the current, terrifyingly high rates of unemployment, as well as its negative impacts, or are they also just victims of the crisis?

Social responsibility of the private sector in general, and of corporations in particular, has become increasingly important in recent years, because they are playing an active role in achieving sustainable development goals, including poverty eradication and community empowerment.  Often, companies that adopt Corporate Social Responsibility (CSR) programmes have grown their businesses to the point that they can give back to society for the mutual benefit of the corporation and society. In other words, CSR is mainly a business strategy for large corporations. Despite its importance, and the considerable research undertaken into CSR, there is no agreed definition of the concept, which is usually broadly defined. The World Business Council for Sustainable Development has defined CSR as the ‘continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large’. The World Bank also had a similar definition in this regard. Thus, CSR is a commitment to employees and co-workers in order to protect their health, increase their creativity and support them for better performance and a better life. However, this commitment is not limited to protecting the workforce within a company: it actually benefits society as a whole. Because CSR means simply taking responsibility for each and every decision and action that may impact society, the environment, as well as the economy, corporations could have better supported their employees and their society, while at the same time facing the challenges of the financial crisis.

In addition, the private sector has taken a keen interest in improving corporate governance since the crisis, which is an important lesson to learn from the current financial crisis: 'good corporate governance matters'. Both corporate governance and CSR focus on ethical practices and responsibility in business; both of them are values rather than rules. All indicators of good state and corporate governance, including government effectiveness, regulatory quality, rule of law and control of corruption are essential to ensure sustainable growth. A good example to consider in this regard is the Japanese corporate governance model that helped to achieve both a low unemployment rate and a low number of bankruptcies during the Great Recession. This remains true during the pandemic, since unemployment rates in Japan were 2.8 per cent, in June 2020, according to CEIC data, in comparison to 11.1 per cent in the US, 7.1 per cent in France and 30.1 per cent in South Africa. This Japanese system of corporate governance solves the hidden problem of corporate operations: balancing between money capital and human capital. In most cases, corporate law says nothing expressly about how to balance between money capital providers and human capital providers; it thus becomes part of good corporate governance to draw up an effective budgeting, planning scheme and conduct prudent management of corporate resources and strategic issues, which in turn usually helps to reduce the severity of the financial crisis and its impact on human capital.

For smaller businesses and corporations, it is obviously vital to learn and understand the importance of a ‘cash reserve’, which is simply an emergency fund that companies set aside for use in emergency situations. Financial experts usually suggest that cash reserves cover three to six months of business expenses, including operating costs and workers’ wages. This fund is indispensable for protecting small businesses and enterprises from financial issues, particularly those that are completely unexpected and out of control (such as the recent Covid-19 crisis), which helps them to mitigate the loss of human resources better.

Evaluation of the private sector is no longer based solely on calculating financial profitability, as the relationship between the social environment in which the institution operates and the institution’s impact on that environment has become an important part of measuring the performance of a business and its ability to continue to work effectively. The sector needs to take into account the three pillars of sustainable development, which are: economic growth, social progress and environmental protection. The private sector has a key impact on people’s lives, not just as a producer of goods and services, and creator of jobs, but also because it enhances overall economic growth and reduces poverty.

It is sometimes said that ‘business branding’ is about creating a comprehensive company message using names, logos, developed marketing materials and advertising etc. But successful business branding is all about the human concepts and the values that a company adopts, its effective contribution to the social environment, its real investment in human capital and its behaviour in times of crisis.

Back to Poverty and Social Development Committee