The COVID-19 pandemic has plunged the Ukrainian economy into crisis. The nationwide quarantine introduced in March especially affected small and medium-sized businesses as convenience stores, entertainment, accommodation, hospitality and transportation services were forced to remain shut for weeks. Other companies were faced with a sudden drop in demand. In consequence, many employers faced the necessity of quickly having to reduce costs in order to stay financially afloat. Adjusting the labour input and reducing labour costs, often the main cost component of companies, was of crucial importance.
We analyse four mechanisms available to companies to make necessary changes to their workforce and reduce labour costs. First, to retain staff, companies could ask employees to take temporary leave, either paid and unpaid, until uncertainty resolves, and workers can safely return to workplace. Second, affected businesses could get an immediate labour cost relief by seeking state assistance: Ukraine, like many other European countries, rolled out a “partial unemployment” programme for employees whose companies remained closed due to restrictions. Another option was to reduce working hours of staff with a proportional wage cut. Finally, an employer could decide to lay off part of the team.
All of these approaches were utilised during the crisis. Putting employees on unpaid leave or reducing their working hours to save costs requires the consent of workers. Although not immediately attractive, acting cooperatively probably was in the interest of workers in order to secure the long-term future of their jobs. Also, informal pressure by employers may have contributed significantly to getting employees’ formal consent to such measures.
Formally, the ability of companies to quickly cut labour costs remains heavily constrained by a very formal and rigid labour law in Ukraine. Layoffs are only permitted on the grounds of “organisational reasons” such as the closure of entire business units and subject to notice periods and severance pay. This does not make firing impossible in times of crisis but requires workarounds that take time and effort as well as objective firing costs due to notice periods and severance pay requirements. While the furlough scheme theoretically bridges this problem by using the state’s coffer to fill the gap and immediately take over responsibility for paying the (reduced) wages of furloughed employees, only few SMEs qualified for the scheme. In consequence, firing employees remained the most widely used mechanism of adaption, despite the high firing costs.
While a final assessment of the adaption to the crisis is not yet possible and will depend on the survival of companies during the crisis and the post-crisis growth of the economy, it appears obvious that labour market adaptivity could be improved in Ukraine. This can be done both through making labour market regulation more flexible (e.g. by permitting layoffs due to economic reasons as a first, short run step) and by extending the coverage of the furlough scheme which permits companies to save labour costs during a crisis while preserving job security of employees, hence reconciling adaption with rigid labour laws. Although the latter approach appears to create fiscal costs, many of those will be compensated as employees are not laid off, leading to savings in the unemployment insurance fund.
The study was prepared with the support of the German Economic Team in Ukraine (GET).