Employment and Wages - The future as seen through history
It is unlikely that any one who is in active employment in India has gone through a recession of this nature in their careers. There is no playbook or experience of what to expect and how to navigate. However, there are a set of realities today that can, with a degree of confidence, be projected into the future. In the medium term, countries and companies are likely to be financially stretched, and jobs less easily available. The automation of processes and factories had anyway started that trend, COVID-19 simply accelerated it. Jobs with specialized skills are expected to be hugely in demand. Countries around the world are likely to be more insular than they may have been in the past, and people are likely to be more uncertain and fearful.
The question therefore is whether these realities can influence the structure of the employment relationship? Currently the relationship is heavily entrenched in a reward structure where the employer awards an employee with a packaged offering including salaries, incentives and benefits. Along with this comes the promise of opportunities to develop skills to be able to do higher order work, which in turn could offer an even larger reward. In return the employer expects minimal agency costs, represented through better and predictable performance outcomes and a level of loyalty. This broad equation, in a sense, is assumed to be linear and balanced, i.e., an increase in the employer’s end of the equation should have a corresponding increase in the employee’s end and vice versa.
Given the almost uniform economic growth in India over the last three decades, the shape of the award and performance curve has been defined more by the fact that only a small population of employees are able to deliver on the constantly increasing expectation from employers. This imbalance has been responded to by consistently driving up pay levels and employers identifying increasingly better reward structures to attract the most capable talent (all the way from higher salary to dog walking benefits). This status quo is getting impacted – initially because of greater automation, and now this crisis. While the extent of change will naturally be an outcome of the depth and duration of the downturn, the scenario now already indicates the fact that certain fundamental shifts are likely to happen.
We could look at history to spot some trends. The Great Depression in America, which ended with a World War provides interesting data around this. Employment levels in the US took 13 years and war production to return to their pre-depression levels. Wages fell by almost 33 percent over the decade. There was a transition in the structure of employment as the least skilled employees lost jobs and higher-skilled employees took their place. This was also the era of increasing mechanisation and that resulted in people above 45 years finding it more difficult to get jobs with companies preferring younger people who could learn faster. People who lost jobs in cities went back to farming, and not only are we seeing this in India but as a recent article highlights, even in countries like Italy. Interesting parallels also exist in how professionals and highly skilled employees did not see a significant impact on jobs. The government actively encouraged “part time employment” arrangements, resulting in with more than half the overall workforce engaged in part-time jobs (the “gig” of today).
Challenges to employment also led to the emergence of insecurity and fear amongst employees. A clear outcome was the increase in union membership - which more than doubled between 1930 and 1940. Pre 1930, workers had limited protection against loss of income. However, over the next decade, wide spread changes happened in the public policy – US government introduced the Social Security Act of 1935 that still exists and provides support to those who are out of employment. It also spawned legislation that provided old age assistance and support to those suffering from disabilities. Union pressure as well as some progressive employers realised the value of employee benefits and welfare plans and by 1939 the cost of benefits as a percentage of compensation had doubled over 1930’s levels.
Will this history repeat itself in some ways for India as well over the next few years? We will probably see a flattening of pay increases over the next few years. And along with that a rise in greater orientation towards benefits – particularly those that offer security, e.g., healthcare, retirement, severance. Employees will probably migrate towards employers who are able to assure greater job security and employers will probably be able to demand greater performance without necessarily increasing pay at the same rate. Employers are likely to focus on ensuring a larger part of their compensation costs are variable – and that is expected to drive changes in not only employment models but also greater orientation towards virtual working to save on real estate costs. Public policy will also respond faster to these changing realities and demand greater protection of livelihoods and increased care-related benefits.
Lord Byron said “The best prophet of the future is the past”. But there is always a chance that the world will go back to exactly where we were when we started the year 2020. Human beings have a tendency to boomerang, and while that seems desirable because it is known and comfortable, maybe a new world order might actually be better. The 1920’s were fantastic years of growth in the US, but the years post the second world war saw more sustainable development.
*Views are personal