The negative impact of COVID-19 can already be seen in the labour market
The measures taken to contain the spread of the coronavirus, contributed to a decline in the economic activity in the first quarter of 2020, thus negatively affecting the labour market.
According to the data compiled by the Central Statistical Bureau, the unemployment rate increased to 7.4% in the first quarter of 2020. With employment contracting, the unemployment rate grew by 1.4 percentage points quarter-on-quarter. Moreover, considering that the state of emergency was declared in Latvia only in mid-March and it was later extended, unemployment is likely to grow further in the second quarter of the year.
Bans on gatherings and travel restrictions imposed due to the state of emergency have nearly paralysed activity in sectors such as accommodation and catering, event organisation and passenger transportation. The pandemic has also affected other sectors that have to deal with supply chain interruptions and face logistics issues and downtime. Thus, the contraction in employment is a logical consequence.
Previously, lower employment levels were largely attributed to a decrease in the economically active population, but current developments are associated with a decline in business activity. It should be noted that the restrictions have had a particularly strong impact on the sectors employing large numbers of people. Therefore, supporting employment is even more important. So far, downtime benefits have partly prevented a steeper employment decline. However, if the benefit payments cease before the economic activity has resumed, the unemployment rate is likely to rise.
According to the latest economic sentiment data compiled by the European Commission, the share of businesses referring to labour shortages as a factor limiting business activity has decreased and the employment expectations indicator has also deteriorated sharply. Therefore, employment is unlikely to grow in the coming months. With their financial resources shrinking, businesses are trying to prevent wage cuts by employing alternative strategies, e.g. by reducing the hours worked or the number of people employed.
Future development will depend on successful containment of the virus, which would allow further lifting of restrictions and boost economic recovery, as well as on the improvement of employee productivity.
Considering that many jobseekers were recently employed and have the required skills, employment is likely to expand once economic activity resumes. However, for the employees receiving downtime benefits to return to work, businesses need some assurance that their operation will normalise in the medium term; otherwise, the unemployment rate is likely to continue rising. Therefore, it is important to consider further measures to reduce unemployment.