The destruction of employer companies has doubled

INDEC’s economic activity estimator indicates that in the 1st quarter of 2021 the recovery of the economy stagnated. As of March 2021 (latest available), a level of economic activity similar to that of March 2019 is observed. This suggests that the economic recovery would have reached a pre-pandemic level in March. However, the level of registered salaried employment in private companies in March 2021 was 5.9 million workers, when in March 2019 it was 6.2 million. In other words, there was an economic recovery with a reduction in formal employment. 

Many factors can explain the phenomenon. Changes in the way of working and the acceleration of the use of technology are likely to generate less salaried employment. It may be also that more employees are being hired under the Monotributo. In fact, in March 2021 the latter increased by 80 thousand against March 2019. This marks a clearly differentiated trend with respect to formal salaried employment. 

Another relevant indicator, on which there is still no official information, is the number of formal private employer companies. However, data produced by the Ministry of Labor allow drawing a picture. According to this source, it is observed that:  

• In the 1998 – 2002 crisis, the economy contracted 18% and 50.000 companies were destroyed, i.e., 3.000 companies were destroyed for each point that GDP fell.
• In the 2017 – 2019 crisis, the economy contracted 4.6% and 28.000 companies were destroyed, that is, 6.000 companies were destroyed for each point that GDP fell.
• This suggests that in the current crisis, twice as many companies would be destroyed

These data show that prolonged crises have a very negative impact on the production network and are accompanied by significant formal companies destruction. The phenomenon would be increasingly virulent, as indicated by the fact that, for each point of decline in GDP, the destruction of employer companies is greater. Part of the missing private salaried jobs can likely be explained by the great employer companies’ destruction that is occurring.

The pandemic shows the consequences of sustaining an aggressive context against employers. This context is only tolerable for larger companies and those operating in a low competition environment. But for smaller businesses exposed to competition, it is stifling. Incorporating a company requires overcoming time-consuming bureaucratic hurdles and costly fees. The tax system imposes a high tax and bureaucratic burden, as well as excessive down payments that eat up working capital. Under normal conditions, these distortions may be tolerated, but when a crisis occurs, the companies closing become massive.

Another key factor is labor regulations. In crises, there is an appeal to reinforce rigidity with measures such as the prohibition of dismissal, the increase in severance pay, and the legal impossibility of adjusting wages downward in order to preserve the company and jobs. This is aggravated by the centralization of collective bargaining, which prevents companies from engaging in a survival dialogue with their workers. All bargaining must be done with the central unions, which is impossible for small companies that are the most vulnerable. If the company seeks to survive the crisis by reducing personnel, it is highly probable that it will receive several labor lawsuits, which will end up being the coup de grâce to its attempt to survive. This labor policy of rigidity, centralization in collective bargaining, and judicialization deepen the crisis within the company forcing many to close when economic activity falls.

The pandemic will be overcome soon. But changes in the ways of working and the incorporation of technologies are enduring. If regulations are adapted with a modern and innovative vision, this could be the opportunity to encourage business creation and good jobs generation. But if the current regulations are maintained, the expansion of informality and welfare will continue.