On Human Capital

On Human Capital
16 July 2020 Marina Hercka
Marina Hercka
In Journal

The separation of the capitals

Do you remember the last slow news day we had? In the past four months, every 24 hours have produced at least one development worth paying attention to, and it’s not been happening in a vacuum; from being furloughed and isolated to more dire financial issues, we’ve had various personal crises, so some days it’s been easier to keep up with the constant stream of news than others; never mind the news, some days it’s been easier to maintain the same yield as before than others. It’s safe to say, then, that the impact of the COVID-19 pandemic on human capital has been substantial.

Literature on the outbreak, by sheer force of necessity, has focused on one facet at a time – economy, health, people, often in that order; but as positive pieces start to come out in the Health category and the Economy streamline faces mixed reviews, global discourse has a respite in which to link them and take a close look at how to pull the economy back to stable ground. As we look at some topical research and lessons from past crises, I want to posit that any financial or economic analysis worth its salt will investigate the role and effects of the pandemic on human capital and, now that emergency response and shocking figures don’t dominate the news cycle anymore, we ought to do just that.

Show me the numbers

In May, Korn Ferry Digital published a report titled on the impact of COVID-19 on rewards and benefits. Participants in the survey were of varying sizes, mostly privately held and American, and a majority from affected industries (FMCG, Industrial Goods). The survey outlines the measures implemented to keep businesses afloat and their effects on those firms’ people; it produces some insightful results:

  • Impact by industry is straightforward: Leisure & Hospitality has born the most severe burden (Severe Impact – decline by 15%-30%) (44%), while ‘FMCG organizations have a more positive business outlook than other industry sectors.’ It’s worth noting that Education respondents also reported Significant Impact (46%), with overall profound uncertainty in the Public Sector.
  • From the entire pool, 24% of participants ‘24% of organizations have implemented or are considering implementing salary cuts.’ Promotion suspensions and salary freezes were the most popular measures, while reduction of benefits (retirement, capital accumulation) was the least. Variable pay was less affected across industries.
  • Delaying hires has been a prevalent measure already implemented (61%), almost on par with active management of paid leave (44%). Along similar lines, outsourcing to contractors has decreased, organizational change and restructuring have happened in dire cases, and cost reduction, as well as better long-term cost management, have been prioritized.

Necessary cuts have impacted staff at all levels almost equally (ref) and across industries, from the first few weeks, though the damage becomes more severe and apparent the longer closures last. Of course, dire consequences also await those entering the job market soon, as well as those seeking to change employment, either due to job satisfaction or extended furlough. The farther we progress through the year, the more changes to the furlough scheme, the more redundancies, the more salary freezes and hiring delays turn into job losses. Some of this is outlined in the latest policy brief by the International Labor Organization, who have been publishing reports on COVID-19 and the world of work since the beginning of the crisis. Their latest report, published June 19th, says:

  • “Young people account for more than four in ten employed globally in hard-hit sectors. Combined with disruptions in education and training, this places them at risk of becoming a ‘lockdown generation’ that will carry the impacts of this crisis with them for a long time.” As heavily impacted as the current workforce can be, this damage will easily trickle down to the next generation, just as severely as every recession has so far, which will further widen inequality gaps: “In the face of all these trends, there is a risk that massive unemployment and loss of income from COVID-19 could further erode social cohesion and destabilize countries in both the North and the South, socially, politically and economically.”
  • The losses, short- and long-term, are not only financial: “These challenges will have a severe impact on efforts to reduce poverty and inequality, putting SDG achievement further at risk. They also risk adding fuel to an already burning fire of discontent and anxiety in the world of work.” In places where inequality was already steep and hope for reform was scarce, the crisis has only exacerbated human capital issues, which will, in turn, deeply affect the economy of said region.
  • The brief goes on to suggest solutions for the above: immediate support for most at-risk groups, creating differently productive and inclusive career paths for a better built economy, and ensuring ‘a comprehensive approach to returning to work.’ It hits quite an easily ignored, though intuitive note: ‘Combatting the pandemic and restarting the economy are not competing priorities. On the contrary, they must go together.’ Measures taken from this point on must account for all facets of the crisis – financial, human, health-related – for our recovery to be as smooth and effective as possible.

Lastly, I want to take a quick look at a research report into HR policies published by Deloitte on January 29th of this year, when COVID-19 was becoming a real threat to the economy in China. Respondents were, in almost equal measure, private, state-owned, and foreign, with 2% nonprofit orgs. Finance and Real Estate respondents were in the majority, though with only 30%. It presented that, at the time, the main concern was not being able to serve clients (66%), with an inability to continue normal business management trailing close behind (47%). The numbers I want to highlight here are the answers to the question, ‘what do you think are the most important solutions in terms of workforce management?’: providing a flexible, remote working schedule is first on the list (82%), and addressing employee psychological stress was second (46%), a larger percentage than ensuring employment and compensation packages and offering emergency assistance and other additional insurance coverage.

Even then, the outbreak was expected to take as much of a toll on morale and psychological wellbeing as it would on cash flow, ability to serve clients, and targets for the next year. Those two aspects of the working world – people and product – went hand in hand before the crisis already, which they have been, and will continue to be, even more tightly knit as we pass the peak of the curve and pause to assess the consequences of the pandemic and the measures we implemented to flatten that curve.

The Road to the New Normal

It is a universally accepted fact that human capital is inextricable from financial capital, but it’s tempting to leave that to the side as we put out the fire; and if you were to argue that the fire isn’t yet out, you wouldn’t be wrong: a local lockdown has recently been announced in Leicester after a spike in cases and, in the US, Florida saw a concerning rise in numbers at the end of June. There are certainly dangers in unequivocally announcing we are now past the need for crisis response, but it is not unreasonable to begin strategizing for the future with a slightly clearer head than a month or two ago. UK PM Boris Johnson has now halted the daily briefings and held a speech on re-building in most sectors, from hospitality to high street to travel to education. Thus, it may be high time to reintroduce the human element into the discussion, which we neglected when the heaviest cloud was above our heads – to establish ‘the new normal’ that has dominated discourse all this time, we need to look at people.

The solutions outlined in the aforementioned Deloitte report are not revolutionary, nor are they only necessary in time of crisis. Anxieties and stresses were only worsened by the public health emergency and, as the outbreak morphed into a pandemic, we’ve begun to realize how precariously close the economy was to the edge of the cliff beforehand. Going ‘back to normal’ will be difficult exactly due to this reality: we built very far up on an unstable foundation and now a very strong wind has revealed all those architectural faults. Therefore, however ubiquitous and overused the phrase ‘the new normal’ has become, it’s as indicative as a short slogan can be of the changes we need to make. It suggests to me that, this time around, we must not forget that human capital makes the economy – people’s health and general wellbeing are what keeps it on this side of that cliff. Those of us who didn’t realize how quickly a health emergency can bring about a recession have learned the hard way, but at least the lesson is clear enough.

In the dark, turn on your high beams

An all-encompassing discussion on human capital, of course, doesn’t stop here: it tackles the future of human capital, in the form of students who will enter a completely different workforce than those who entered it last year; it examines the nuances of disadvantage and highlights which groups have had the most to lose; it explores the intersections of industry and inequality and offers policy solutions accordingly. However, in the interest of brevity, what I have aimed at here is to underline a fundamental lesson from which those nuances will be derived: we must correctly assess the value of human capital in trying to revive the economy and avoiding another severe depression.

As to how we might do that, it’s worth noting we do have the small gift of hindsight – in 2002, severe acute respiratory syndrome (SARS, caused by the associated coronavirus, SARS-CoV) began spreading rapidly. In The SARS Epidemic and Its Aftermath in China, Yanzhong Huang writes, the outbreak ‘was not simply a public health problem. Indeed, it caused the most severe socio-political crisis for the Chinese leadership since the 1989 Tiananmen crackdown.’ The economy was predicted to crash, panic about political and financial instability spread as quickly as the disease itself, and China’s political structure came under intensive scrutiny. The crisis was drawn out and complex, but ‘with the SARS outbreak wreaking havoc and shaving an estimated seven-tenths of a percentage point off China’s gross domestic product for 2003, the government appears to have drawn some important lessons from the crisis, including the need for coordinated development.’

There we have it – coordinated development: bigger picture progress, not just the advancement of one area, not just focus on kind of capital. This health crisis, as well as the many others before and after it, are cars behind us on a dark road with strong headlights to light a small portion of the road ahead, which, despite this help, is still empty. It’s imperative that, in the dark, you turn on your high beams to look as far ahead as possible and, with the guidance of hindsight, you’ll be as prepared as anyone can be.

Join Our Newsletter