Workers face pay cuts for new unemployment fund

People walk from Kibera slums to Industrial Area in Nairobi in search of work. FILE PHOTO | AFP

By CONSTANT MUNDA
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Summary

• The plan will see employees contribute one per cent of their pay that will be matched up by employers towards the fund that aims at generating at least Sh23 billion annually on implementation.
• The State seeks to offer a monthly stipend during periods of mass job cuts to ease the pain of loss of income and put money in people’s pockets to demand for firms’ goods and services.
• The unemployment fund, to be managed by the Social Protection Department under the Labour ministry, mirrors that of South Africa -- which has so far disbursed huge amounts of money to support of millions of workers and businesses affected by the vagaries of the Covid-19 pandemic.

Salaried employees in the formal sector face deductions from their pay slips towards a planned special fund by the Treasury, which is aimed at cushioning workers involuntarily squeezed out of employment.

The Treasury has revealed in its post-Covid recovery blueprint that it intends to create an Unemployment Insurance Fund (UIF) to give short-term relief to workers who lost their jobs or are unable to work due to illness.

The plan will see employees contribute one per cent of their pay that will be matched up by employers towards the fund that aims at generating at least Sh23 billion annually on implementation.

While offering relief to sacked workers, it looks set to add to the cost of doing business in an economic setting where employers pay mandatory fees monthly to staff health and pension schemes.

“The government will establish a UIF to cushion workers in financial distress by providing them with short-time relief when they become unemployed, are on unpaid leave or are unable to work because of illness,” says the Treasury in its Post-Covid-19 Economic Recovery Strategy 2020-2022 paper.

About 1.72 million workers lost jobs in three months to June when Kenya imposed stringent coronavirus containment measures that led to layoffs and pay cuts. Young people were the hardest hit by job cuts compared to their counterparts aged above 35 years in an economic setting that is plagued by a hiring freeze on the back of sluggish corporate earnings.

This is a major blow to jobseekers, especially the close to one million who graduate from various educational institutions every year.

Now, the State seeks to offer a monthly stipend during periods of mass job cuts to ease the pain of loss of income and put money in people’s pockets to demand for firms’ goods and services.

Going by last year’s wage bill of Sh2.28 trillion for the nearly 2.93 million formal sector employees -- both in public and private sector -- the size of the fund could hit Sh22.79 billion in a year or Sh1.9 billion a month.

The unemployment fund, to be managed by the Social Protection Department under the Labour ministry, mirrors that of South Africa -- which has so far disbursed huge amounts of money to support of millions of workers and businesses affected by the vagaries of the Covid-19 pandemic.

The South African scheme also involves employees contributing one per cent of their pay which is matched up by employers.

As at last month South Africa had disbursed more than 51 billion rand (Sh364.59 billion) through its Covid-19 Temporary Employer-Employee Relief Scheme (Covid-19 TERS) to help workers, businesses and the economy mitigate the worst impact of the national lockdown on workers.

The proposal by the Treasury to set up a similar fund comes in the wake of Covid-19-linked economic fallout which left nearly two million workers in Kenya jobless after firms were forced to scale down operations or shut down at the height of containment measures to stem the spread of the contagious disease.

The economy sank into a trough, with gross domestic product (GDP), a measure of economic output, contracting 5.7 per cent—the first in 12 years.

Companies, which were already struggling with flagging sales since the beginning of the year, resorted to job cuts and unpaid leave when the Covid-induced shutdowns and restrictions were imposed on March 25.

Findings of a Stanbic Bank Kenya’s Purchasing Managers Index (PMI) monthly survey showed that firms shed jobs between February and September, ruining the livelihoods of millions.

The Kenya Association of Manufacturers (KAM) and consultancy firm KPMG in September pitched for the creation of the UIF, urging that it be designed to allow workers to either work part-time or remain “formally with the business even if not working at all to ensure quick resumption of activity once normalcy returns”.

Simon Githuku, the lead researcher at KAM, said Kenya could borrow from Germany’s and France’s frameworks in setting up such a scheme.

“If you reach retirement age and a pandemic or any other major crisis has not happened, it becomes part of your pension,” he told the Business Daily in September.

The Federation of Kenya Employers (FKE), however, urged for caution, saying although such an arrangement has worked well in at least 30 developed or upper middle-income countries with large formal sector employment, low-income countries such as Kenya could struggle to sustain it.

The employers’ body said its research had shown that such a fund, supported by employers and employees, had not been “effective in economies with high unemployment and underemployment rates”.

“On average, in Kenya, people are staying out of employment for seven years. You cannot sustain payment of unemployment benefits in such an economy,” FKE executive director Jacqueline Mugo said via email.

“The employment search period is too long, and a majority of the labour force is unemployed. In this scenario, unemployment insurance fund is not feasible.”

The FKE also wants implementation of the proposed fund delayed until companies and employees have recovered from the Covid-19 shocks that have cut their earnings.

“These are not normal times since the economy is in distress and both employers and employees are facing cash flow and financial challenges,” Ms Mugo said. “Starting such a fund and asking the employers and workers to contribute into it at this point will be ill advised.”