The impact of economic downturn on human resource policies in small businesses: the case of North Macedonia

Abstract

Current economic conditions create challenging environment for small businesses which could significantly affect the way they do business and manage their workforce. Globally, businesses struggle to survive amid the rising uncertainty, inflationary pressures and increased costs as well as disrupted supply chains, which deeply affects their performance. Such economic turmoil will inevitably result in cost cutting measures by businesses, thus affecting their human resource policies and practices. This raises issues related to the implications of the economic crisis on the human resource function and the challenges in terms of human resource policies that small businesses face. Previous economic crises have initiated a great deal of debates about the possible effects on human resource management policies and the potential areas for action, as retention of key talent and nurturing employee commitment. During economic downturn, businesses implement shortterm cost-cutting measures mainly by freezing recruitment, reducing employee training and development budgets, pay cuts, reduction of bonuses and even layoffs. Research on the effects of recession on human resource management found that major areas that are primarily affected refer to reductions in compensation and monetary rewards, training and development opportunities and the staffing levels. However, cost-cutting measures undertaken by businesses should not be at the expense of a severe loss of motivation and commitment among employees or reduction of their key talent pool. Indeed, the major challenge of human resource management during uncertainty is balancing between short-term and long-term strategy. While coping to maintain their viability through cost-reduction plans, businesses should also consider long-term plans and strategy in order to be prepared for the post-crisis period. In developed economies, many businesses are aware that in responding to the crisis they have to develop strategies that combine initiatives to reduce costs with measures to improve innovation and quality, employee morale and engagement. In this regard, for example, the financial crisis of 2008 has not affected the level of training investments considerably as major reductions in employee training were not reported in developed countries. This is mainly because the cuts on employee training and development were least effective in the previous recession and had negative impact on employee commitment and consequently productivity. In addition, major layoffs not only disrupt businesses’ talent pools, but also diminish the motivation among employees and affect their productivity levels. Therefore, in an effort to avoid major layoffs and maintain their talent pools, businesses insist on short-term costcutting measures as reducing employee training or compensation and bonus levels. Costs related to funding development opportunities are always a concern for management, making businesses reluctant to continue to provide development opportunities to their employees in such times. The main objective of this paper is to assess the immediate effects of the economic downturn on the performance and management activities of small businesses in the Republic of North Macedonia, as well as their response in terms of human resource management policies. An online survey questionnaire was distributed to owners and/or managers of small businesses in different sectors in North Macedonia. The questionnaire included questions that would determine the negative effects of the current economic conditions on small businesses, as perceived by business owners. In addition, the questionnaire covered aspects pertaining to current human resource policies undertaken by small businesses as a response to the current economic downturn, in terms of recruitment, compensation and employee training and development policies. The findings reveal that although small businesses consider increased costs of doing business to be their primary concern, most of the surveyed businesses did not and do not anticipate to decrease the pay levels or monetary rewards of their employees, nor do they plan major reductions of employee training and development opportunities. In fact, as a response to the growing inflation, many businesses have increased pay levels of their employees. In terms of staffing policy, the results show that the majority of businesses have already frozen their planned recruitments, but do not plan to implement layoffs. These findings are in line with the studies on firms’ human resource policy response conducted during previous economic crisis.