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What are the effects of coronavirus on the UK and US labour markets?

Millions of jobs have already been lost in the Covid-19 recession. What do we know about the kinds of workers who have been most affected? And what will be the likely effects on economic inequalities and the future prospects of people whose employment and earnings have been hit?

The Covid-19 recession is likely to be the most severe economic downturn since the Great Depression of 1929-32. Early evidence shows the scale of disruption to people’s lives along numerous dimensions. A variety of public policy interventions in many countries are acting to prevent even larger scale job losses, but enormous differences in labour market outcomes are emerging between people, including by occupation, industry, gender, age and place of residence.

A major concern is the potentially persistent negative effects of job loss in a recession on people’s earnings and job security. This recession is occurring at a time when inequalities of income, consumption, wealth and labour market power are already very high.

What does evidence from economic research tell us?

  • The crisis has caused significant disruption to people’s jobs and the effects have been unequal across different job types, with sharp drops in labour demand in many sectors and labour shortages in other sectors.
  • The extent to which people are being affected varies enormously by age, gender, occupation and industry. A major determinant of job loss is the extent to which tasks can be done at home.
  • Workers with permanent, salaried, fixed hour contracts are less likely to be affected compared with workers who were on temporary contracts, non-salaried and whose hours varied.
  • Job loss during a recession has durable, negative effects on future earnings and job security.
  • Preserving workers’ attachment to the labour market is an essential goal of public policy.
  • The high exposure of women to employment loss is likely to put upward pressure on the average gender wage gap for years to come.

How reliable is the evidence?

There is a large amount of research on the effects of recessions on various labour market outcomes, such as employment, wages and household income. There is also significant research on the causes and consequences of inequalities in wages, income and consumption at both the individual and household level. Most of this evidence is published in peer-reviewed journals, but the fast-moving nature of the crisis means that initial analyses of the effects of the crisis are not necessarily peer-reviewed, and data are often coming from small-scale surveys.

Most regular surveys used by statistical agencies to measure unemployment struggle to capture the current state of the labour market because of the frequency of the data or time taken to release them. The most recent labour market statistics available from the Office for National Statistics (ONS) in the UK are for March 2020. Claimant count data from DWP show over two million new claims for benefits between mid-March and mid-May, a 69% increase.

In the United States, surveys are showing massive declines in employment, with an estimated 20 million jobs lost in April far more than jobs lost over the entire Great Recession of 2008/09.

The scarring effects of recessions

Research shows that those who enter the labour market during recessions are ‘scarred’ for many years thereafter, with lower employment and wages than similar individuals from cohorts that entered at better times. The recession following the 2008/09 global financial crisis was unusually severe, and in the labour market long-lasting.

One study finds that in contrast to previous recessions where the effects have tended to evaporate within ten years after graduation, the cohorts that graduated during and after the Great Recession have recovered much more slowly (Rothstein, 2020). The evidence to date in this study suggests that the negative effects on employment for the Great Recession cohort are permanent (at least up to the age of 40).

A study in the UK finds persistent scarring effects on employment and earnings using data covering economic cycles from the 1970s onwards (Cribb et al, 2017). Interestingly, this study finds little or no impact on the net household incomes and household expenditure of these individuals because of the cushioning provided by the welfare system, and because many young adults are living with their parents for some years after entering the labour force.

The economic impact of the physical distancing measures taken to reduce the spread of Covid-19 is a distinct feature of the current recession. This has huge implications for the types of jobs that can be done at home, with employment losses concentrated so far in occupations that largely cannot be done from home, with the exception of jobs deemed essential such as health workers.

Several studies have attempted to quantify the proportion of jobs that can be done at home, or are providing estimates of the occupations that are most exposed to contagion while at work. A US study estimates that about 37% of US jobs can plausibly be performed at home (Dingel and Neiman, 2020). There is also a gender gap in respondents’ ability to work from home: women on average report they can do 41% of their tasks from home compared to 46% for men (Adams-Prassl et al, 2020).

Related question: Who can work from home and how does it affect their productivity?

Moreover, the crisis means that some people may not just lose employment or earnings, but also their lives. Health professionals are the most exposed occupations, followed by workers in sales, and personal and protective services. Such key or essential workers also tend to be those with weaker labour market positions – that is, they are disproportionately women, young and less educated.

Exacerbating existing inequalities

Before the Covid-19 crisis, there was already an inequality crisis. In the UK, median household income stalled completely in 2017/18, largely driven by employee earnings growth being lower than inflation. Falling working-age benefit incomes have pushed down the incomes of low-income households. Inequality has remained relatively constant since the 1990s, but is much higher than it was in the 1970s.

Early research suggests that the pandemic recession will exacerbate existing inequalities. One study finds a major negative impact on wages in the United States by mid-April 2020 that was concentrated in the bottom quintile of workers, caused by a combination of massive layoffs and reductions in working hours (Berman, 2020).

There are also profound differential effects on women and men in the labour market, and have implications for gender equality, both during the downturn and the subsequent recovery (Alon et al, 2020). In past recessions, men’s employment tended to be more severely affected than women’s employment, but the physical distancing measures have a large impact on sectors with high shares of women in employment. Several studies have shown that to date women are more likely to lose their jobs than men (Adams-Prassl et al, 2020; Hupkau and Petrongolo, 2020).

Childcare poses an additional challenge to working parents, with single parents facing the greatest challenge. Because of the high returns to experience in the labour market, the effects of the crisis are likely to be persistent for working mothers. One study argues that there is a case of optimism in the longer term as some businesses adopt more flexible work arrangements (Alon et al, 2020).

Previous research has shown the lack of flexible work arrangements to be one of the biggest sources of the gender wage gap (Goldin, 2010). Changes in flexible work arrangements might be persistent and go hand in hand with changes in social norms that turn fathers into the primary childcare providers, thereby changing the distribution of the division of labour in housework and childcare (Alon et al, 2020).

What else do we need to know?

Much of the available evidence is so far coming from relatively small scale and ad hoc surveys (for example, Adams-Prassl et al, 2020; Coibion, 2020; Bick and Blandin, 2020). It is difficult to verify whether they are broadly representative of the distribution of the characteristics of the population.

In the UK, the ONS has accelerated the roll-out of an online Labour Market Survey (LMS) with the intention of publishing results more frequently than the established quarterly Labour Force Survey (LFS). Both the LFS and LMS have had questions added to assess the impact of Covid-19 on people’s employment and working patterns. These surveys, in combination with longitudinal surveys, will be essential for examining the short- and long-run consequences of the crisis for earnings, job security and individual and household inequality in income, consumption and wealth.

Early evidence for the United States shows that despite the large job loss, the rise in the unemployment rate has so far been surprisingly small, indicating that many of those losing jobs are not actively looking for new work (Coibion, 2020). This may be due to transitory factors such as the ‘shelter at home’ orders. But early retirement almost fully explains the drop in labour force participation.

More severe recessions are also often associated with a rise in ‘discouraged workers’, in which some unemployed workers stop looking for work (Coibion, 2020). This leads them to be reclassified as ‘out of the labour force’, so the unemployment rate can decline along with the labour force participation rate. As in previous recessions, paying attention to both of these measures and, crucially, the employment-to-population ratio is essential for understanding the state of labour markets.

Policies to provide assistance to employees unable to perform their jobs at home have been essential in preserving both living standards and employees’ attachment to their employers. Instituting equivalent schemes for the self-employed has been slower and more complex, with some people such as the newly self-employed or self-employed high earners not covered. Existing data sources already struggle to capture many in low-paid insecure work, such as those on zero hour contracts. A better understanding of how these groups are coping is necessary.

Related question: How is coronavirus affecting the self-employed?

Unlike previous downturns, the recession represents a radical (temporary) shift in the mix of economic activities. Therefore, finding ways to reallocate workers to sectors that are experiencing shortages would help preserve incomes and maintain attachments to the labour market. Designing policies that preserve as much as possible existing employer-employee links while facilitating short-term reallocation of workers is of critical importance.

Related question: How can labour market policy help to get people back into the right jobs?

Where can I find out more?

Inequality in the impact of the coronavirus shock: evidence from real time surveys: Abi Adams-Prassl, Teodora Boneva, Marta Golin and Christopher Rauh have a project to survey people in the UK, Germany and the United States providing real-time information on labour market effects of the crisis.

The impact of Covid-19 on gender equality: Titan Alon, Matthias Doepke, Jane Olmstead-Rumsey and Michele Tertilt provide evidence of the effect of the pandemic on gender equality in the United States.

US and UK labour markets before and during the Covid-19 crash: David Bell and David Blanchflower provide an early overview of the effect of the shock in the UK and US and analysis of the labour market situation at the beginning of the crisis.

Job vacancies during the Covid-19 pandemic: Monica Costa Dias, Norris Keiller, Fabien Postel-Vinay and Xiaowei Xu provide real time information on job postings (vacancies), a leading indicator of economic activity.

Entering the labour market in a weak economy: scarring and insurance: Jonathan Cribb, Andrew Hood, and Robert Joyce provide UK evidence on the negative short and long-run effects of entering the labour market during recession.

Recessions and the costs of job loss: Steven Davis and Till von Wachter study the cumulative effects of job loss on earnings using longitudinal data.

Spillovers and redistribution through intra-firm networks: the product replacement channel: Jay Hyun and Ryan Kim study evidence from the last recession in the United States on how firms that operate in multiple places can spread the economic even to regions that have not been directly affected – summarised at the Chicago Booth Review.

Who are UK experts on this question?

Author: Andrew Aitken, NIESR
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