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BPEA Article

COVID-19 is also a reallocation shock

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Editor's Note:

This paper is part of the Summer 2020 special edition of the Brookings Papers on Economic Activity, the leading conference series and journal in economics for timely, cutting-edge research about real-world policy issues. Research findings are presented in a clear and accessible style to maximize their impact on economic understanding and policymaking. The editors are Brookings Nonresident Senior Fellow and Northwestern University Professor of Economics Janice Eberly and Brookings Nonresident Senior Fellow and Harvard University Professor of Economics James Stock. Read summaries of all the papers from the journal here.

The COVID-19 pandemic is driving a massive shift in jobs and businesses—within industries, across industries, and across locations, concludes a paper discussed at the Brookings Papers on Economic Activity conference June 25, and government policies that impede that process could make a potentially slow and painful recovery even worse.

Nick Bloom

Professor of Economics - Stanford University

Steven J. Davis

William H. Abbott Professor of International Business and Economics - The University of Chicago Booth School of Business

COVID-19 is also a reallocation shock develops an innovative, forward-looking measure of the reallocation of jobs and sales using the monthly Survey of Small Business Uncertainty (SBU) conducted the Federal Reserve Bank of Atlanta in cooperation with the University of Chicago Booth School of Business and Stanford University.

Based on survey questions that asked businesses to estimate sales and staffing a year ahead, the authors—José María Barrero of the Instituto Tecnologico Autonomo de Mexico, Nick Bloom of Stanford University, and Steven J. Davis of the University of Chicago—show that the rate of job reallocation across firms will more than double from the pre-pandemic average and the rate of sales reallocation will quadruple.

Line graph showing expected rates of excess job reallocation

They then consider the implications of their findings for government policy responses to the pandemic. These include unemployment benefits that exceed what workers would be paid if they returned to work, loans to small businesses under the Paycheck Protection Program that link forgiveness to employee retention and regardless of the firms’ longer-term prospects, and a $25 billion subsidy to 10 major airlines tied to paying employees through September even though many of the employees likely won’t be needed again for years. The measures could end up prolonging the recession by discouraging people who have lost their jobs from taking new jobs created by the pandemic and by encouraging businesses to keep workers they can no longer employ productively, the authors warn.

“[P]olicy efforts to preserve all pre-COVID jobs and employment relationships could prove quite costly … in terms of resource misallocation and taxpayer burden … [and by] slowing the overall recovery from the pandemic,” they write.

Drawing on previous research to help interpret the SBU results, the authors estimate that 42 percent of the jobs lost because of the pandemic are gone for good. But even as many firms were shedding workers, some were hiring. The April SBU showed that the COVID-19 shock caused three new hires in the near term for every 10 layoffs. A restaurant server, for instance, might take a job with a delivery service or a clothing store clerk might go to work in an online retailer’s distribution center.

The authors predict that consumer, worker, and business responses to the pandemic will persist to a sizeable extent even after the pandemic is over—including increased online shopping, reduced business travel, and increased working from home.

“Millions of households are learning how to purchase almost anything online, and many will stick with it. Business people are learning how to travel less, and employees and firms are learning how to make working from home work” the authors say. “Much of the shift in spending patterns and business practices will persist.”

Relative to before the pandemic, businesses responding to the May SBU survey expect that one-tenth of all work days (one-fifth for office workers) will shift from business premises to employees’ homes.

“This statistic implies a huge, persistent shift in worker spending power away from central business districts to locations closer to residences,” the authors write.

In examining the policy implications of their findings, the authors suggest changes to pandemic-relief measures. To encourage furloughed employees to return to their old jobs or take new ones, they would discontinue a temporary $600-a-week unemployment benefit supplement, which has pushed benefits above previous earnings for most workers. It is scheduled to expire at the end of July, but House-passed legislation would extend it through January. They recommend offering low-interest loans to businesses but, to avoid encouraging firms to retain employees who could be more productively engaged elsewhere, they would de-link loans and any forgiveness provisions from employee retention.

The authors also recommend reform of “legacy features of the U.S. policy landscape” that inhibit reallocation. For instance, they would relax state regulations that restrict land available for housing and commercial development with the goal of facilitating the movement of businesses and workers to the most productive cities. They also would relax occupational licensing restrictions that make it difficult for a wide range of workers, from tree trimmers to manicurists to sign-language interpreters, to practice their occupations in other states.

“If we leave these reallocation-retarding policies in place, it will weaken and lengthen the recovery. If we can reform them quickly, prospects for a relatively rapid recovery are much better,” Davis said in an interview with The Brookings Institution.

David Skidmore authored the summary language for this paper. Becca Portman assisted with data visualization.

CITATION

Barrero, José María, Nick Bloom, and Steven J. Davis. 2020. “COVID-19 Is Also a Reallocation Shock” BPEA Conference Draft, Summer.

CONFLICT OF INTEREST DISCLOSURE

The authors did not receive financial support from any firm or person for this paper or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. No outside party had the right to review this paper before circulation. The views expressed in this paper are those of the authors, and do not necessarily reflect those of the Instituto Tecnológico Autónomo de México, Stanford University, or the University of Chicago.

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