At Least 42 Percent of Covid Layoffs Will Be Permanent

Covid-19 is Also a Reallocation Shock, a recent white paper from the National Bureau of Economic Research, makes some troubling predictions for the U.S. economy.

The researchers anticipate a drawn-out economic recovery from the Covid-19 shock, even if the pandemic is largely controlled within a few months. They also estimate that 42 percent of recent Covid layoffs will be permanent job losses. And the longer it takes to resuscitate the economy, the larger the fraction of recent layoffs that will turn out to be permanent.

At Least 42 Percent of Covid Layoffs Will Be Permanent

This graph displays the expected sales reallocation rate from October 2016 to April 2020. The upshot is that the Covid-19 pandemic has given rise to a large labor reallocation shock. In fact, the coronavirus pandemic is forcing the fastest reallocation of labor since World War II.

The paper cites three reasons. First, the pandemic and shutdowns have curtailed both consumer demand and, as a consequence, demand for labor. Second, economic uncertainty will remain extraordinarily elevated, disincentivizing hiring and causing more companies to “do more with less.” And third, the Covid-19 shock will have negative effects on the economy’s productive potential in the future, leading to the creation of fewer jobs and more wide-scale unemployment.

Even if medical advances or natural forces bring an early resolution to the crisis, many pandemic-induced shifts in consumer demand and business practices will persist. Even with a vaccine in hand, consumer and business spending won’t fully revert to pre-pandemic patterns.

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