We Need Flexibility In Labor Markets To Recover After Coronavirus

A pedestrian walks past a closed barber shop in Ward 7 as the coronavirus disease (COVID-19) outbreak continues in Washington, U.S., May 8, 2020. REUTERS/Leah Millis
May 10, 2020 Topic: Politics Region: Americas Blog Brand: The Buzz Tags: CoronavirusCOVID-19EconomyUnemploymentRecovery

We Need Flexibility In Labor Markets To Recover After Coronavirus

Generous unemployment insurance benefits, employee retention subsidies, occupational licensing laws, the minimum wage: All stand in the way of the economy adjusting quickly.

Much of the pandemic economic policy response around the world seemed designed to freeze the economy of March 2020. Existing employment relationships were subsidized, businesses were granted loans to encourage them to protect payrolls, and bailouts sought to keep existing industries on the road.

Such policies had a clear and understandable rationale: to preserve existing economic relationships. When it came to jobs, the thinking was that widespread layoffs would lead to substantial skills mismatches, creating vast inefficiency. Many believed the pandemic would be like an extended vacation and we could just pick up where we all left off by providing bridging support to businesses and households today. In this frame of thinking, layoffs and rehiring would be needlessly economically wasteful and prolong the pain of the pandemic shock.

That was always extremely optimistic. Economies are both dynamic and organic, with a constant churn of jobs and companies even in normal times. There was also huge uncertainty about the duration of this pandemic. Preserving the March 2020 economic structure would therefore come with ever‐​escalating costs. 

The huge risk with this approach, however, was that the pandemic itself would induce much greater economic change than usual. If it brought substantial permanent or semi‐​permanent alterations in behavior or tastes, then subsidizing businesses to protect existing jobs or business practices would actually slow the jobs recovery. As the economy woke up to new realities in a changed world, we’d want workers and capital to be reallocated to where they are most productive as quickly as possible. Programs that delayed or disincentivized this reallocation would then become extremely costly.

That take is the conclusion of a new paper published at the Becker‐​Friedman Institute by economists Jose Maria Barrero, Nick Bloom, Steven J. Davis. Reviewing the Survey of Business Uncertainty, they find:

  • That a measure of job reallocation across businesses was 2.4 times higher in April than the average value pre‐​pandemic, suggesting a major COVID-19 induced jobs reallocation.
  • That between March 1 and mid‐​April, the COVID-19 shock had led to 3 new hires in the near term for every 10 layoffs, showing substantial reallocation of workers already as demand patterns change already (think grocery stores, Amazon, hand sanitizer producers etc).
  • That using historical evidence of layoffs relating to recalls, 42 percent of pandemic‐​induced layoffs will likely result in permanent job loss.
  • That, historically, job creation responses tend to lag the destruction by a year or more.

Two conclusions stem from this analysis. First, there is likely to be a painful hangover from this crisis. Not because “relief” was inadequate, but because the world has changed and it will take time for employment relationships to adapt.

Second, policies that gum up that reallocation of workers could be extremely costly in recovery. Barrero, Bloom, and Davis mention the current generous unemployment insurance benefits, employee retention subsidies, occupational licensing laws, and regulations that inhibit business formation. I would add to that minimum wage laws and some other aspects of labor market regulation. All stand in the way of the economy adjusting quickly.

As sectors in the economy begin reopening, we need as much regulatory flexibility as possible to let the market sector reallocate workers.

This article by Ryan Bourne and Unemployment Insurance first appeared in CATO on May 7, 2020.

Image: Reuters.