Credit: (Photo: IMF Photos)

Healing the Pandemic’s Economic Scars Demands Prompt Action

Challenges facing emerging market workers and students everywhere could turn to long-term damage.

The Group of Twenty economies continue their recoveries from the pandemic, but the unprecedented shock could still leave long-lasting scars that reduce economic prospects compared with their pre-crisis trends.

Pandemic-induced losses for both economic output and employment will be significant in coming years, as discussed in our April World Economic Outlook. Emerging market economies are likely to endure greater losses because they had relatively less access to vaccines and their pandemic-support packages were smaller. For many economies, the outbreak of the war in Ukraine is adding to the challenges.

Our new analytical work finds that, among the key causes of scarring from the pandemic are the prospective weak labor market recoveries in emerging market economies and the severe disruptions to schooling over the past two years across both advanced and emerging economies. Policymakers must act promptly to repair the damage from the crisis and prevent decades of diminished economic output from lost human capital.

Recessions often have lasting impacts on workers who lose jobs at the depths of the downturn. They may find it hard to find a new position during the recovery and may lose some skills from prolonged joblessness. Such losses harm not only affected workers but also reduce overall economic output.

This time around, the prospects for such job market scarring look very different between G20 advanced and emerging market economies. In fact, advanced economies have experienced strong labor market recoveries, thanks to robust policy support and widespread vaccination. Moreover, initial worries that the pandemic would create large-scale mismatch between workers’ skills and employers’ labor demand—due to persistent shifts in activity across sectors, for example—haven’t materialized so far.

However, workers in many G20 emerging market economies face a very different outlook, with employment rates remaining below pre-pandemic projections due to weaker economic recoveries. We also see a marked impact on the extent of informal work—which is widespread in many of these economies. In fact, informal work fell sharply at the peak of the crisis when contact-intensive sectors, which tend to have higher shares of informal employment, were hit hard by social distancing efforts.

Since then, however, informal employment rebounded much more than formal employment in several G20 emerging market economies, including Brazil, Indonesia, Mexico, and South Africa, with the share of informal work relative to total employment exceeding pre-pandemic levels for some economies by late 2021.

As contact-intensive sectors continue to recover, the share of informal employment could rise even further. Moreover, as informal workers often earn lower wages and enjoy less access to social safety nets, this increase in informality could weigh on incomes for the affected workers if it becomes persistent.

The unprecedented school closures during the pandemic have hurt students’ learning across many G20 economies, but particularly students in emerging market economies. Within countries, that impact was more severe for children from poorer families.

The effects are already becoming apparent. For example, the share of students in the United States performing below grade level in mathematics has risen, especially for those in lower grades and from lower-income households. If these learning losses aren’t addressed, affected students could experience a lifetime of depressed earnings.

And, as our research shows, today’s students will account for close to 40 percent of the combined working-age populations across G20 economies for decades.

Such long-lasting impacts on the labor force will significantly affect economies. While much is still unknown, our simulations show that, once all such students are in the labor market, gross domestic product for advanced G20 economies could be as much as 3 percent lower in the long run relative to the baseline scenario. And with poorer households suffering the worst learning losses, their prospects could be particularly diminished, further widening income inequality.

In addition to the challenges in the labor market and from schooling disruptions, there are other channels for scarring as well. For example, the increase in corporate debt and vulnerabilities in the industries hit hardest by the pandemic could also contribute to scarring by weighing on investment and productivity for years to come, according to new research presented in the IMF’s April World Economic Outlook.

Policies to heal scars

Many economies face mounting challenges as the war in Ukraine comes atop a continuing pandemic, and room for policy action is increasingly constrained as elevated debt and rapid inflation make further support difficult. Even so, policymakers can minimize the pandemic’s scars—if they act decisively.

Time is short for limiting learning losses because education is cumulative, each year building on the last. To minimize enduring harm, countries must quickly assess setbacks to learning and implement the appropriate measures to help students. This could include, for example, additional tutoring or a longer school year.

In addition, pandemic-era support measures for firms and workers that helped limit pandemic scarring, such as credit guarantees and job retention policies, will need to be scaled back as recoveries strengthen. Doing so will help avoid holding back the reallocation of workers and resources to their most productive uses as the pandemic eases, and help foster productivity growth.

Instead, policies could shift to helping people to adjust to changing labor markets, such as through well-targeted job-search programs and additional support for training to build new skills. Moreover, to limit elevated pockets of corporate distress turning into significant business failures or investment slumps, it’s also crucial to ensure well-functioning mechanisms for corporate insolvency and out-of-court restructuring.

While the challenges are many, by taking appropriate action now, G20 policymakers can repair the damage and set the stage for strong and inclusive recoveries in the world’s largest economies.


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