Working Out the Differences: Labor Policies for a Fairer Recovery

IMF Blog, March 31, 2021

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Authors: John Bluedorn
Published: March 31, 2021

Pandemic labor-market impact: unequal and persistent

The COVID-19 pandemic’s destruction of jobs was "sure and swift."
Youth and lower-skilled workers took some of the hardest hits on average.
Women, especially in emerging market and developing economies, also suffered.
Many affected workers face earnings losses and difficult searches for job opportunities.
Structural changes may mean that job options in some sectors and occupations permanently shrink and others grow.

Sectoral patterns and automation

Jobs that are less skill-intensive and more vulnerable to automation tended to suffer more during the pandemic recession.
The pandemic accelerated preexisting employment trends, reinforcing a shift away from employment in sectors and occupations more vulnerable to automation.
Sectors that have shrunk the most from the crisis include:
- hotels and restaurants (accommodation and food)
- wholesale and retail stores (trade)
Sectors that saw employment growth last year include:
- information technology & communication
- finance & insurance
More impacted sectors often have fewer jobs amenable to remote work and tend to employ higher shares of youth, women, and the lower-skilled, contributing to unequal effects across worker groups.

Scarring, occupational switching, and earnings penalties

Evidence from past recessions suggests the pandemic is likely to inflict sizable costs on the unemployed, particularly lower‑skilled workers.
After unemployment spells, workers often have to switch occupations to find a new job, which tends to come with a pay cut.
On average, unemployed workers finding work in a new occupation experience a large average earnings penalty of about 15 percent compared to their previous earnings.
Lower-skilled workers face a "triple whammy":
- more likely to be employed in sectors more negatively impacted by the pandemic;
- more likely to become unemployed in downturns;
- more likely, if reemployed, to need to switch occupations and suffer an earnings fall.

Policy scenarios and quantified effects

No-policy scenario:
- An asymmetric pandemic shock leads to an enormous and rapid rise in unemployment and a grinding adjustment as conditions gradually improve.
Policy-package scenario (job retention + worker reallocation support):
- Job retention measures (examples: short-term work schemes like Germany’s Kurzarbeit; wage subsidies like the new US Paycheck Protection Program) help preserve jobs during the initial high-distancing shock.
- Worker reallocation policies (examples: incentives to start new businesses and hire workers; assistance to help match workers to new jobs; (re)training programs) ease adjustment to more permanent structural employment changes as the pandemic subsides.
- Combined policy support lowers unemployment about 4 ½ percentage points below what it would have been without such support.
- The policy mix disproportionately benefits lower-skilled workers and can hasten recovery if some measures are targeted toward more impacted populations (such as youth).

Policy guidance and timing

Policymakers need to consider the path of the pandemic (including cases and deaths, the extent of distancing measures, and rollout of vaccines) when deciding whether to shift from job-preservation measures to policies that expedite worker movement to growing sectors and occupations.
The right balance of measures can reduce unequal impacts across workers and encourage a speedier labor market recovery.

Based on Chapter 3 of the World Economic Outlook, “Recessions and Recoveries in Labor Markets: Patterns, Policies, and Responses to the COVID-19 Shock,” by John Bluedorn (lead), Francesca Caselli, Wenjie Chen, Niels-Jakob Hansen, Jorge Mondragon, Ippei Shibata, and Marina M. Tavares, with support from Youyou Huang, Christopher Johns, and Cynthia Nyakeri.