Healing the Pandemic’s Economic Scars Demands Prompt Action
IMF Blog, May 17, 2022
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Bibliographic details
- Authors: Mehdi Benatiya Andaloussi, Lone Engbo Christiansen, Ashique Habib, Davide Malacrino
- Published: May 17, 2022
Overview and authorship
- Authors: Mehdi Benatiya Andaloussi, Lone Engbo Christiansen, Ashique Habib, Davide Malacrino
- Date: May 17, 2022
- Focus: Long-lasting economic and human-capital scarring from the COVID-19 pandemic, with emphasis on differences between G20 advanced and emerging market economies and policy responses to limit permanent damage.
Key findings on output, employment, and labor-market scarring
- Pandemic-induced losses for both economic output and employment will be significant in coming years (as discussed in the 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.
- Recessions often have lasting impacts on workers who lose jobs at the depths of the downturn, including difficulty finding new positions and skill loss from prolonged joblessness.
- Labor-market recovery divergence:
- Advanced G20 economies: experienced strong labor market recoveries, aided by robust policy support and widespread vaccination; initial concerns about large-scale skill mismatches have not materialized so far.
- G20 emerging market economies: employment rates remain below pre-pandemic projections due to weaker economic recoveries.
- Informal employment dynamics in several G20 emerging market economies:
- Informal work fell sharply at the peak of the crisis when contact-intensive sectors were hit by social distancing.
- Informal employment rebounded much more than formal employment in several G20 emerging market economies, including Brazil, Indonesia, Mexico, and South Africa.
- The share of informal work relative to total employment exceeded pre-pandemic levels for some economies by late 2021.
- Continued recovery of contact-intensive sectors could push the share of informal employment even higher.
- Increased informality could weigh on incomes for affected workers if it becomes persistent, since informal workers often earn lower wages and have less access to social safety nets.
Education, learning losses, and long-term human-capital effects
- Unprecedented school closures during the pandemic have hurt students’ learning across many G20 economies, particularly in emerging market economies.
- Within countries, the impact on learning was more severe for children from poorer families.
- 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.
- Long-term labor-force implications:
- Today’s students will account for close to 40 percent of the combined working-age populations across G20 economies for decades.
- Simulations indicate 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.
- Poorer households, suffering the worst learning losses, could see particularly diminished prospects, further widening income inequality.
Other scarring channels
- Increase in corporate debt and vulnerabilities in the industries hit hardest by the pandemic could contribute to scarring by weighing on investment and productivity for years to come (as presented in the IMF’s April World Economic Outlook).
Policy recommendations to heal scars
- Act promptly: time is short for limiting learning losses because education is cumulative.
- Immediate education actions:
- Quickly assess setbacks to learning.
- Implement measures to help students, such as additional tutoring or a longer school year.
- Fiscal and structural policy stance:
- Scale back pandemic-era support measures for firms and workers (examples cited include credit guarantees and job retention policies) as recoveries strengthen to avoid holding back reallocation of workers and resources.
- Shift policies toward helping people adjust to changing labor markets through well-targeted job-search programs and additional support for training to build new skills.
- Ensure well-functioning mechanisms for corporate insolvency and out-of-court restructuring to limit pockets of corporate distress turning into significant business failures or investment slumps.
- Overall conclusion: 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.
Source: IMF Blog post “Healing the Pandemic’s Economic Scars Demands Prompt Action,” May 17, 2022.
