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By Dominique Dwor-Frecaut 27-05-2020
In: deep-dives | COVID-19 Economics

Supply-Side Perspectives On The Economic Impact Of COVID-19

(4 min read)
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Most of the discussion on the economic impact of COVID-19 has focused on demand destruction. Yet two recent academic papers, COVID-19 Is Also a Reallocation Shock and US Unemployment Insurance Replacement Rates During the Pandemic, provide an important supply-side perspective. They argue that the recovery will entail substantial reallocation of labour and that the current policy response hinders this reallocation, and they propose changes. Their views help assess the likelihood of a V-shaped recovery.   

In the first paper, the authors argue that COVID-19 has led to a spike in labour reallocation, a process that goes on even under normal circumstances. They cite the following key evidence:

The Atlanta Fed Survey of Business Uncertainty, a monthly US-wide survey that asks business executives for a subjective one year ahead forecast of their own capex, employment, and sales. Based on the survey, the authors construct an index of labour reallocation and show that it has spiked in April. They also estimate that, so far, there have been 2.7 hires for every 10 COVID-related layoffs.
Dispersion of listed firms’ monthly equity returns that spiked in March 2020.

The authors further argue that even if COVID-19 turns out to be a short-lived medical crisis, elevated reallocation will continue. The reasons: some of the shifts in consumer and business spending are likely to persist; small firms lose out to bigger, deeper pocketed ones; and the demand shock cleanses out marginal firms. 

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