FindingJun 23, 2020

COVID-19 is also a Reallocation Shock

The COVID-19 economic shock caused 3 new hires in the near term for every 10 layoffs, with 32% to 42% of layoffs likely permanent
Expected Rates of Employment Growth and Excess Job Reallocation Rate

Nearly 28 million persons in the US filed new claims for unemployment benefits over the six-week period ending April 25. Further, the US economy shrank at an annualized rate of 4.8% in the first quarter of 2020, and many analysts project it will shrink at a rate of 25% or more in the second quarter. Yet, even as much of the economy is shuttered, some firms are expanding in response to pandemic-induced demand shifts.

By pairing anecdotal evidence from news reports and other sources, along with the rich dataset provided by the Survey of Business Uncertainty (SBU), [1]the authors construct novel, forward-looking measures of expected job reallocation across US firms. The authors draw on two special questions fielded in the April 2020 SBU, one asks (as of mid-April) about the coronavirus impact on own-company staffing since March 1, 2020, and another asks about the anticipated impact over the ensuing four weeks. Responses reveal that pandemic-related developments caused near-term layoffs equal to 12.8 percent of March 1 employment and new hires equal to 3.8 percent. In other words, the COVID-19 shock caused 3 new hires in the near term for every 10 layoffs.

Firm-level sales forecasts show a similar pattern, further supporting the authors’ view that COVID-19 is a major reallocation shock. In addition, the authors’ measure of the expected excess job reallocation rate rose from 1.5% of employment in January 2020 to 5.4% in April. The April value is 2.4 times the pre-COVID average and is, by far, the highest value in the short history of the series.

The authors also draw on special questions put to firms in the May 2020 SBU to quantify the anticipated shift to working from home after the coronavirus pandemic ends, relative to the situation that prevailed before the pandemic. They find that full work days performed at home will triple in the post-pandemic economy. This tripling will involve shifting one-tenth of all full work days from business premises to residences (and one-fifth for office workers). Since the scope for working from home rises with worker earnings, the shift in worker spending power from business districts to locations nearer residences is even greater.

Finally, the authors find that much of the near-term re-allocative impact of the pandemic will persist, as indicated by their forward-looking reallocation measures and their evidence on the shift to working from home. Drawing on special questions in the April SBU and historical evidence of how layoffs relate to realized recalls, they project that 32% to 42% of COVID-induced layoffs will be permanent. The authors also construct projections for the permanent-layoff share of recent job losses from other sources, obtaining similar results.

[1] The SBU is a monthly panel survey developed and fielded by the Federal Reserve Bank of Atlanta in cooperation with Chicago Booth and Stanford.