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  • Laurenz Mathei

The Labour Market after Covid-19: At a glance

At the time of writing, the world has seen more than 40 million confirmed Covid-19 cases, and more than 1.1 million deaths. While pandemic is not unprecedented – conservative estimates attribute 50 million deaths globally between 1918 and 1920 to the Spanish flu – it is certainly the most severe health crisis we have experienced in the last century. Of course, Covid-19 isn’t the first modern virus outbreak either, but its ease of transmission makes it far more dangerous than SARS, MERS, or Ebola – all of which (in ascending order) are deadlier than Covid, but much harder to contract. The only other easily spreading virus recently witnessed was the swine flu, though with much lower fatality rates.

Keeping these sad realities in mind, it becomes immediately clear why so many countries reacted – as they do again now to contain the second wave – with severe measures, such as social distancing or even complete lockdowns. Primarily driven by subdued consumer demand for goods and services, protective health policies had severe repercussions on the world economy. The latest IMF projections show a 4.4 per cent reduction in global GDP growth in 2020 (7.7 percentage points below the pre-Covid19 January 2020 outlook) with low-income households most heavily affected. EU economies face an even larger contraction with -7.2 per cent in 2020. A large wave of unemployment (though somewhat softened by job-retention schemes) significantly reduces households’ disposable income, leading to a further decrease in consumption – as indicated also by low consumer confidence – and, hence, a sluggish recovery. Worldwide GDP growth is expected to increase by 5.4 per cent in 2021, though this figure is about 6.5 per cent lower than in pre-Covid-19 forecasts.

Source: PEACS graphic; data from IMF World Economic Outlook Database October 2020

Many governments as well as firms have implemented – mostly reactionary – short-term policies to keep workers in their jobs and make workplaces (more or less) Covid-safe. Introducing such measures quickly is crucial to keep the economy going, but there isn’t a single blueprint, and different political economies require different policies.

These observations are clearly supported by the numbers. As the IMF’s Fiscal Monitor shows, fiscal stimulus has amounted to $11.7tn, or close to 12 per cent of global GDP. Government spending as a response to the current economic downturn is not only significant in absolute terms, but also considerably larger than the relief granted in the last pan-economic crisis, the Global Financial Crisis (GCF) 2008/09. National leaders seem to have learnt that increasing public debt in times of a severe economic contraction is indeed the right thing to do.

However, these large sums must be sustained by the right accompanying policies for the type of crisis we are facing. A close examination of the disruption’s origin is a crucial tool for developing a coherent long-term strategy to get out of it. The virus-containment measures are a textbook example of an exogenous shock, i.e. an event that occurs outside of the economic system, but has dramatic effects on its performance. The GFC, on the contrary, was an example of an endogenous shock within the system, as it ensued because a bursting bubble brought financial markets into significant trouble.

In the wake of the GFC, authorities around the world passed new regulations for financial markets; but no one can tell the virus how to behave. It becomes therefore immediately clear that the exogenous nature of the present economic crisis’ root causes renders any mitigation by economic players impossible. The only real option for mitigation is a globally distributed vaccine, but – while not impossible, as shown with over viruses, e.g. the common flu, or Polio – it will take a while to control or even eradicate Covid-19. Hence, while short-term economic relief mechanisms, e.g. a fiscal stimulus in the form of job retention schemes, are crucial to soften the disruption, in the medium to long run, the only way out of the economic Covid crisis is an adaptation to the new conditions under which the economy operates.

To prevent severe economic scarring, or a long economic Covid as a recent FT piece coined it, governments need to convert their short-term reactions to the downturn into stable action plans for economic recovery. To understand the macro-economic and political dimension of the current challenges, national leaders should look at lessons learnt from of large structural transformations – including the institutional landscape and policy strategy required to maximise the benefits of government spending and potential effects (or lack thereof) on economic fundamentals.

Any structural transformation should be guided by past experiences, but even more crucially, it must take into account current and future trends in the labour market, e.g. process organisation, tasks, and the resulting skills demand. Covid-19 provides an interesting example of how an exogenous event can be both a major driver and an accelerator for change in the world of work.

Working from home (WFH), on the one hand, was a technically feasible arrangement that was used in some organisations to cater for employees’ needs, but usually only in extraordinary cases. The need to keep our distance and continue our work – even in complete lockdown – has created a revolutionary acceptance of WFH arrangements. As pointed out in Part 1 of this dossier, remote working is a largely feasible alternative to sitting in a crowded office space and is highly likely to stay present even after Covid-19.

Automation, on the other hand, is a trend that we’ve been observing for a while now. It offers – on the face of it – an attractive way of cutting production costs by replacing expensive labour with relatively cheap capital that amortises over a few years. The pandemic has put many companies under financial distress – liquidity shortages due to declining revenues are a common threat. While publicly funded job retention schemes have softened the unemployment wave slightly, many firms have laid off workers to minimise their expenditure, turning to robots instead. Covid-19 has thus facilitated an acceleration in the reduction of the workforce, which would likely have happened in any case – though at a later stage and potentially slower pace.

Both trends, however – while (for better or worse) almost impossible to reverse – need to be accompanied by forward-looking labour market policies to guarantee their success and minimise social costs. Solutions for these challenges have to be novel and creative: A re-definition of tasks can make WFH more productive and enjoyable, re-training employees is tantamount to fully utilising automation and makes it socially palatable, and new ideas on how to design institutions that can help detect and provide skills of the future.


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