The COVID-19 pandemic is wreaking havoc on the economy. Businesses struggle to stay afloat. Unemployment is skyrocketing. Families worry about making ends meet.
Yale economist Giuseppe Moscarini, a labor market expert, says policymakers must move quickly but carefully to craft measures addressing the pandemic’s economic fallout. Drawing on his research on the 2008-2009 global financial crisis, Moscarini offers recommendations for keeping workers and businesses afloat, productive, and attached to each other.
Moscarini shared his insights with YaleNews. Interview condensed and edited.
What are the primary lessons from the 2008-2009 global financial crisis that policymakers and central bankers should consider as they address the pandemic’s economic impact?
Let me say first: Policy recommendations should cite research and hard evidence: Common sense alone does not cut it. And they must identify the reason why an intervention is needed.
On the financial side, central banks learned during the financial crisis how to keep markets and banks functioning, and they acted promptly. The concern in 2008-2009 that this massive expansion of the central banks’ balance sheets would cause runaway inflation didn’t pan out.
In terms of the real economy — the production of good and services — things are more complex. The shock that caused the Great Recession, which was financial in nature, propagated into a prolonged stagnation in the real economy in part because labor markets were deeply churned, and the required reallocation created skill mismatch — workers’ skills either lagged behind or exceeded those employers sought — leading to an incredibly prolonged duration of unemployment, and a slow rebound in productivity and wages.
This time the shock is much bigger, but hopefully much less persistent. An effective public-health campaign or a treatment breakthrough could get the outbreak under control within months. Unlike 2008-2009, the private sector does not have a lot of bad debt to deleverage (unless the current lockdowns last for a very long period), so we must keep workers attached to their employers to save our massive stock of “intangible capital”— namely firm-specific human capital, organizational knowledge, customer base, supply chains — that has been assembled over decades.
If that intangible capital is lost, no one gains. It is pure waste. Workers will be the primary victims.
What happens if firms lose their intangible capital?
If that intangible capital is lost, no one gains. It is pure waste. Workers will be the primary victims. Much research, including my own, shows that losing a job for such extraneous reasons and not returning to the old employer reduces a worker’s earnings by more than 10% on impact and also over their lifetime, by requiring workers to climb the job ladder again. It’s not just a matter of the few (painful) months of unemployment; the effects of a career derailment last for a decade or more. And it is not simply that bargaining power lost by the worker is gained by the firm; to a large extent, the worker’s earning loss reflects loss in productivity, which hurts everybody.
How can we keep workers attached to their employers?
We need the government to act. Firms and workers may not be able to commit to reuniting on their own. Imagine an unemployed worker who moves to another state or takes another job because they worry their old employer won’t recall them. At the same time, an employer pays rent, interest on debt, and other costs to keep their business viable, but fears that its old employees will disband and move away to make ends meet. It will take forever to restart the business without those trained employees. Each party fears the other’s lack of commitment, and bails out earlier (workers move, employers shut down) to cut its losses. The government can help them commit to one another through appropriate incentives.
What kinds of incentives should the government provide?
The priorities should be providing financial support to households whose incomes fall and providing support to businesses, provided that they pledge to rehire employees and resume operations promptly once circumstances allow. The reason for this condition is to avoid five years of rehiring, retraining, and lost productivity, which would make companies’ accumulated debt unsustainable.
At the same time, if the COVID-19 pandemic continues, we will need to temporarily reallocate employment to certain essential activities required to overcome it, such as wholesale and retail (as employees quit, take care of sick family members, or get sick themselves), manufacturing, information technology, and whatever governments and markets will require to face the crisis.
The balance is between helping workers remain attached to their employers without keeping them idle (unless this is required by social distancing) and unable or unwilling to take on temporary jobs needed to keep our society functioning during the emergency.
What policies do you recommend?
To help workers, I’d recommend more generous and targeted unemployment insurance benefits. I also recommend wage subsidies, which is something the United Kingdom and Denmark have introduced, for employees finding themselves unable to work. (They provide 80% of wages up to a limit of £2,500/month and 75% of wages, respectively.) These subsidies attain the goal of preserving workers’ attachment to prior employers, but they also may discourage temporary reallocation of employment. We still do not know how much temporary reallocation is needed in the medium run.
Unconditional bailouts… should be avoided. We need targeted policies aimed at preserving workers’ attachments to their old employers.
To support companies, I suggest zero-interest, long-maturity loans to cover only fixed operation costs — rent, maintaining a minimum labor force, and paying interest. The loans could be forgiven to the extent that the recipients offer to rehire old workers. This way, workers will feel reassured that their old jobs are waiting for them, and be more willing to spend and be helpful elsewhere in the meantime, including staying home if required.
Unconditional bailouts, without these strings attached, should be avoided. We need targeted policies aimed at preserving workers’ attachments to their old employers, but policymakers should not be simply throwing money around.
What do you think are the strongest aspects of the economic stimulus package recently passed by the U.S. Congress? Where is it most deficient?
The package’s unemployment insurance provisions and rule waivers, which make it easier to receive and maintain unemployment benefits, and some conditions of the loans provided to companies move in the directions that I have discussed above.
The $350 billion small-business loan program is too small. The $600/week unemployment insurance addition is too blunt an instrument. It should be modulated by a worker’s pre-crisis salary and job sector. I understand the urgency and simplicity of the flat subsidy, but over the next few weeks, we can do better. For some, $600 a week is not enough. For others, it is a windfall. Additional legislation should provide people incentives to work in risky but essential occupations, such as first responders and retail, public transportation, and health care workers.
To learn more about Moscarini’s policy recommendations, read this recent column he published with colleagues Shigeru Fujita, an economist with the Federal Reserve Bank of Philadelphia, and Fabien Postel-Vinay, an economics professor at University College London.