Millions of jobs could be permanently lost in reallocation shock

William Lovely, Twenty-year-old, used to work at Jason’s Deli in Virginia Beach, delivering catering orders to surrounding businesses. Now, thanks to the coronavirus, he’s struggling to pay his bills.

Laid off in March, went out of the ordinary hours and paid to go to UberEats or Instacart, earning up to $ 100 some days, but often coming home almost nothing. As the restaurant tries to reopen it slowly, Lovely reckons that the best he can hope for is a part-time position, which requires him to keep his second job if he’s going to meet his expenses.

He said, " My job stopped, but the bills don’t."

Lovely experience goes to the heart of the global economy’s dilemma as it gradually emerges from the virus-enforced lockdown and the unprecedented recession: How many millions of the millions of lost jobs are gone for good?

The hope is that the stimulus waves doled out by governments and central banks should eventually buoy economies and spark a revival in hiring. Furloughed or redundant workers would then return to their employers.

However, the risk is that the pandemic causes a "reallocation shock" in which firms and even entire sectors suffer lasting damage. The lost jobs are not returned, and unemployment remains high. This would force workers to retrain or relocate, which is difficult, and governments have to do more than just try to get out of trouble.

A theme hit last week by Federal Reserve Chairman Jerome Powell as central bankers in the United States forecast leaving interest rates will remain close to zero until 2022, in part due to higher unemployment at the highest level since the Great Depression.

Powell, who will testify before Congress on economic prospects this week, said there will be "many millions of people who will not be able to return to their old work." "In fact, there may not be work in this industry for some time."

Unfortunately, new research from Bloomberg Economics reckons 30% of job losses in the U.S. from February to May are the result of a reassuring shock. The analysis, based on the relationship between employment, dismissal, vacancies, and unemployment, indicates that the labor market will recover quickly at first, but will stabilize thereafter as millions of unemployed continue to exist.

Workers in the hospitality industry, such as Lovely's, are among the most at risk, along with retail, entertainment, education, and health. In many cases, the pandemic will increase the challenge for brick and mortar companies facing e-commerce platforms such as Amazon.com.Inc, accelerating the pre-crisis trend.

According to Bloomberg economists, financial markets are already pricing in the risk. Equity market returns across different sectors and companies of different sizes suggest that investors are betting on a change in profits between companies similar to those they experienced after the 2008 global financial crisis. Lost profits spell lost jobs.

Other studies carry similar warnings. Research published by the Becker  Friedman Institute at the University of Chicago has estimated that 42% of recent layoffs in the United States will be permanent.

" There’s a massive reallocation shock," said Nicholas Blum, Stanford University economics professor and one of the study's authors. The recession "affects different sectors differently. Some benefits and others decrease."

This phenomenon puts governments under pressure to craft policies that help viable firms survive, and workers move to various jobs, but ideally, it does not support companies that are no longer sustainable and simply drain resources.

The Peterson Institute for International Economics said in a study last week that the unique impact of the virus means that governments may need to do more to keep jobs and protect workers more than they do in a natural recession. They recommend subsidizing wages to create incentives to resume production and the continuation of credit guarantees for new loans.

Bloomberg Economics's research highlights the challenge. It was found that about 50% of job losses in the USA United States of America come from a combination of lockdown and weak demand, 30% from reallocation shock, and 20% of high unemployment benefits that encourage workers to stay at home. Different causes of job losses require different and sometimes conflicting political responses.

One of the main concerns is that with the continued loss of temporary jobs, skills are lost and unemployment increases, concept economists call a slowdown.

In this context, labor market experts say that measures must not stop to improve safety nets, but also ensure that people have the right skills. Last week, the Organization for Economic Cooperation and Development called for public investment in theater training.