Reflections: the economic impact of COVID-19

Dr Christopher Rauh of the Faculty of Economics considers the economic consequences of the pandemic.

The outbreak of COVID-19 is not only a health pandemic but also the beginning of an economic crisis. Some optimists think that the bounce back will be rapid and strong. The pessimists see a recession looming which is much deeper than the Great Recession of 2008, which was in part driven by high default rates on mortgage-backed securities, or even the Great Depression following the stock market crash in 1929 commonly referred to as Black Tuesday. While every day I am waiting to hear in the governments’ press conference that a scholar from Trinity College has developed a vaccine, I am occupying myself by collecting and analysing data about the impact the pandemic is having on workers.

Together with Abi Adams-Prassl of the University of Oxford, Marta Golin of the University of Oxford and Teodora Boneva of the University of Zurich, we find that the economic downturn is not affecting all segments of society in the same manner (see an overview of results of the COVID Inequality Project). On the one hand, there are those that have switched to working from home and continue to earn their salary. On the other hand, there are self-employed and workers in the gig-economy that have already been left with no work or income. Actually, we find that in the UK and the US about one in six workers have already lost their jobs due to the coronavirus. But not everybody is equally likely to suffer these economic blows. In particular, the young and low income earners are being blown away. The current picture is dire and many report they are already struggling to cover their usual bills.

Job loss probability depending on individual income in 2019

When listening to politicians, I get the impression that economic policies are focused on the short-run: the survival of airlines, income support for the self-employed and those that have been furloughed, etc. These measures are important. My feeling is that long-run implications of this downturn are being set aside and might be forgotten once the public health crisis improves. Firms shed contracts that were easiest to shed first: temporary and zero-hour contracts. These were mostly held by young workers who are now relying on universal credit rather than the more generous furloughing schemes. Furloughed workers will return to their jobs. Young laid off workers and adolescents that are bound to enter the job market soon will face bleak prospects of being hired. Besides these immediate drawbacks for the young, research has shown that cuts into early careers leave scars for the rest of one’s working life.

Given that production has been widely shutdown and the economy is, loosely speaking, running on money printed by the Bank of England, an open question is who will foot the bill. Of course not all of these extraordinary government expenditures will be covered by tax revenues this year, especially when one considers that tax revenues will be lower than ever. Therefore, we will see an increase in public debt in the short-run and we are unlikely to see drastic austerity measures in the near future to make up for the budget imbalance the government is running during the pandemic. As a consequence, at least part of the mountains of debt the intervention measures and bail-outs are piling up are going to be rolled off onto future generations.

I arrived in Barcelona in September 2008, right when the Great Recession unravelled and I spent the following six years there working for a consultancy and afterwards doing my PhD at the Universitat Autonoma de Barcelona. I witnessed the difficulties of the lost generation of Southern Europe. There were very few vacancies for qualified jobs and many educated young adults saw themselves forced to take temporary jobs not requiring their expertise. The other option was to migrate to better economic climates further north. Now there might be no place offering a better economic climate because this is a global shock of unprecedented scale. We should avoid the creation of a new lost generation, this time at a global level.

Finally, economic crises are often followed by rises in nationalism. Joan Esteban and Debraj Ray have a series of papers, including ‘On the Salience of Ethnic Conflict’ (2008), showing how political leaders push ethnic cleavages and national identity in order to distract from class cleavages. In the most extreme instances this has led to ‘wag the dog’-type of wars in the past. Listening to politicians during this pandemic, the frequent references to ‘wars’ and ‘our people’ has become frightening to me. Therefore, I think that despite the public health crisis being the absolute priority at the moment, we should be alert about these developments in the time to come.

This might seem like a sombre note. To end it on a high(er) note I’ll share my optimism that there must be some sort of silver lining to the pandemic. Necessity is the mother of invention. Many people are learning to adapt to this peculiar situation by advancing their digital knowledge. Firms are improvising how to fill the gaps in their supply chains using 3-D printers. Some of this acquired expertise will produce new knowledge and prove advantageous even once we return to whatever our new normality will look like. In the meantime, I will tune in to the government’s daily press conference and hope for the announcement. Trinity Fellows, I am counting on you.

The entire series of Reflections by Trinity Fellows can be viewed here.

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