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The Economic Impact of Covid-19

Ying Liu Bazak

yil795@sfu.ca

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Required Readings

Abstract and Section 3 of “The Economic Impacts of COVID-19: Evidence from a New Public Database Built Using Private Sector Data, by Raj Chetty et al. 2020 NBER working paper

The Economic Impact of Travel Restrictions on the Canadian Economy due to the COVID-19 Pandemic, by Huju Liu, 2020

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Other suggested readings

A literature review of the economics of COVID-19, by Abel Brodeur, David Gray, Anik Islam, and Suraiya Bhuiyan

Effects of the COVID-19 Recession on the US Labor Market: Occupation, Family, and Gender, by Stefania Albanesi and Jiyeon Kim, Journal of Economic Perspectives, 2021

Labor Demand in the time of COVID-19: Evidence from vacancy postings and UI claims, by Eliza Forsythe, Lisa B. Kahn, Fabian Lange, and David G. Wiczer, NBER working paper, 2020

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Today we are going to talk about …

  • What? - What do we talk about when we talk about economic impacts? (5’)
  • How? - Theoretical framework on how to analyze the economic impact of public health issues (10’)
  • What? - What have we learnt from the existing studies (45’)

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  • Activity – play with data (30’)
  • Student presentation (1h)

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What? - What do we talk about when we talk about economic impacts?

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Economics

  • Microeconomics focuses on the actions of individual agents within the economy, like households, workers, and businesses. 
  • Macroeconomics looks at the economy as a whole. 

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What did we observe during the pandemic?

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What did we observe during the pandemic?

  • Macroeconomy: stock market performance, global supply chain, international trade, etc.
  • Labor market: unemployment, wage, etc.
  • Consumption: consumer spending, business revenue, spending on education and health, etc.
  • …and more!

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  • Variables in economics are interactive. To deal with recession, we need to first figure out the relationships between them

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How? - Theoretical framework on how to analyze the economic impact of public health issues

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Correlation ≠ Causation

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Correlation ≠ Causation

  • 1. random
  • 2. reverse causality
      • X 👉 Y, or X 👈 Y?
      • e.g. more people get covid in places where social distancing policies are implemented
  • 3. omitted variable
      • X 👉 Y , or Z 👉 X &Y ?
      • e.g. places with more covid cases tend to be more liberal, for example NYC and California
  • 4. structural (not discussed here)

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Necessary conditions for causality

  • x happens before y
  • There’s theoretical relationships between x and y

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  • How? ``natural experiment”(not discussed here)

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Analysis Framework

    • Direct impact
      • Behavioral changes as a result of pandemic
        • e.g. spend less on dining out; quit jobs that require in-person contacts; increase savings for potential health expenditure, etc.
    • Indirect impact
      • stimulus checks - e.g. increase purchases in durable goods
      • lockdown - e.g. more economic activities move online
      • international travel restrictions - e.g. reduction in tourism revenue
      • school/business closure, etc. - e.g. unemployment in small businesses

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Direct vs. Indirect

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Analysis Framework

    • Strict NPIs may harm the economy now, but create positive expectation of the future
      • E.g. Stock price increases after the announcement of international travel restrictions in the US

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    • However, some short-term loss could extend into the long-term
      • E.g. Children in lower-income areas completed 50% fewer online lessons than they did pre-pandemic through the end of the school year.

Short-term vs. Long-term

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What? - What have we learnt from the existing studies

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What do we know so far?

  • Consumption
  • Business revenue
  • Labor market
  • The effect of some fiscal policies

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consumer spending

  • Data source: aggregated credit and debit card spending

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Findings:

1. Spending fell sharply on March 15, when the national emergency was declared and the threat of covid became widely discussed in the US

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2. High-income households cut spending more in percentage terms and absolute terms

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3. Consumption for low-income households returned to pre-COVID level earlier before the high-income households

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Consumer spending

  • Two mechanisms:
    • Loss of income
    • Fears of contacting or spreading Covid

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  • Compared to spending reduction during the Great Recession (2009-10):
    • In the Great Recession, nearly all reduction in spending came from a reduction in spending on goods.
    • In the Covid recession, 71% of reduction came from a reduction in spending on services.

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What do we know so far?

  • Consumption
  • Business revenue
  • Labor market
  • The effect of some fiscal policies

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Consumer spending small business revenue

  • Most of the services are provided by local small businesses
  • E.g. restaurants, local grocery stores, etc.

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Shock to small businesses

Small business revenues fell by 48% when the pandemic began, and then recovered to 11% below pre-Covid level by July 2020

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Small businesses located in dense, affluent areas lost the most revenue

    • Revenues fell by 32.7% in the lowest-rent ZIP codes
    • Revenues fell by 61.0% in the highest-rent ZIP codes

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What do we know so far?

  • Consumption
  • Business revenue
  • Labour market
  • The effect of some fiscal policies

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Labour market

  • Data source: job postings
  • Job postings with minimal education requirements fell much more sharply in affluent areas than for workers in poor areas.

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Labour market

Jobs did come back around July 2021

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Labour market

  • However, employment rates did not return to pre-covid level for low-wage jobs

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  • Why the labour shortage?
    • The ongoing risk of covid can explain 3.4 pp of the 13.5pp reduction in low-wage employment

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    • Unemployment insurance explains less than 1 pp

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    • Reduction of immigrant workers, individuals move to self-employment, and internal migration together explains a very small pp of the reduction

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What do we know so far?

  • Consumption
  • Business revenue
  • Labour market
  • The effect of some fiscal policies

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Policy response to Covid-19: Stimulus cheque

  • Goal: boost economy through increasing consumer spending, and ultimately increase employment
  • 3 rounds of stimulus cheques: April 2020, Jan 2021, March 2021

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  • How to evaluate?
    • Upon receiving stimulus payments and tax refunds, most people spend them in a short period of time
    • Compare consumer spending 1 month before/after the stimulus cheque

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  1. Low-income households spend the money almost immediately, while high-income households show no immediate spike in spending

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  • Low-income households have an increase in spending of $407 (19%) during the 1st month after receiving a $1200 stimulus cheque

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  • High-income households have an increase in spending of $653 (9%) during the 1st month after receiving a $1200 stimulus cheque

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However, the 2nd and 3rd stimulus cheques show a much smaller effect on spending, especially for the high-income households

  • 2nd round: $261 out of $1200 for low-income, and $129 out of $1200 for high-income
  • 3rd round: $232 out of $1200 for low-income, and no impact for high-income

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Reason: Wealth liquidity

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Gender inequality of the impacts

“Effects of the Covid-19 recession on the US labor market: occupation, family and gender”, Albanesi and Kim, 2021

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  • Recessions are usually associated with a larger employment drop for men than for women

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  • However, during the Covid-19 recession, employment losses were larger for women

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Gender inequality of the impacts

  • Why?

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  • Reminder: employment is determined by labor supply and labor demand

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Gender inequality of the impacts

  • Demand side
    • Men primarily employed in production occupations, while women concentrated in service occupations
    • Consumer spending on services dropped sharply during Covid

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  • Supply side
    • In the past, married women have tended to increase their labor supply during recessions to increase household income
    • However, during Covid, limited availability of in-person childcare and schooling options led many women to exit the labor force

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Summary

1. High-income individuals reduced spending sharply in March 2020

This reduction in spending greatly reduced revenues of small businesses

2. Businesses laid off workers, esp. low-wage workers

3. Consumer spending and job postings had recovered fully by Dec 2021. However, employment rates in low-wage jobs remained lower in places that were initially hard hit.

4. Stimulus policies can stem secondary declines in consumer spending and job losses, but do not have the capacity to restore full employment

5. Unlike previous economic recessions, the Covid recession affect employment for women more than men

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Main takeaways

  • Economic outcomes are interactive
  • The pandemic have very heterogeneous effect on households
  • The pandemic will be temporary, but iIndividual response to the pandemic, as well as the policies related to the pandemic, would deter the outcomes perhaps more than the pandemic itself

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Break