| None of us has any experience in dealing with a medical emergency that has become an economic crisis, and none of us knows how long this will last or how the end game will play out. I think we all can agree that this is a dilemma like no other, freighted with profound uncertainty.
Economic theory and econometric modelling do not provide a specific roadmap. Unlike previous postwar recessions, today’s is not an endogenous shock triggered by huge imbalances.
To be sure, medical considerations should outweigh economic ones. The job of policymakers is to mitigate the financial burdens caused by doing the right things on the medical side.
How do we navigate the coming months? In my opinion, this is a question to be answered first by medical experts. To assess the next steps from an economic policy perspective, the government should explain its view on the likelihood of a vaccine and antivirals over a six-month, one-year and three-year time frame.
A sober assessment of the outlook for Canadian growth suggests that while the second quarter might be the bottom of the cycle, the economy will only crawl back to full employment. Those hardest hit will be those that can least afford unemployment. Small businesses, which account for more than 40% of private-sector jobs, are by now hard hit, and in many cases, might have already received a death blow. Undeniably, some of these lost jobs are gone for good.
The hope is the waves of stimulus doled out by the government, and the Bank of Canada will eventually bolster the economy and spark a revival in hiring.
The risk, though, is that the pandemic is inflicting a “reallocation shock”[1] in which some firms and even entire sectors suffer lasting damage. Lost jobs in these sectors don’t come back, and unemployment remains elevated. Traditional fiscal stimulus does not address this kind of shock.
An estimated 30% of job losses from February to May could be the result of this permanent reallocation shock. The labour market will initially recover swiftly, as we saw in the May data, but then level off with too many people still unemployed.
Workers in the hospitality industry—accommodation and food—are among the most at risk, alongside inessential retail, leisure, travel and education. Most of these people cannot work from home.
In many cases, the pandemic has increased the challenge of bricks and mortar companies facing off against e-commerce platforms such as Amazon, accelerating a pre-crisis trend in which Canadian companies have woefully underperformed.
The unique shock of the virus means governments may need to do more to support businesses and protect workers than they would in a typical recession. This puts the government under pressure to craft policies that help viable cash-strapped firms to survive and displaced workers to navigate to different jobs, but which ideally do not prop up companies that are no longer sustainable. We have already seen evidence[2] that shows that high COVID-unemployment benefits can encourage layoffs, discourage work and delay productive reallocation.
We need to know the proportion of Canada’s job losses that come from lockdown and weak demand. Those will diminish quickly in response to stimulus and reopening. The part generated by high unemployment benefits encouraging workers to stay home requires a gradual reduction in income support. The most intractable group of unemployed suffer the permanent fallout of the reallocation shock.
For them, the government should provide the training that gets workers ready for the next phase of the technology revolution.
The pandemic has accelerated structural shifts that will remain. The efficient response to these shifts requires–among other things–widespread enhanced broadband and computer access for all households, reduced government land-use restrictions and occupational licensing restraints, the removal of regulatory barriers to business formation and interprovincial trade restrictions.
These fault lines were there before the virus, but they are now exposed and need a new social contract between government and its citizens. |