Economists are used to describing various ailments that lead to problems with the economy. They speak of things like “market failure” where incentives in the business world create adverse outcomes, as happened in the financial crisis. Or they talk about government failure, where corrupt institutions ravage the economy, removing the incentive for people to create value.
But nothing in living memory comes close to the current situation. We’ve never had a pandemic shut down the economy before. And so we don’t have a good framework to evaluate it. You can’t, in all fairness, call it a market failure.
The market didn’t create it. Neither can you necessarily call it government failure – at least not yet. So long as the virus emerged naturally and not from some wretched state lab in Wuhan, governments weren’t involved. It is more like an asteroid hitting the planet. The average business can’t plan for it or mitigate it. (Unless you’re SpaceX, of course).
Right now, the economic headlines primarily concern the devastation underway in the job market. Millions of people are furloughed from work, and millions more join the unemployment roster every week. It is a worrying time for everyone affected.
The industries most affected are those in retail, tourism, and hospitality. But everyone is feeling the effects. The fact that people can’t leave their homes for anything other than essentials means that a lot of businesses can’t function. Demand is drying up, and the circular flow of income is not operating how it otherwise might.
The current pandemic is going to change the structure of work as we know it fundamentally. But that doesn’t mean that it is the end. Things will return. And when they do, there will still be plenty of work for everyone. It just might take a different form.
The Virus Is Similar To A Sudden Technological Shock
If you want to analyze the current pandemic within the current economic analytical framework, your best bet is to think of it as a sudden technological shock that leaves millions of people unemployed, like the spinning Jenny of the eighteenth century.
Just like back then, a new set of circumstances prevails that now means that people must remain in their homes. This new form of organization – or technology – is disrupting existing patterns of business, forcing people to switch how they occupy their time.
Technology, however, usually made its effect felt over a long period of time as entrepreneurs built it out. But that isn’t a luxury you have in a deadly epidemic. You need to change social organization immediately to prevent people from dying. You can’t have a long run-in to minimize the pain. You have to take it all upfront.
And that’s fundamentally the position that we find ourselves in today. The job market is reacting as if companies across the planet are suddenly implementing a game-changing labor-saving device, and now everyone is at home, having to re-skill.
But what’s strange about this situation is that the shock is, by its nature, temporary, unlike technology, which is permanent. Soon, a large tract of the population will have COVID-19 antibodies, and we will have herd immunity, preventing the emergence of another outbreak – hopefully. And when that happens, social distancing measures will relax, and we will be able to get on with business as usual.
Will There Be Any Permanent Changes?
Whether there will be any permanent changes to the types of jobs available in the economy after this remains to be seen, but we’re likely to see a shift in wages.
For instance, the pandemic makes it clear just how risky working as a medic can be. You’re putting your life on the line to serve patients. The same applies to delivery drivers or anyone else that has to interact with people to provide essential services.
Usually, when jobs are risky, you get paid a wage premium. Your employer compensates you for the extra hazards you face to stop you from taking a similarly-paid but less dangerous role elsewhere. Now we’ve seen how pandemics play out, then, we could see a bump in wages for people who work on the frontlines, and a fall in those who earn their keep remotely.
Secular trends in the labor market, however, are unlikely to change forever. The fastest growing jobs will remain in sectors with the biggest opportunities. Solar energy is going to continue expanding at a rapid clip. And the demand for workers in healthcare will no doubt continue to accelerate as we move forward and the population ages.
The Case For A Speedy Recovery
We know that the economy is shedding jobs at a rapid clip. It was what most people expected. But when can we expect them to return? That’s the more contentious issue.
In general, recoveries tend to take a variety of shapes. There’s the “V-shape” where the economy quickly snaps back to its old growth path. Then there’s the U-shape where growth returns, but the economy falls short of its long-term trajectory. And then there’s the L-shape, where things don’t really improve at all, like in Greece.
It’s not entirely clear how the current pandemic will play out. We’ve never seen anything like this before. But there is hope. Remember, even though jobs are being lost, income is still flowing. The government is paying the bills of furloughed workers and the unemployed, up to 80 percent of their pre-crisis earnings.
So when things do finally reopen, companies will remain relatively capitalized, and workers will still have disposable income. It won’t be like the Great Depression, where people had to start from scratch again literally.
There’s a good cause for optimism. Bear market sentiment will probably dog the financial markets for a while. But in time, they will learn that the pandemic was a sudden shock – and something from which we can all recover.
The most significant risk is the loss of human capital and skill. If people spend too long out of work, we could wind up with a less productive workforce. We will have to wait and see.