ECONOMIC SHOCK AND IMPLICATIONS
COVID-19 is leaving low-skilled workers worse-off
An interview with Luigi Guiso, AXA Chair in Household Finance & Insurance
In your view, what makes this crisis so different from previous financial crises?
Economically, there are two features unique to this COVID crisis. The first is its extremely high speed. The second is that the economic shock has not affected everybody equally. The sectors subject to lockdown tend to be relatively low-pay, low-skill. As a result, the economic shock is not only unprecedented in size and speed, it is also very concentrated in a particular segment of the population and that will increase inequality. We should also look at what has happened with asset prices. In mid-March, the stock market dropped sharply. Some investors had to sell just to weather the shock and cashed in losses on their investments. Typically, the subsequent buyers were wealthy investors, who could afford to take on the extra risk. Since March, the market has recovered quickly providing those wealthy investors with gains. The result is a redistribution from mainly the middle to the wealthier classes.
Do you think this increase in inequality will last, or is it more a short-term phenomenon?
Overall, those on lower incomes will suffer the longest because, while the stock market recovers quite quickly, a recovery in the real economy is a much slower process. We do not yet know how long the recovery will take. Ultimately, workers depend on their firms re-opening again. There is another aspect: younger generations coming into the workforce are likely to do so on low pay and research shows that, if you begin your working life on low pay, you rarely make up the lost ground. The loss in earnings is permanent.
“Overall, those on lower incomes will suffer the longest because, while the stock market recovers quite quickly, a recovery in the real economy is a much slower process. We do not yet know how long the recovery will take.”
How well have governments responded to this economic shock?
Generally, governments have had two responses. The first, on the monetary side, amounts to injecting as much liquidity as possible into the economy while simultaneously keeping interest rates low. That gives companies access to what they need in this crisis: liquidity and credit. The second, in Europe, involves measures to protect jobs, or at least keep workers attached to their current firms through furlough or salary support schemes. The US doesn’t have the same welfare system – consequently, in the US, unemployment has risen sharply. In Italy, by contrast, that unemployment is effectively hidden because workers’ wages are being paid by the government. We don’t know yet how well this European approach will work. We know that some firms will close permanently as a result of this crisis – also that some sectors will see significant restructuring. Government response also depends on resources. Germany has been able to inject much more money into its economy because of the strength of its public finances. Other European countries – like Italy, Spain, or even France – face more constraints. The recovery fund approved by the EU leaders will be fundamental in speeding up the recovery process across all Europe.
In your view, will we see more jobs lost as a result of further restructuring in the economy?
What we will see is resources shifting, in effect, from one sector to another. As a worker, if you have the right skills – in technology, for example – you may benefit from that process. For most people, that won’t be the case unfortunately.
“The fact is, not all sectors are equal in those two respects and re-opening should hinge on both if we want to avoid the in-and-out-of-lock-down scenarios as much as we can.”
Economies are going in and out of lock down - how should we approach reopening the economy – after so many weeks in lockdown?
As we have seen in many places, it is not an easy answer. We have to be careful when reopening the economy. If we reopen too quickly, as done by several US states, we risk spreading the virus again. That said, we cannot keep the economy closed indefinitely. It is far too costly with the daily loss of money and jobs. In reopening the economy, we need to both minimize the risk and maximize the potential economic gain. That means taking a gradual approach over a period of weeks, starting off with those sectors that are central to the economy and to international trade, and where social distancing can be managed. The fact is, not all sectors are equal in those two respects and re-opening should hinge on both if we want to avoid the in-and-out-of-lock-down scenarios as much as we can.
What are the prospects for a quick economic recovery?
It is possible that government policies will support a quicker recovery but there is so much uncertainty, not least surrounding consumer behavior. Purchasing and travelling have both been drastically reduced even post shut down and that will have a significant impact – in Italy, tourism accounts for 15% of the country’s GDP. Thousands of hotels, restaurants, bars and clubs depend on tourism. We will see a fall-off in activity – and it will take a long time for some sectors to recover from this crisis.
AXA Chair in Household Finance & Insurance, Einaudi Institute for the Economy and Finance, Rome (Italy)
Professor Luigi Guiso specializes in household finance, financial markets and economics. Based in Rome, he has won a number of awards for his work, including the 2009 Smith Breeden Prize for his paper Trusting the Stock Market. In 2016, he was listed by Reuters as one of the world’s most influential scientific minds. Recently, Luigi has been studying how civic attitudes may determine the effectiveness of policy response to the COVID-19 virus.