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Effects of Covid-19 on spending and saving

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The outbreak of the Covid-19 pandemic has caused profound health shocks worldwide, resulting in more than 400,000 deaths. This unprecedented health crisis has led to the worst economic crisis since the Great Depression of the 1930s. Understanding how and why consumption spending and labor market outcomes have changed during the crisis is critical to informing public policy so that the adverse impact is mitigated and the economy rebounds more rapidly. 

We have used individual-level monthly panel data covering the country before and during the pandemic to document the considerable economic consequences of the Covid-19 outbreak in Singapore. The first cases were diagnosed in late January. Households’ total consumption spending decreased in February and March 2020 by 7–9% when the total number of cases was still relatively low in Singapore. However, when the number of new cases soared and the nationwide partial lockdown policy was implemented in April 2020, consumption spending plummeted by 22%. It declined because: (i) the frequency of people leaving their homes dropped due to the lockdown policy and the desire to avoid the risk of infection; (ii) their expectations about their economic future, as measured by their assessments of the risk of losing their jobs and by increased saving, were diminished; and (iii) household incomes fell. The reductions in spending were greater among those households with greater net worth, but did not differ between households in which some members had chronic health problems and those with members who were all healthy. 

Most workers worked fewer hours or took pay cuts rather than becoming unemployed: the probability of working full-time declined by 1.2 percentage points and 6.0 percentage points in April and May, and monthly labor incomes decreased by 5.9% in April. By contrast, the probability of employment or self-employment was minimally affected, likely due to Singapore’s massive wage subsidy program that provided up to 75% of gross wages to each employee. Based on the implied decrease in hourly wages, deteriorating labor market outcomes were mainly driven by declining labor demand rather than a decrease in labor supply. The worsened labor market outcomes were greater among those with lower net worth, but were similar across workers with differing underlying health status.

The results suggest that consumer spending declined not just due to negative income shocks, but also due to other factors such as avoidance behavior, the nationwide lockdown, and economic uncertainties. We conclude that alleviating perceived uncertainties among the general public about the pandemic and about future economic conditions can be an important pathway to economic recovery. The data also imply that subsidies that decline with households’ incomes may be more efficient in stimulating the economy than across-the-board income grants, because the drop in consumption by relatively rich households is less likely to be due to liquidity constraints. The labor market analysis suggests that large-scale wage subsidies to employers will be effective in restoring the economy, as they can boost labor demand.

© Seonghoon Kim, Kanghyock Koh, and Xuan Zhang

Seonghoon Kim is an Assistant Professor of Economics at Singapore Management University, Singapore.
Kanghyock Koh is an Assistant Professor of Economics at Korea University, South Korea. 
Xuan Zhang is an Assistant Professor of Economics at Singapore Management University, Singapore.

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"Labor markets in the Covid-19 pandemic: Western Europe and the US," by Hans-Martin von Gaudecker 

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