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April 07, 2020

The coronavirus crisis and the next generation

Opinion image

Even if the cause of the current economic standstill is very different from any previous one, the consequences are likely to be similar. Youths graduating and entering the labor market this year risk experiencing considerable negative impacts on their careers. In my IZA World of Labor article I document that these impacts differ according to the flexibility of the labor market and the education level of entrants. In flexible labor markets, such as in the US or Canada, the short-term impact of a typical recession is particularly severe for low-educated youths, but the penalties are short-lived. College graduates are less penalized initially, but the penalties last longer. Nevertheless, after ten years, high-educated workers manage to catch up with the luckier cohorts that graduated during good economic times. In more rigid labor markets, such as in the European ones, entering the labor market during a recession may cause less damage in the short-term but may inflict permanent economic scars. 

Clearly, the coming recession will be more severe than a typical one. Without massive testing of Covid-19, severe health consequences can only be avoided by maintaining social distance measures for 12 to 18 months. This corresponds roughly to the time span required for an operational vaccine. Only if we acquire rapid testing capacity will we be able to hold down both the cumulative death toll and the cumulative economic damage; but even in this most optimistic scenario the recession risks being more severe than the Great Recession. This means that the career prospects of this year’s graduating cohort are particularly gloomy. It is therefore crucial to keep in mind this long-term perspective when designing short-term policies to cope with this recession. Proper targeting of public expenditures in the short-term is crucial to maintain sufficient resources to curb the long-term adverse consequences for this unprotected group.

Policymakers across the globe have rightly massively introduced temporary measures to support businesses and families in forced idleness. But before being prolonged, these measures require better targeting at those really in need and toned to incentivize employers to preserve work opportunities. Work-sharing, remote work, work respecting social distance measures, and transfers of the workforce from non-essential to essential sectors, i.e. to health, food, and logistics, should be encouraged more than schemes that support idleness. Moreover, for workers for whom such solutions are not feasible, employers should be incentivized to seize these circumstances as an opportunity to reallocate time to remote training. This will save scarce resources and facilitate rapid recovery. More global demand-side measures are for later, when social distancing measures can be removed. In addition, we should harness the current generation of youths through targeted wage subsidies and study grants at cohorts graduating this year. More structural “flexicurity” reforms, which aim at combining greater job flexibility with more job security and social safety net provisions, can follow-up later on. We should keep the outcomes of future generations in mind when designing policies today, however dramatic the situation currently is.

© Bart Cockx

Bart Cockx is Full Professor at the Faculty of Economics and Business Administration, Ghent University, Belgium

Read more on the coronavirus crisis:
"Coronavirus and the labor market," by Daniel S. Hamermesh
"Fighting a coronavirus recession," by Daniel S. Hamermesh
"Pandemics and the labor market—Then and now," by Karen Clay
"Pricing the lives saved by coronavirus policies," by W. Kip Viscusi
"Health effects of the coronavirus recession," by Christopher J. Ruhm
"The long-term consequences of missing a term of school," by Simon Burgess and Hans Sievertsen
"Coronavirus, telecommuting, and the labor market," by Nikos Askitas
"Expectations about Covid-19 social-distancing measures in Italy and their impact on compliance," by Guglielmo BrisceseNicola LaceteraMario Macis, and Mirco Tonin  

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