It is not a health crisis : employment re-allocation during covid-19

The covid-19 pandemic is not only about an  health shock to date, -it has brought many adddtional negative consequences in terms of job/finance/social and personal well-being.  

Those different types of risk should shape the work environment significantly—e.g. companies may still need workers to come on site for face to face critical missions while workers may decide not to work as a result, say, of fear to come back to work (FOG).  Workers may accept to work from home (WFH), but may be at risk of more family tension by sticking to same confined environment, or can be suffering from lack of contacts with friends and colleagues.

Here, we embrace all those covid-19 work decisions (part and full time, WFH or not), and are tying them to employment allocation decisions.  Our findings imply that the health crisis has major impact on the labor market and that this should be urgently tackled by authorities, in order to rebuild how citizens perceive the efficacy of policies erratically guided by government policies to do.

Underlying background

The underlying background to our estimation of employment allocation effect is a model of labor market with, and without covid-19, put in appendix. This model is important as it provides the adequate reduce form of employment allocation, say between no work, or WFH for example.

Essentially, the main message of the equilibrium employment under covid-19 is that a) employment may shrink as the result of both productivity challenges and availability of safe workers pool during covid, b) workers may be willing a wage premium to compensate for a risky workplace ; c) workers, as citizens, may be largerly affected by social distancing measures even if WFH allows some of them to keep earning their living.

 Evidence ?  

We estimate this reduced form of employment under covid-19 on France, based on a survey conducted in May 2020 by Neurohm . Figure 1 confirms that covid-19 has had a major impact on French employment, especially at a time where lockdown was imposed in the whole territory. We note the high portion of WFH during the first way of the covid-19 pandemic

Further, there is a clear contrast between, on one hand, a large part of people keeping working on-site, while, on the other hand, a large part of workers who have stopped working

Figure 1: French workers’ employment allocation, may 2020 covid 19 pandemic

Seven elements emerge when we estimate factors affecting equilibrium employment allocation,

1.   Are u Covid recovery free? the fact of being covid- positive increases the probability of being working on-premises versus non-working by more than 50%  

2.   Do you face co-morbodity risk? suffering from another pathology leads to a reduction of 20% probability to be working full time on site.

3.   How old are you ?The propensity to work full time on site reduced by close to 40% for a worker above 50 years old versus a worker at least twice younger ( less than 25 years old).

4. Do you have enough of  skills. The lower the level of education, the lower the employment

5.  Are you really at Health risk: health risk shrinking employment materially.

6.  Do you suffer from social distancing: those worried about living in isolation may want  to go to work, bur expose themselves with higher health risk

7.  Can you sustain your financial situation? those afraid of job preseervation tend to be working more exposed

The estimates thus reveal that risks linked to the pandemic are much larger than thought . As an experiment, let us contrast two extreme scenarios: on one hand, consider a young worker, highly educated, with no co-morbidity risk and no related worries; on the other hand, thin about a 60 years old, low educated, with high co-morbidity and heavy worries linked to the pandemic. The math above suggests that the first may work full time on premises like before, the second may simply leave the labor market and not work.

Call for actions

Employment effects of pandemic may be thus be very contrasted in function of individual socio-economic profile. This calls for  much better policy responses regarding employability and work type allocation, on top of health policies pushed forward by governments so far. This is key for governments to regain trust in how they have been tackling the covid crisis-- and for the well-being of our society.  

Jan 31, 2021, ? Jacques Bughin and Michele Cincera

Appendix

We use a typical epidemiologic model to account for flow of pandemic in the first case.  Suppose a citizen deciding to work. We note her  utility:

(1) U = as.(w) +g.(1- as)

where g is a preference parameter against work participation. w/P is unit real wage,  P=1 is the general price numeraire, and s is minimum subsistance level.

The i-th monopolistic firm (1<i<M) maximizes its profit, Dropping the prefix, we further assume that the firm demand curve, is given by

(2) Q=1-p,

and the effect of p on P is negligible.  The short term production function  uses only labor, L:

(3) Q= ad

Where the optimal a*= as =ad is chosen by both the firm and the worker and converges at the (equilibrium) wage that clears the labor market.. Given (1) it is straighforward to have :

(4) w*= g

(5) a *= (1-g)/2

Assume now that covid-19 has been hitting the market. In a relative SIS model, where S stands for the share of susceptible, and I is the share of infected, the law of motion of the portion of infected through times is guided by 

(6) D=e. S.I.b0. a c

Where the suffix ? c ? refers to a covid economy, and is being linked to the equilibrium of contacts at work, a c.  Still, in order to prevent major endemic situation, social distancing rules are put in place to reduce the risk of contagious

The possibility that D>0  only arises when the individual choses to work, as we assume full quarantine in the home against the virus. In the case of being infected, the worker receives a portion of salary, m(c) <1, with m stands for an allowance netted out of the health cost, c incurred, e.g mw-c if disease.

In such a case :

(7) U = ((1-D)+(D.m)).(w). acs  + g.(1 - acs )- acs. Dc

(8)  wc*   = ( g'-c)/(1-D.(1-m))

Regarding labor demand, the expected profit, P’,  writes :

(9) P'=(1-D). P =(1-D).t acd. (1- t. acd -w))

Differentiating in part with respect to acd , dP'= -dD. P +(1- D).dP=0, leads to :

                   (10) -D. t. (1- t. acd -wc)+(1- D).(1-2 t. acd -w)=0

                   (11) acd*= (1-D.(1+t)/(2t.(1-D)-t2.D).(1-wc)

Equilibrium volume of work is then found after substituting (6) into (10), that is acd = acs = ac*

                   (12) ac*=(1-D.(1+t)/(2t.(1-D)-t2.D).(1-( g'-c)/(1-D.(1-m))

Which can be compared to (5).

Hence, equilibrium employment under covid-19 shrinks as the result of the combination of two factors. The first  factor, (1-D.(1+t)/(2t.(1-D)-t2.D)<1/2, accounts for both productivity challenges and availability of safe workers pool during covid, while the second factor (1-( g'-c)/(1-D.(1-m))<1- g, is the result of workers willing a wage premium to compensate for a risky workplace.