The impact of COVID-19 on unemployment and earnings inequality.

The current pandemic has left many sectors of the UK economy shrinking, with large number of individuals unemployed or at risk of unemployment. It is increasingly clear that the economic impact of the pandemic will persist over time, particularly in the worse affected sectors. The speed of the UK's economic recovery therefore depends on the extent to which the unemployed reallocate from harder hit sectors to those that are booming. More reallocation could make the increase in unemployment short-lived, boosting the UK's chance of a swift economic recovery.

The UK Government has recently announced a set of policies to encourage individuals to retrain and reallocate away from sectors hard-hit by the COVID19 pandemic. Evidence shows, however, that the degree of occupational/industry mobility falls during recessions (see e.g. Carrillo-Tudela, Hobijn, She and Visschers, European Economic Review, 2016). This cast doubts on whether individuals will actually be willing and/or able to change occupations in this difficult time. Indeed, for many changing careers remains a difficult decision: do they wait for jobs to reappear in their previous industries/occupations, risking long periods of unemployment? Or do they accept available jobs, even if they lose their occupation/industry-specific skills which potentially means less job stability and lower earnings? This trade-off makes clear that it might not be desirable for public policy to encourage such reallocations as they might generate "low-pay-no-pay cycles" among a significant group of the population. Given that wages have been already falling since the financial crisis, as individuals reallocate to low-paying sectors, encouraging further reallocation could hasten this trend and worsen livelihoods.

In this research we will first document how individuals search for jobs across occupations/industries. For this purpose, we will use newly collected longitudinal data on job search available through the Understanding Society COVID19 study. Informed by these data, we will develop and estimate multi-sector business cycle models in which workers' occupation/industry mobility decisions trade off their career prospects against the relative abundance of vacancies across sectors. This framework will allow us to quantify the effectiveness of e.g. job seekers assistance, re-training and job retention schemes on unemployment and earnings inequality through their effects on workers' reallocation and firms' layoff and job creation decisions. This will provide a new perspective to the current debate on how best to bring people back to work.

To showcase our findings, in addition to academic articles we will make freely available an online "unemployment and inequality calculator". This tool will provide the likely evolution of unemployment and earnings inequality under different simulated policy regimes. Users will be able to analyse different what-if scenarios by simply changing the models' parameters that describe the aforementioned policies. In the background our models will be re-simulated to produce the desired output. This will inform about the likelihood of persistently high unemployment due to mass layoffs; whether the increase in inequality connected to reallocation to low-paying sectors will be exacerbated by the pandemic; and which policy measures could be implemented to reduce unemployment scarring and inequality.