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

Lead Research Organisation: University of Essex
Department Name: Economics

Abstract

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.

Publications

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Carrillo-Tudela C (2022) Cyclical Earnings, Career and Employment Transitions in SSRN Electronic Journal

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Carrillo-Tudela C (2021) Search and Reallocation in the COVID-19 Pandemic: Evidence from the UK in SSRN Electronic Journal

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Carrillo-Tudela C (2022) Cyclical Earnings, Career and Employment Transitions in SSRN Electronic Journal

 
Description It is well known that different sectors of the economy react differently to the business cycle. The Covid-19 pandemic highlighted this feature. During recessions these differences typically leave a large number of individuals, mostly from the worst affected sectors, unemployed or at risk of unemployment. The speed of the economic recovery therefore depends not only on renewed job creation but also on workers' willingness or ability to reallocate from harder hit sectors to those that are booming. In this context our research has considered how workers' search behaviour and mobility between industries and occupations responded to the Covid-19 pandemic.

We highlight four key findings:

(i) Job seekers significantly adjusted their job search in favour of the industries and occupations that expanded during the pandemic. The growing occupations were those which typically require higher skills, offer higher wages and provide more opportunities to work from home.

(ii) Those at the margins of the labour market were most likely to target declining industries and occupations. For example, we find that non-employed workers were significantly more likely to target a declining industry and occupation in their job search. Those with the lowest education levels were also significantly more likely to target declining occupations. These results hold true even when conditioning on past occupation or industry, so they are not simply a reflection of attachment to previous jobs. However, attachment does play a role as workers from a declining industry (occupation) are more likely to target a declining industry (occupation), suggesting these workers may be trapped in ``bad-job'' cycles. The flip side of this is that employed or higher education workers are more likely to target expanding industries and occupations, as are those who have previously worked in these jobs, implying a more ``virtuous'' job-cycle for these workers.

(iii) There is a substantial mismatch between targeted and realised transitions. Among those targeting an occupation switch, the proportion of workers actually making an occupation transition into expanding occupations was substantially lower than the proportion of job seekers targeting a switch into an expanding occupation, particularly for those individuals coming from declining occupations.

(iv) As the labour market recovers the rise in resignations in the UK over 2021 - the so called "Great Resignation''- has not significantly improved the career paths of workers as some have hoped. Resigning workers are not quitting to leave the labour force, or even to drastically change career. Instead, most of the rise in resignations is "sideways" moves, with workers quitting to move to jobs in the same occupations at new firms. But the sharp rise in the competition to fill vacant positions has at least led firms to improve the pay of these workers who are willing to move firm. For most workers, who don't change jobs, wage growth will be slower and insufficient to offset large increases in the cost of living. Rising resignations are a symptom rather than cause of labour shortages, with most of the rise occurring among workers staying in the same industry.
Exploitation Route The outcomes of this project have been very helpful in informing our discussions with several government departments: HM Treasury, Bank of England, Department for Work and Pensions as well as the Lords Economic Affairs Committee inquiry into UK Labour Supply. We have and continue to engage with all these stakeholders. Recently we have also engaged with the Low Pay commission and BEIS (Minimum wage group). Our findings have been heavily used in the report by the Lords Economic Affairs Committee inquiry into UK Labour Supply. https://committees.parliament.uk/committee/175/economic-affairs-committee/news/175197/eac-uk-labour-supply-report-publication/
It has also been used in the National Minimum Wage:
Low Pay Commission Report 2022. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1129930/Low_Pay_Commission_Report_2022.pdf
Sectors Government, Democracy and Justice

URL https://covidjobsresearch.co.uk
 
Description Some of the findings of this research have been used to inform the Lords Economic Affairs Committee inquiry into UK Labour Supply https://committees.parliament.uk/committee/175/economic-affairs-committee/news/175197/eac-uk-labour-supply-report-publication/ They have also been used to inform the National Minimum Wage: Low Pay Commission Report 2022. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1129930/Low_Pay_Commission_Report_2022.pdf We have engaged in continue discussions with members of HM Treasury, Bank of England and the DWP, which continue to be very interesting in our ongoing work on worker reallocation its impact on labour shortages as well as the early retirement of the over 50s. We continue engaging with these government departments.
First Year Of Impact 2022
Sector Government, Democracy and Justice
Impact Types Policy & public services

 
Description Bank of England 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Policymakers/politicians
Results and Impact Members of the Bank of England were very interested in our findings and ongoing work. We are currently finalising the second paper of the project that we have refocused to deal with reallocation and labour shortages across industries and occupations. All BoE members found our results very relevant and interesting and wanted to continue engaging with us.
Year(s) Of Engagement Activity 2022
 
Description Conference participation 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact I was invited to present the paper "Search and Reallocation in the Covid-19 Pandemic: Evidence from the UK" in a special session of the Econometric Society Summer Meeting in August, 2021.
Year(s) Of Engagement Activity 2021
 
Description Interview for national news 
Form Of Engagement Activity A press release, press conference or response to a media enquiry/interview
Part Of Official Scheme? No
Geographic Reach Regional
Primary Audience Media (as a channel to the public)
Results and Impact I was interviewed by Hearts Radio in September, 2021 to explain the main results of our research paper "Search and Reallocation in the Covid-19 Pandemic: Evidence from the UK". The interview was transmitted in Hearts Essex and Hearts Cambridgeshire.
Year(s) Of Engagement Activity 2021
 
Description Lords Economic Affairs Committee inquiry into UK Labour Supply 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Policymakers/politicians
Results and Impact The Lords Economic Affairs Committee inquiry into UK Labour Supply were very interested in our research on the reallocation of the over 50's. In particular, what they were retiring en masse. Our research ended influencing the committee's decisions and recommendations.
Year(s) Of Engagement Activity 2022
 
Description Meeting with DWP Labour Market Analysis Division, Strategy and Governance Directorate 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Policymakers/politicians
Results and Impact Members of the DWP were very interested in our findings and ongoing work. We are currently finalising the second paper of the project that we have refocused to deal with reallocation and labour shortages across industries and occupations. All DWP members found our results very relevant and interesting and wanted to continue engaging with us.
Year(s) Of Engagement Activity 2022
 
Description Roundtable for the Treasury on the rise in non-participation of the 50+ 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact I was invited to contribute to a Roundtable organised by the Labour Market and Distributional Analysis of the Treasury. The analysis of this project was the basis of my contribution to the debate.
Year(s) Of Engagement Activity 2022
 
Description Seminar invitation 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach International
Primary Audience Professional Practitioners
Results and Impact I was invited to present the paper "Search and Reallocation in the Covid-19 Pandemic: Evidence from the UK" to the members of the members of the Economics Department of the University of Le Mans, France in November, 2021.
Year(s) Of Engagement Activity 2021
 
Description Treasury 
Form Of Engagement Activity A talk or presentation
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Policymakers/politicians
Results and Impact Members of the Her Majesty Treasury were very interested in our findings and ongoing work. We are currently finalising the second paper of the project that we have refocused to deal with reallocation and labour shortages across industries and occupations. All Treasury members found our results very relevant and interesting and wanted to continue engaging with us.
Year(s) Of Engagement Activity 2022
 
Description Update on the results of the project - Treasury 
Form Of Engagement Activity A formal working group, expert panel or dialogue
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact I was invited to update members of the Labour Market and Distributional Analysis group of the Treasury about the results of the paper "Search and Reallocation in the Covid-19 Pandemic: Evidence from the UK" as well as the give preliminary findings on our analysis on labour market shortages.
Year(s) Of Engagement Activity 2021
 
Description Workshop participation 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach Local
Primary Audience Professional Practitioners
Results and Impact The paper "Search and Reallocation in the Covid-19 Pandemic: Evidence from the UK" was presented in a workshop hosted by the Department of Economics of the University of Essex in October, 2021.
Year(s) Of Engagement Activity 2021