Shutdown: estimating the COVID-19 employment shock, Grattan Institute Working Paper No. 2020-03

By Brendan Coates, Matt Cowgill, Tony Chen, and Will Mackey

Australia faces an unprecedented economic challenge in the coming weeks and months. Never before has such a large proportion of economic activity come to such a sudden stop. Never before has such a large slowdown been deliberately engineered as a matter of public policy – in this case, to protect public health during a global pandemic.

COVID-19 is already having a big impact on the livelihoods of many Australians. This is visible at Centrelink offices around the country, as people queue to be added to the income support rolls, and visible in the form of closed shopfronts in all Australian cities, suburbs, and towns. But the size of the employment shock from the COVID-19 response is not yet known and will not be known for weeks, even months. In this working paper, we estimate the hit to employment from mandatory and voluntary spatial distancing.

We calculate that between 14 and 26 per cent of Australian workers – 1.9-to-3.4 million people – could be out of work in the coming weeks as a result of spatial distancing measures to contain the spread ofCOVID-19, if they aren’t already. More than half of all workers in the hospitality industry could be off work due to COVID-19. Many workers in retail trade, education and training and the arts are also at risk. Lower-income workers are twice as likely to be out of work as high-income earners. Younger Australians and women are likely to be hit hardest, because they are more likely to be employed in occupations and industries most affected by the response to COVID-19.

Unemployment will rise substantially in the coming months, but the Commonwealth Government’s new JobKeeper wage subsidy will obscure much of the impact. Many Australians out of work will still be counted as ‘employed’ because they will receive JobKeeper payments via their employers. Others that would have lost their jobs will remain employed. And others will leave the labour force entirely and so won’t be counted among the unemployed either. Nonetheless, we expect the unemployment rate could rise to between 10 and 15 per cent.

There is, of course, considerable uncertainty around our estimates of the job losses from COVID-19. Real-time data on the extent to which different occupations and industries are being hit by spatial distancing is limited. The degree to which many jobs can be adapted to be done remotely is unclear. We do not factor in the impact that policy responses to date will have in boosting demand, although these measures are unlikely to maintain work in directly affected sectors. But if our estimates are even close to accurate, Australia is facing either the worst or one of the worst economic downturns in its history.

The second-round impacts of the COVID-19 crisis on employment, and economic activity, will also be severe. Firms and households not initially affected by public health measures will scale back their spending top reserve cash flow in the face of an extended downturn. Meanwhile Australia faces a synchronised slowdown among our major trading partners, adding to the economic hit from COVID-19.

History tells us that recovery from periods of high unemployment is rarely fast. This time may be different: recession has been deliberately engineered as a matter of public health, and substantial economic support is in place. But the longer the downturn goes, and the worse it gets, the less likely the labour market can spring back afterwards.

The economic challenge of COVID-19 underscores the importance of getting the virus under control. Resolving the public health crisis is acritical first step on any path to sustained economic recovery. Policymakers have rightly taken unprecedented steps to households and businesses weather this storm. But given the size of the economic shock from COVID-19, more support will be needed in time.

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