Data from a research by four economists Brian Bell, Nick Bloom, Jack Blundell, and Luigi Pistaferri have estimated how the ongoing pandemic may impact earnings by age group, gender, and firm size.
The data suggests that young men working in small firms could see earnings losses of 8-9%, with older women in large firms seeing little or no change.
The Covid-19 pandemic is turning into a global recession – probably the biggest drop in economic activity since the Great Depression of the 1930s. The latest forecasts put UK and US GDP both down by about 10% in Q2 2020 (40% on an annualized basis).
GDP is an important measure of economic wellbeing, but the key way workers feel aggregate fluctuations is through their pay packets.
Their analysis is based on over 3 million earnings observations drawn from more than 400,000 UK workers between 1975 and 2016.
“We estimate a set of ‘exposure parameters’, which are essentially estimates of how earnings of different type of workers are impacted by changes in GDP. These figures are similar to those estimated in the US and other countries, so these results are broadly applicable,” they said.
They assumed a plausible year-on-year GDP decline of 10% and predict how the current crisis will affect workers.
“We stress that this is a period of immense uncertainty and one in which unprecedented policy responses make forecasting difficult. However, we argue that in terms of understanding which types of workers bear the brunt of aggregate fluctuations, it is instructive to investigate past fluctuations in GDP.
“On aggregate, feeding a 10% decline in nominal GDP through our GDP sensitivity estimates, we estimate a fall in real weekly earnings of about 3.5%. This would be a significant shock to household incomes. But, as will be shown below, this is very unevenly spread across different workers,” they said.
The economists posit that there is a clear age profile in earnings responses to GDP changes. The earnings of workers under 35 being the most responsive. For these younger workers, on average a 10% drop in nominal GDP corresponds with a 3.8% fall in real weekly earnings. For those aged 45-55, the fall is 3%.
“Younger workers typically see higher wage growth than older workers, but here we see that this is very much dependent on economic conditions. Even more concerning for the youngest worker is the substantial literature demonstrating a lifetime penalty from entering the labour market in a recession.
“We also find that the earnings effect is largest for those employed in smaller companies and it declines substantially with firm size. The pattern is striking but perhaps unsurprising, given that larger firms are likely to have greater access to the liquidity required to smooth over temporary shocks. Workers at smaller firms already tend to earn lower wages. This suggests the ‘large firm wage premium’, the earnings advantage accrued by working at a larger employer, could be set to grow. The firm size effect dominates the age effect, so that even older workers at the smallest firms will see large earnings losses. Taken together, this evidence suggests that a younger worker in a small firm will see earnings fall by about 6.7%, compared to 1.4% for an older worker in a large firm,” they said.
They stated that men and women tend to work in different industries and occupations, work different hours, and are found at different employers, which makes aggregate shocks have different effects by gender.
According to the authors, historically, female earnings have been less impacted by fluctuations in GDP, in part since they are more likely to work in sectors that are typically less exposed to GDP fluctuations, such as the public sector or the food preparation sector. For men, a 10% drop in nominal GDP corresponds to a 4.6% fall in weekly earnings compared to a 2.1% drop for women.
“Here, however, we might expect to see a difference between previous patterns and those stemming from the current crisis. As recent research emphasized, many of the most affected industries in the short-run by the Covid-19 shock, such as hospitality and travel, contain a high proportion of female workers. This stands in sharp contrast to previous downturns, where male-dominated industries such as finance, construction, and manufacturing have borne the brunt of the decline in output,” they said.