5/2022 Jaanika Meriküll, Alari Paulus. Were jobs saved at the cost of productivity in the Covid-19 crisis?
Working Papers of Eesti Pank 5/2022
Economic recessions can boost the productivity-enhancing reallocation of jobs, yet the Covid-19 crisis has provided limited and mixed evidence of that. The paper studies the link between productivity and reallocation and investigates the role of job retention schemes in it, using a rich administrative dataset for Estonia that covers the whole population of firms from 2004 to 2020. We find persistent evidence for the reallocation of jobs towards more productive sectors and firms. However, the within-sector reallocation was surprisingly unresponsive to productivity in the Covid-19 crisis, in sharp contrast to the experience in the previous major crisis, the Great Recession. We show that a generous job retention scheme supressed the acceleration of within-industry reallocation towards more productive firms, which had negative consequences for aggregate productivity during Covid-19. These estimates appear sufficiently large to imply that there are negative overall welfare effects that offset the positive employment effect.