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The short- and long-run employment impact of Covid-19 through the effects of real and financial shocks on new firms

Christoph Albert, Andrea Caggese () and Beatriz González ()
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Andrea Caggese: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3418950

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: The aim of this paper is 1) to use empirical evidence to make predictions about the impact of the Covid-19 shock on firm entry, its composition, and its short- and long-run impact on employment; and 2) to provide guidance on which policy tool would be more effective to counteract the negative impact of the shock on this margin. The Covid-19 shock caused a large GDP contraction and our predictions suggest that this would cause a reduction in firm entry that ranges from 60% in Germany to 80% in Spain. Moreover, if this collapse of GDP is also accompanied by an even moderate increase in financial frictions, this shock also reduces the share of high-growth firms among the new startups, implying substantially larger negative long-term consequences for the employment generated by the entering cohort. Our estimates for Spain predict employment losses of the entering cohort of nearly 80,000 jobs for 2021, which increase up to almost 115,000 in 2029. Finally, using a simple partial equilibrium model calibrated to match the empirical evidence, we show that a subsidy to initial financing costs is more effective to increase aggregate employment of the entering cohort in the long run than a wage subsidy, which is more effective in the short run only.

Keywords: Recessions; Financial Crisis; Entrepreneurship; firm dynamics; Coronavirus; Covid-19 (search for similar items in EconPapers)
JEL-codes: E20 E32 D22 J23 M13 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-lma and nep-mac
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Working Paper: The Short- and Long-Run Employment Impact of Covid-19 through the Effects of Real and Financial Shocks on New Firms (2020) Downloads
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