The Short- and Long-run Employment Impact of COVID-19 through the Effects of Real and Financial Shocks on New Firms

48 Pages Posted: 18 Dec 2020

See all articles by Christoph Albert

Christoph Albert

Centre for Monetary and Financial Studies (CEMFI)

Andrea Caggese

Universitat Pompeu Fabra - Department of Economics and Business (DEB)

Beatriz González

Banco de España

Date Written: December 15, 2020

Abstract

We use the latest available empirical evidence on the impact of the COVID-19 shock on the EU economy to predict its effect on firm entry, and in particular on high-growth startups, and on the related short- and long-run impact on employment growth. We find that the COVID-19 shock is expected to reduce firm entry and that its overall impact is very sensitive to financial conditions. A relatively small increase in financial frictions is likely to strongly reduce the entry of high-growth startups, with fewer jobs created in the short run but, more importantly, also slower employment growth in the long run. We then develop a model with heterogeneous startup types and simulate the effects of the COVID-19 shock on the entry and growth of a cohort of new firms to evaluate alternative policies. We find that a loan subsidy that reduces the excess cost of credit for new startups is the most efficient policy in promoting the entry of high-growth startups. The comparison of this subsidy with a wage subsidy that supports current employment shows that, for the same overall costs, the number of jobs created by the loan subsidy in the long term is significantly larger than that created by the wage subsidy in the short term. Our findings imply that, while policies aiming to stimulate current employment are important, in order to ensure also a faster recovery in the future they should be accompanied by measures directed at reducing the cost of credit for new businesses.

Keywords: recessions, financial crisis, entrepreneurship, firm dynamics, coronavirus, COVID-19

JEL Classification: E20, E32, D22, J23, M13

Suggested Citation

Albert, Christoph and Caggese, Andrea and González, Beatriz, The Short- and Long-run Employment Impact of COVID-19 through the Effects of Real and Financial Shocks on New Firms (December 15, 2020). Banco de Espana Working Paper No. 2039, Available at SSRN: https://ssrn.com/abstract=3749284 or http://dx.doi.org/10.2139/ssrn.3749284

Christoph Albert (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain

Andrea Caggese

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

Beatriz González

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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