'Major reallocation shock' from coronavirus will see 42% of lost jobs evaporate: Study

Permanent job losses are likely to be a feature of the eventual U.S. recovery, according to University of Chicago research, which estimates that 42% of recently unemployed workers will not return to their jobs amid the “profound” shock stemming from coronavirus lockdowns.

The pandemic has taken a brutal toll on the world’s largest economy, with at least 36 million people thrown out of work over the last two months. With states gradually relaxing restrictions that have shut down businesses and locked workers at home, economists are forecasting at least some of those employers could rehire laid off workers.

Read more: Coronavirus: How to find a job in a tough economy

However, researchers at the U of C’s Becker Institute for Economics have painted a dour picture of the labor market reallocating those lost positions. Calling the crisis a “major reallocation shock” across all major economic sectors, the authors found that for every 10 coronavirus-induced job losses, only 3 were created.


Some employers — primarily Amazon (AMZN) and Walmart (WMT) — have hired en masse to deal with temporary demand spikes, yet the Chicago study suggests positions created during the COVID-19 crisis are unlikely to offset the labor market’s extreme bloodletting.

The lockdowns have cratered activity in an economy that consists of 70% consumer spending, while undoing all of the jobs created since the great recession ended.

“Even if medical advances or natural forces bring an early resolution to the crisis, many pandemic-induced shifts in consumer demand and business practices will persist,” wrote Jose Maria Barrero, Nick Bloom and Steven Davis, the study’s authors.

They cautioned that a litany of reasons — such as generous unemployment benefits that exceed their lost job earnings, policies to encourage companies to keep people on the payroll and other regulatory factors “will impede reallocation responses to the COVID-19 shock.”

As a result, “much of the near-term reallocative impact of the pandemic will also persist, as indicated by our forward-looking reallocation measures,” they wrote, adding that “42 percent of recent layoffs will result in permanent job loss."

The study’s findings raise the specter of a potential jobless recovery, which became a byword of the post 2001 recession era that bedeviled policymakers’ ability to promote full employment. JPMorgan Chase economist Michael Feroli warned last week that “the specter of permanent job loss looms as a factor that could contribute to a painfully slow recovery.”

A lack of jobs has heightened the increasingly polarizing debate over state reopenings, with many citizens eager to resume their livelihoods, and divisions on Wall Street over the shape of an economic rebound.

“If the pandemic and partial economic shutdown linger for many months, or if pandemics with serious health consequences and high mortality rates become a recurring phenomenon, there will be profound, long-term consequences for the reallocation of jobs, workers and capital across firms and locations,” the U of C’s researchers wrote.

In recent days, Wall Street economists have themselves grown pessimistic about the length of the recovery, and the shutdown’s impact on the job market. In a research note to clients on Monday, Wells Fargo noted that while employment is expected to rebound, “It is likely will take a number of years for the labor market to recover from its pandemic-induced meltdown.”

Although the pandemic is perceived as a “one-off” event — albeit a big one — economists are warning the impending changes to the economy will result in long-term behavioral shifts, and likely to see mass bankruptcies.

“The restaurant industry provides a salient example of intra-industry reallocation in the current crisis,” the University of Chicago study wrote.

Using National Restaurant Association data about recent eatery closures, researchers extrapolated their findings that over 100,000 restaurants are expected to be permanently shuttered in the near-term — even as takeout and delivery options boom. “Much of this immediate reallocative impact will likely persist,” the study added.

Retail, restaurant, travel and leisure job losses have been a hallmark of the current turmoil, but the growing white-collar shift to working remotely may have a salutary impact on other sectors.

Some employers will shift resources to other roles, while many laid off workers may have to find new positions or careers.

Javier David is an editor for Yahoo Finance. Follow him on Twitter: @TeflonGeek

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and reddit.

Find live stock market quotes and the latest business and finance news