Abstract: 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.

JEL Codes: J62, D24, J68, D61

Keywords: job reallocation, productivity, Covid-19, cleansing effect, firm exit and entry, job retention scheme

Co-author
Alari Paulus (Eesti Pank)

The public research seminars of the Department of Economics and Finance (DEF) at Tallinn University of Technology  usually take place on the second and fourth Wednesdays of the month in both onsite and online format, unless announced otherwise. The presentation will last approximately 45 minutes followed by 15 minutes of discussion. The seminars are held in English. Copies of the paper are usually made available at the seminar. The DEF seminar series is organised in collaboration with the project ”Individual Behaviour and Economic  Performance: Methodological  Challenges and Institutional Context” (IBEP), which has received funding from the European Union’s Horizon 2020 Research and Innovation programme under Grant Agreement No 952574. Questions about the seminar can be sent to the IBEP seminar coordinator Kadri Männasoo, kadri.mannasoo@taltech.ee.