How many jobs will be lost is still unknown. But past experience shows that displaced workers often suffer a drop in pay after job loss.

COVID-19 has highlighted significant vulnerabilities and inequalities that were largely hidden in Canada prior to the pandemic. It has shown that Canadian families are unequal in their ability to deal financially with a lockdown.

In a recent Statistics Canada study, Derek Messacar and I found that prior to the pandemic, one in four Canadians in working families were financially vulnerable to a two-month work stoppage, meaning they did not have enough savings to remain out of low income during a two-month work interruption. But lone mothers, recent immigrants, Indigenous people and young, less educated families were much more vulnerable than other families (figure 1).

Other groups were vulnerable as well. Even among working families, poverty rates varied substantially prior to the pandemic. For example, poverty rates in 2015 were about 14 percent among Arab families, 11 percent among Black families, and 5 percent among white families (figure 2). Families’ employment in industries that ended up being severely impacted was also unequal, with lower-income families being over-represented in these industries.

COVID-19 has also shown that Canadian families are unequal in their ability to work from home. While 54 percent of the dual-earner couples who are in the top 10 percent of family earners (weekly) have jobs where both partners can plausibly work from home (figure 3), the corresponding percentage is only 8 percent among their counterparts who are in the bottom 10 percent. Highly educated families also have greater opportunities to work from home than less educated families.

In sum, higher-income families were — perhaps unsurprisingly — in a better position to deal with a relatively long work stoppage and had jobs that are generally more conducive to telework, a partial “insurance policy” that increased their chances of remaining employed during the pandemic.

As governments closed many sectors of the economy, low-wage service industries were highly affected. As of August 2020, the number of Canadians employed in accommodation and food services and working at least half of their usual hours was 21 percent lower than in August 2019. The corresponding employment gap in arts, entertainment, and recreation was, at 30 percent, even larger. In contrast, the overall employment gap relative to 2019 was about 8 percent when considering all industries.

The net result was that low-wage workers ended up being much more affected than they had been during the 2008-2009 recession. For example, the number of Canadians earning less than $14 per hour — the cut-off for the bottom 10 percent of wage earners in 2019 — and working at least half of their usual hours fell by 40 percent from July 2019 to July 2020. In contrast, the number of employees earning more than $38.46 per hour — the top 20 percent of hourly wage earners in 2019 — and working at least half of their usual hours did not fall during that period (figure 4).

Overall, far more employees have been laid-off during the first months of the pandemic than during the first months of the recessions of 1981-1982, 1990-1992, and 2008-2009. From February 2020 to April 2020, on average 12.4 percent of paid workers have been laid-off —temporarily or permanently — each month. This is more than three times the layoff rates observed during the three previous recessions.

Given these numbers, a key question emerges: to what extent will the layoffs observed so far become permanent, meaning they will lead to job losses? In all three previous recessions, roughly 45 percent of all laid-off workers ended up being laid-off permanently. The remainder — 55 percent — were involved in temporary layoffs. Nobody knows at this point what these percentages will be by the end of the labour market downturn caused by COVID-19.

The degree to which the COVID-19 pandemic will lead to permanent layoffs is crucial to understanding how it might affect Canadian workers in the longer term. The reason is simple: while most of the employees who lose their job in a given year find a new job in the following year, the new job often pays lower wages than the previous one. As a result, many permanently laid-off workers see their earnings decline in the year following job loss, a well-known pattern confirmed recently in Canada using several Statistics Canada datasets.

These earnings declines are not limited to the short term. At least one in five permanently laid-off workers experiences substantial earnings declines even five years after job loss (figure 5). This is true especially for long tenure workers, those who have been with the same firm for several years prior to job loss, a trend documented back in 1993 in the American Economic Review.

There are several reasons why displaced workers experience earnings losses even five years after job loss. One reason relates to the fact the pay rates of workers often reflect how productive they are in their job, meaning the quality of the match between their skills and the requirements of their position. As a labour market downturn destroys jobs, many workers whose skills matched perfectly the requirements of their previous occupation can no longer find such good match — and the corresponding pay — elsewhere in their local labour markets. They often have to move to occupations for which they are less qualified or over-qualified. Hence, labour market downturns not only destroy jobs: they also destroy high-productivity employer-employee matches.

Another reason is that some firms may choose to pay their employees below-productivity wages at the beginning of their career and above-productivity wages as they accumulate more tenure. If part of the pay of long-tenure workers reflects this trade-off, then job loss will lead them to lose the “premium” they received in recent years as a result of this compensation scheme.

Labour market downturns not only destroy jobs: they also destroy high-productivity employer-employee matches.

All of this implies that what matters is not only how many jobs the economy ends up creating after a downturn but also whether displaced workers have the skills the new jobs require and can get a similar pay in these new jobs. Nothing guarantees that all jobs created after a downturn will have the same skill requirements as those destroyed and that displaced workers will get similar pay rates in the new positions.

Part of the earnings losses experienced by permanently laid-off workers are offset by the Employment Insurance (EI) benefits they receive in the short term. However, EI benefits are usually exhausted after one year. As a result, five years after job loss, the earnings losses of displaced workers can be mitigated only by the progressivity of the tax and transfer system, and for some of those who are married or in a common-law relationship, by an increase in the annual hours worked by their spouse.

Ultimately, the degree to which COVID-19 will adversely affect Canadian workers in the longer term depends on several interrelated factors, such as the degree to which it will:

  • affect consumption expenditures, as households try to improve their balance sheets and possibly worry about a second wave of infections;
  • reduce exports, as Canada’s trading partners work toward re-opening their economies;
  • stifle investment, as firms face uncertainty about the speed of the recovery and the possibility of subsequent lockdowns;
  • reduce the entry of new firms and increase firm closures (for example, conventional retail trade stores);
  • lead firms to automate certain tasks through the use of robots and computer algorithms;
  • prompt firms to expand their telework and online sales capacity.

In addition, the speed of the recovery in low-wage service industries will depend on the degree to which expected decreases in consumer spending reflect (temporarily) reduced consumers’ incomes rather than health concerns. If people aren’t spending because they’ve experienced a hit to their income, the recovery will be faster when sectors reopen and employment income rises. Conversely, if people aren’t spending because they’re worried about being infected in a restaurant or retail store, the recovery will be slower. This health concern will be of primary importance if a second wave of infections emerges.

This article is based on a presentation made at the 25th annual Queen’s International Institute on Social Policy, which was held online this year between August 25-September 21, 2020.

This article is part of the Tackling inequality as part of Canada’s post-pandemic recovery special feature.

Photo: Shutterstock/By Michael D Brown