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Society and communities

Covid-19, mass unemployment and structural change

This week the Office for Budget Responsibility forecast that more than 4 million people in the UK will be unemployed by the end of 2020. But beyond this immediate shock, the Covid-19 crisis will also have a permanent effect on some sectors and the livelihoods of those who work in them.

Why? Well, imagine Covid-19 is a virus you caught through the internet. No, this is not a conspiracy theory, it is a thought experiment. A virus you caught through the internet, where  the only option was to switch off the wifi, the mobile phone and all the internet connectivity in your workplace and home. An internet lockdown. Where would that leave us? Well, probably somewhere in the late 1980s. Now, imagine the changes to our daily lives that would induce – no more working from home, online deliveries, zoom calls. That virus would take us back 30 years, and see the creation of many, many manual jobs the type of which we have done away with over the past decades. It would also see us hiring video tapes, going back to bookshops, and phoning for a taxi.

But of course, Covid-19 does exactly the opposite. It is a virus you catch from people, which makes communication via the internet safer than face-to-face, accelerating a trend to moving online for our work, shopping and leisure that was already under way in the economy. In the past few months we have all lived through a big experiment in moving online. A remarkable feature of the pandemic, therefore, is that it is accelerating structural change – the remote revolution – which has been gaining pace since the mid-1990s and was already changing the face of work, retail and transportation. Structural change refers to a change in the economy from which there is no going back. These are often changes that severely disrupt industries, and the jobs of those employed in disappearing industries.

"A remarkable feature of the pandemic is that it is accelerating structural change – the remote revolution – which has been gaining pace since the mid-1990s."
Professor John Gathergood

The last major structural change in the UK economy was indeed experienced in the early 1980s with the widespread closure of heavy industry (think shipbuilding, steel works and car production) and textiles in the UK. This created a surge in unemployment to 12% of the working-age population Being typically older and lower-skilled, many of those workers never worked again, either moving onto long-term disability benefits of long-term unemployment followed by retirement.

The structural change accelerated by Covid-19 is the move away from offline work, retail and associated face-to-face services. Once people been through the experience of change – the financial and psychic costs of moving to working and living more online – they are less likely to move back to the offline. That is the structural change from Covid-19 which is unlikely to be reversed.

When will be know the full effects of Covid-19 on structural change? This is likely to materialise in late-2020. One could characterise the structural economic effects of the pandemic as emerging in three phases. The first phase, lockdown, was a forced movement towards online services. The second phase, which we are now in, one might call the ‘cautionary’ phase. A phase in which most people still feel safer online than face-to-face, and in which the inconvenience of queues, distancing and mask-wearing in shops serve as deterrents to moving back offline. The third phase, which we may see emerge later this year, is the ‘new normal’ phase in which we see the size of the permanent effect on work, transportation and consumer retail culture.

The effects of this on the labour market will be profound. The OBR is forecasting an increase in unemployment back up to 1980s level – 12% by the end of 2020. This equates to approximately 4 million individuals of working age. The majority of the newly-unemployed are likely to be young and relatively lower-skilled workers previously employed in the sectors undergoing the most radical change, including offline retail and the many retail and catering services that support offices and city centre hubs. 

We will, therefore, see a repeat of the 1980s story with long-term unemployment, but this time among the young and low skilled? Here, the picture is mixed. The upside is that workers who are younger potentially have more scope for re-training and adapting, being physically healthier and have higher fluid intelligence on average compared with the displaced workers of the 1980s. The downside is that the skills gap between the jobs these workers used to do (semi-skilled jobs in retail, catering, cleaning, etc…) and the jobs the new economy demands (most generally, digital skills) is quite wide.

The policy challenge is therefore to re-train and re-skill for this fast new world of the digital economy. Workers need skills for the databases, customer records management, content management systems, coding platforms, design platforms, and so on (let alone the data driven discovery, machine learning and artificial intelligence that discovers new products and markets in this space).

"The policy challenge is to re-train and re-skill for this fast new world of the digital economy."
Professor John Gathergood

This is a great challenge because the skills gap between the manual and the digital is wide and the resources to bridge it are limited. Schools and further education colleges persistently struggle to teach digital skills to a high standard due to the difficulties in recruiting high quality tutors, who have attractive job prospects in the private sector.

Hence, there is a desperate need for higher-quality further education that bestows useful skills, such as the ability to use digital tools and packages, which power the online architecture of modern business. If the government is to provide serious training of this type, it has to be willing to make serious investment in further education after a decade of reduced funding, and do so before the scarring effects of unemployment on the cognitive skills and mental health of younger, lower-skilled workers make the gap to be bridged even wider. 

John Gathergood is a Professor of Economics. He has served as an expert adviser on household finance to the Bank of England, Financial Conduct Authority and the UK Treasury.

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