Were jobs saved at the cost of productivity in the COVID-19 crisis?

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. The negative effects on productivity were offset by the positive employment effect, but the net gains from the job retention support appear limited.