Insights

Effective Fiscal Policy Response to COVID-19

The battle against the economic fallout related to the COVID-19 outbreak has broadened from monetary policy to fiscal policy. Several proposals are circulating and, of course, the macroeconomy itself remains difficult to forecast. Yet, we think some proposals may be more effective than others. Here, we consider which sectors are more vulnerable to layoffs and deserve priority for relief.

18 March 2020

It is quite possible that employees in the accommodation and food service sectors could experience even more pain than those in the air travel sector. While airlines have already delivered their “wish list” to Washington, employment subsidy programs for hospitality and food service will likely offer more bang for the buck in term of keeping as high a number of people in jobs as possible.

A look back at these sectors’ employment experiences during 2001-02 (the 9/11episode) and during 2008-09 (the Great Financial Crisis) is informative in regards to the type of impact we might see this time around.

9/11 was by far the worst experience for airlines and, in fact, air travel employment has not recovered following from the retrenchment following the 2001 catastrophe. Figure 1 indicates the proportion of employment lost following 9/11 compared to the Great Financial Crisis. COVID-19 could ultimately be worse for activity, although airline operations are leaner today than in 2001 and, with a potential bailout, the employment losses may proportionally exceed the 9/11 experience. This doesn’t mean there won’t be layoffs, but it probably caps them to some extent.

In contrast, employment in accommodation and food services is presently at a record high. These sectors were little impacted after 9/11 as Americans continued to enjoy restaurants and domestic travel. These sectors were more severely hit during the great recession.

Putting the two charts together reveals a serious risk in the COVID-19 shock. Note the speed of adjustment in the airline industry following the 9/11 experience. The accommodation and food services sectors could experience similarly rapid layoffs. In fact, we are already hearing news of furloughs and layoffs by some large hotel chains. Thus, there is a considerable risk to employment outside of the air travel industry and it will be critically important for stimulus measures to encompass these industries.

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The views expressed in this material are the views of Simona Mocuta through 17 March 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

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