Welcome to Plugging the Gap (my email newsletter about Covid-19 and its economics). In case you don’t know me, I’m an economist and professor at the University of Toronto. I have written lots of books including, most recently, on Covid-19. You can follow me on twitter (@joshgans) or subscribe to this email newsletter here.
Today’s post is about what Covid-19 has taught us about the broad economy and what this might portend for the future. Covid-19 is disruptive (in the traditional sense of the word) and its most notable impact has been on the work-side of our lives. Covid-19 has made workers more costly for businesses. And the impact has been distributional. If you were lucky to have a job that could be performed remotely, that is what happened. If not, things were worse. But there has also been disruption on the leisure-side of our lives. Covid-19 has made consumers more costly for businesses. Once again, the impact here has been distributional. This time, however, it is the other way around — more likely to impact on wealthier than poorer people. What are the effects of these two seemingly opposing forces?
I want to stress here that this is going to be a pretty high-level analysis and, for that reason, very speculative. But I provide it to provoke thought more than provide a clear prediction of the future.
Here is my starting point. In my mind, the model of the economy is highly stylised. There are two classes of people — rich and poor. The rich people have jobs that they can do from home while the poor people do not. The poor people consume leisure using technologies that allow consumption at scale — e.g., think TV etc — with low or zero marginal costs while the rich people are able to also consume leisure using ‘old-timey’ technologies like travel, entertainment and eating out that have high marginal costs of delivery — mostly because they have to employ people to make them happen and, wouldn’t you know it, those people are poor.
Covid-19 Made Workers More Expensive
Now let’s introduce Covid-19 to the mix. On the work-side, Covid-19 made workers more expensive. Either this is because they had to find ways of working from home (which given that is not what they did before, is more ‘expensive’ on some measure) or because they had to find ways of keeping them safe at work. For the latter part, this may have been impossible and so, in effect, some workers became too expensive to employ.
The effects of this have been distributional. The third to half of people who could work from home were on the rich side of the economy. They are more expensive but not so much that the jobs became unworkable. Those who lost their jobs because they were now too expensive were on the poor side of the economy. They were also more likely to be minorities and, unlike other recessions, women (in your normal recessions it is usually men who disproportionately face job losses).
From Track the Recovery:
But let’s also not pretend there hasn’t been within sector variation. Work from home is all very well unless you have younger children in which case it is very expensive indeed. This effect has if you know anything about the way society works, fallen disproportionately on women. Child care used to be a difficult process in the morning but it involved this nice part — the commute to school — whereby you were legally required to bind your children in a chair followed by not having them at all for 8 or so hours. Instead, it is now surely a relentless and constant issue saved only by the grace of the Internet (which is on the leisure side of the equation I’ll come to in a moment). In other words, a division that has always been there has been opened further and the longer this goes on, the longer those consequences will be felt.
Not surprisingly, business will look for ways to reduce these costs. One possibility that was highlighted in the Wall Street Journal is that automation will be accelerated to replace workers completely. But that isn’t obvious to me. This issue is one where my last three books collide and it seems to me that automation, when it works to replace low-skilled labour, ends up putting a premium on high-skilled labour to work with those machines. What that means, however, is that Covid-19 or its ilk that makes it hard for those high-skilled workers to get into work, does not necessarily mitigate the risk to businesses from pandemic-related disruptions all that much. I am just saying that it isn’t clear that pandemics will cause businesses to substitute machines for people. My guess is that the businesses investing more in getting their people back to work are more capital-intensive than not.
Covid-19 Made Consumers More Expensive
Now let me turn to the issue that hasn’t received much attention. Covid-19 has made consumers more expensive to businesses. What I mean by this is where consumers’ physical presence is required for consumption, it is now more costly (to both them and businesses) to bring them in.
You can see this in the pattern of changes in consumer spending. Notice that despite the huge increase in unemployment, consumer spending is only down 4.4% in the US from pre-Covid-19 levels. This is caused mostly by a shift in spending as the following two graphs show. There has been a move away from restaurants, hotels and entertainment — things that require consumer presence for consumption — and not as much on retail and purchases of things — which don’t. (I’m not sure that spike on grocery sales in March was all toilet paper but you never know.)
When we look at changes in consumption patterns between the rich and poor we can get a sense of what is going on. Notice that richer folks dropped their consumption spending by more than poorer folks. There are fewer of them but their effect, on the aggregate, is, thanks to inequality, higher.
The broad reason for this is that those consumption activities that involve consumers interacting with workers (and other people) are more expensive and so are disproportionately consumed by the rich. That consumption path became more expensive and what is more, to the extent that supplying these goods is predominantly done by poorer workers, it is not surprising that the more expensive workers and the more expensive consumers have effects that compound one another.
[Note: Leisure here is construed quite broadly. When people working in central business districts, there were many services that supported them but, importantly, food services. These are facing grave challenges as the Financial Times recently reported about Pret in London.]
The Technology of Leisure
When we think about the replacement of workers by machines, we normally have an image of a manufacturing plant producing real stuff by real people now having machines produce that stuff. What we don’t think about is the production of goods and services that provide intangible and non-durable consumption that is leisure. But this very insightful paper by Lukasz Rachel shows that over the past half-century or more, leisure, as a big lump of activity, is increasing supplied using scalable means from broadcasting to digital development and distribution. That is, software has permitted the substitution of labour for capital in the production of leisure.
Those new leisure goods that are supplied at scale are cheap and often free. And there really are more of them.
These are goods and services that are hugely important on a time spent doing front but really low on a contribution to GDP front.
Consequently, their production does not, because it cannot, support the incomes of many workers.
The good news is that, as a whole, good leisure options are now affordable and widely available. The bad news is that those good leisure options are available which means that they provided good leisure substitutes even for our rich folks who were previously consuming more expensive, labour-intensive leisure goods.
What does Covid-19 portend?
Covid-19 has shocked the consumption of leisure. Leisure that was expensive became more so and its consumption dropped. Leisure that was cheap became a better option and I suspect its consumption has increased. The shock to expensive leisure also has driven a shock to the incomes of poorer workers who were previously employed in its production. It has also shifted the amount of savings done by the rich which is probably why the stock market performance looks so good. This all suggests that any return to normal will be predicated on the rich returning to their previous consumption bundle choices.
Will this all return to normal once Covid-19 is over? A thesis in this newsletter has been Covid-19, along a variety of fronts, has forced us to experience things we didn’t otherwise experience. Some of that stuff will be abandoned as soon as the pandemic is over. But some will stick. The question here is whether the reduction in expensive leisure consumption by the rich will stick or not.
I am, in the terms of my potted model here, one of the rich (in that I can happily do what is called work at home) but I am not the rich in terms of my adoption of leisure technologies — I like the cheap stuff that most people consume at scale. That said, the reason I like that is not because it is cheap but because it isn’t leisure that involves going places. So if Covid-19 leads to more products for my leisure at scale then I will have less reason to do other things. But if those products emerge, they could also encourage other rich folks to not do those other things either.
What I don’t know is whether the rich are going to rush back to their previous leisure options (well, those who play golf will but what about other stuff) or whether they might have discovered that they don’t like doing that stuff as much and certainly don’t like working hard to be able to do it. If that’s the case, then some of these changes might stick. According to Rachel, that means lower supply of labour in the future, more time on cheap leisure, less R&D and slower productivity growth. But is it really worth it to have productivity growth if you don’t need it for leisure?
This all raises lots of questions but I suspect that our consumption of leisure is something we will be thinking lots about over the next year or so. It turns out that may have long-term impacts.