Labour market effects of the corona crisis in the short and the long term

Economic Commentaries, News The corona crisis has hit the labour market hard. Although the comprehensive economic policy measures introduced during the pandemic have mitigated the negative effects, the number of unemployed has risen at the same time as employment and hours worked have fallen.

Groups entering the labour market are always hit hardest in crises, and it is the same this time. This is due to the restrictions aimed at limiting the spread of infection and changes in consumer behaviour having had a particularly adverse effect on sectors that employ many young people and foreign-born persons.

The crisis may also have more long-term effects on the labour market. How substantial these will be depends on how long the crisis lasts. Deep and prolonged crises can change the way the labour market works and cause the unemployment rate to become entrenched at a high level. A person who has been unemployed for a long time often has more difficulty finding a new job when demand returns.

The coronavirus pandemic can also increase the pace of structural change. This is positive for productivity and prosperity in the long term but can also lead to a higher unemployment rate for a period. How much higher depends on the ability of the labour force to adjust and on how flexible the labour market is. Reforms that promote a more inclusive labour market, greater mobility and possibilities for education and workplace training could reduce the risk of the unemployment rate becoming entrenched at a high level.

In a new Economic Commentary, Iida Häkkinen Skans examines how the pandemic is affecting the labour market and discusses the experience from and similarities with previous crises.

By Iida Häkkinen Skans. The author works in the Riksbank’s Monetary Policy Department.

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Updated 08/01/2021