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      Lockdown, employment adjustment, and financial frictions

      Small Business Economics

      Springer US

      Matched data, Employment, Firm size, Sectoral heterogeneity, Lockdown, Financial frictions, C30, C55, D22, L26, M51

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          Abstract

          We examine firms’ employment adjustments immediately after the imposition of stringent lockdown in March 2020. In doing so, we use monthly administrative data, and take value-added tax payment changes as a proxy for the demand shock. We merge data with COVID-19 tests, classified by economic activity, and employ a fixed effects instrumental variable regression. We find that all sized firms in the manufacturing sector reduced employment more if they had uncovered tax liabilities before the lockdown. Among small firms, real estate and service sector firms downsized more rapidly. While employment changes are rather modest, this very early evidence points to the need to address liquidity needs and firm pre-conditions among capital-intensive and services firms and, in particular, small businesses, to avoid employment losses.

          Plain English Summary The administrative data from the first COVID-19 lockdown in 2020 point to the need to address liquidity requirements among manufacturers, capital-intensive and service firms, and, in particular, small businesses to avoid subsequent employment losses.

          While there is a vast literature on firms’ adaptation and adjustments in the face of adverse shocks, firms’ reactions and the macroeconomic implications of stringent, government-imposed lockdowns are much less understood due to their novelty. We analyze businesses’ responses to the first and very stringent lockdown in March 2020 by making use of monthly administrative data and taking value-added tax payment changes as a proxy for the demand shock. We exploit variation in the sectoral differences across small, medium, and large firms. A simple average employment adjustment was non-negative in agriculture, construction, information and communication, and public administration sectors in our sample. By merging data with COVID-19 tests, classified by economic activity, and employing a fixed-effects instrumental variable regression, we find that all sized firms in the manufacturing sector reduced employment more if they had uncovered tax liabilities before the lockdown. Among small firms, real estate and service sector firms downsized more rapidly. While employment changes are rather modest, this very early evidence about businesses’ reactions to COVID-19-induced uncertainty and activity restrictions points to the need to address business liquidity needs early on. Another policy message concerns the importance of firm pre-conditions among capital-intensive and services firms and, in particular, small businesses to avoid subsequent employment losses.

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          Most cited references 20

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          Relationship Lending and Lines of Credit in Small Firm Finance

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            The Employment Effects of Credit Market Disruptions: Firm-level Evidence from the 2008–9 Financial Crisis *

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              Supply and demand shocks in the COVID-19 pandemic: an industry and occupation perspective

              Abstract We provide quantitative predictions of first-order supply and demand shocks for the US economy associated with the COVID-19 pandemic at the level of individual occupations and industries. To analyse the supply shock, we classify industries as essential or non-essential and construct a Remote Labour Index, which measures the ability of different occupations to work from home. Demand shocks are based on a study of the likely effect of a severe influenza epidemic developed by the US Congressional Budget Office. Compared to the pre-COVID period, these shocks would threaten around 20 per cent of the US economy’s GDP, jeopardize 23 per cent of jobs, and reduce total wage income by 16 per cent. At the industry level, sectors such as transport are likely to be output-constrained by demand shocks, while sectors relating to manufacturing, mining, and services are more likely to be constrained by supply shocks. Entertainment, restaurants, and tourism face large supply and demand shocks. At the occupation level, we show that high-wage occupations are relatively immune from adverse supply- and demand-side shocks, while low-wage occupations are much more vulnerable. We should emphasize that our results are only first-order shocks—we expect them to be substantially amplified by feedback effects in the production network.
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                Author and article information

                Contributors
                Povilas.Lastauskas@ef.vu.lt
                Journal
                Small Bus Econ
                Small Business Economics
                Springer US (New York )
                0921-898X
                1573-0913
                3 June 2021
                : 1-24
                Affiliations
                GRID grid.507386.f, ISNI 0000 0001 1087 4842, Center for Excellence in Finance and Economic Research and Faculty of Economics and Business Administration, , Bank of Lithuania and Vilnius University, ; Vilnius, Lithuania
                Article
                496
                10.1007/s11187-021-00496-3
                8174130
                © The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2021

                This article is made available via the PMC Open Access Subset for unrestricted research re-use and secondary analysis in any form or by any means with acknowledgement of the original source. These permissions are granted for the duration of the World Health Organization (WHO) declaration of COVID-19 as a global pandemic.

                Funding
                Funded by: FundRef https://doi.org/10.13039/501100004504, Lietuvos Mokslo Taryba;
                Award ID: LT08-2-LMT-K-01-073
                Award Recipient :
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