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On relaxing lockdown measures – Marcela Eslava (translation)

This article is a collaborative result of the "Macroeconomics Research Group of the Faculty of Economics of the University of Los Andes, Bogotá".

Although there are 7.5 million Colombian workers who, being in the sectors most affected by the lockdown, are unable to telework, the productive chains of this paralysis affect many more. Taking into account those who cannot telework due to the pause in activities of their clients or suppliers, the figure would exceed 10.5 million jobs. Relaxing lockdown measures could help mitigate the effects of the pandemic on the livelihoods and future prospects of these workers and their families, although it does not guarantee the extent of the mitigation due to the major impact on the demand for all products that the health crisis will cause, with or without the lockdown. Lifting the lockdown measures also implies health risks that must be dealt with. Social distancing protocols and occupational safety equipment will help, but not replace, more effective and probably even cheaper strategies: those aimed at continuing to strengthen, and much more decisively, ICU bed capacity and the testing of COVIDs as well as proper management of the operation of transport systems to minimize the risk of their congestion.

The paralysis of some sectors as a result of the health crisis has impacts on the lives of workers in at least two dimensions. On the one hand, keeping them at home protects them from exposure to the contagion at their workplace, which could be high density offices or work premises, or from the need to take public transportation. On the other hand, the paralysis of many of the businesses in which they work exposes them to a decrease in income and even unemployment (see notes No. 9 and No. 11). In this note we show initial results of research that classifies the country's employed population in these two dimensions: exposure to the economic effects of halting activities in certain sectors and reduction of exposure to illness at work as a result of these measures.

Using information from the DANE's Large Integrated Household Survey (GEIH) for 2019, we assigned a high value of exposure to the disease in the workplace to people in occupations with a high degree of physical contact (hairdressers are a common example) and to those who use mass public transport to get to their work. We consider those who usually work at home or in jobs that can be done remotely to have a low exposure value. Of course, this is the type of exposure that can be mitigated by social distancing protocols in the workplace. We assign a high exposure to the negative economic effects of the measures if, while performing a job that is not possible to do remotely, the individual works in a sector that is not allowed to operate or depends on inputs from other sectors that are also paralyzed or on purchases from clients that are part of those sectors. The risk is higher if his employer is a micro or small enterprise or is informal or self-employed and lower if he is employed by a company with more than 50 workers. It is essential to take into account the effects of closures in client or supplier sectors, as we do here, because productive complementarity makes it difficult or even impossible to reactivate some sectors in the absence of others.

It should be noted, in any case, that the reduction in productive activity does not derive solely from the restrictions on mobility and work imposed by authorities. It also occurs due to the lower demand for certain goods and services, reflecting the caution of consumers in an environment of high uncertainty plus an association of some activities with higher risks of contagion (shows, hotels), and the external shock that affects access to imported inputs and the appetite of foreign clients. The exercises presented in this note only quantify the workers affected by lockdown measures, directly and through local production chains, in comparison to the 2019 scenario. Effects of the demand shock and the external shock must be added to this analysis, understanding that a lifting of the lockdown will not return us to the 2019 situation but to a more precarious one. Public policy efforts to mitigate these adverse economic effects of the crisis will surely help alleviate them, and are not considered here either. The effects of demand are the subject of ongoing research, the results of which we will present in future notes. Our suggestions for policies to mitigate the crisis are in previous editions of the Nota Macroeconómica.

By dividing the employed among those in sectors vulnerable to sectoral paralysis and those who are least vulnerable (such as those that produce essential goods or education, which has continued virtually), it is possible to identify that more than nine and a half million employees, of the 22.3 million employees in the country, are in the most vulnerable sectors. These people are also characterized by greater exposure in all dimensions to economic risk: they have a higher concentration of employment in trades that are not suitable for remote working and higher concentration on the informal market, self-employed or employees who work in micro and small companies.

On the side of exposure to the disease in the workplace, news are not so bad: 17% of those employed in these sectors worked at home before the crisis, the fraction of those who travel by public transport is smaller than those in less vulnerable sectors and the proportion of those whose work requires high physical contact is similar to that of those other sectors.

Three sectors stand out among those that generate employment and are actually paralyased by lockdown measures: construction, retail trade of non-basic goods and accommodation and restaurants. These sectors represented almost 5 million jobs in 2019. The infrastructure sector shows a high level of exposure to the disease in the workplace because, although it is work that can be done outdoors, it requires closeness and physical contact with other members of the work team. For their part, sectors such as tobacco production, textile manufacturing and wood product manufacturing have lower impacts on employment and can be carried out in environments with lower levels of exposure, especially since a significant part of workers report exercising their trade from their own home. Most manufacturing sectors are among those highly linked to the rest of the economy (marked by triangles), including linkages between manufacturing subsectors for the purchase of inputs and others with the marketing sector. The deep density of product linkages raises doubts about the degree of reactivation that can be achieved with limited openness to some productive sectors.

Based on these elements, we simulate the economic impact of two lockdown scenarios: one with generalized closings of the non-essential sectors and remote working or online work in the education and administrative services, similar to what has been experienced since the end of March, and another which includes the reopening of the construction and a good part of the manufacturing sectors, as proposed by the National Government as of April 27. We consider the direct effects of the lockdown on some sectors due to the temporary pause of activities and its indirect effects. The latter takes into account that, by pausing activity in some sectors, demand and the possibility of obtaining inputs for other sectors are reduced due to productive linkages.

 We also take into account that the loss of jobs and income is not immediate: medium and large companies, according to our calculations, can pay their payroll and rent for around 3 months without receiving income. However, smaller companies will surely find it difficult to maintain the flow of income to their employees in less time. We assume in the simulation that this period will be two months in small companies (between 10 and 50 employees) and only one month in micro-companies and for informal and self-employed workers.

The lockdown scenario that we have experienced since the end of March threatens to destroy 8.2 million jobs among informal workers, self-employed workers and employees of micro-companies if an additional month of lockdown is extended. These jobs represent an added value and, therefore, a contribution to the national GDP of almost 19 trillion colombian pesos per month (over 5 billion USD). After three months of closing, these impacts can reach 10.5 million jobs in companies of all sizes, which mean almost 30 trillion pesos per month of loss to the national GDP. At the same time, these closings, if strictly observed, reduce the risk of contagion at work to zero for a very large fraction of workers.

Relaxing the lockdown to allow for production in the manufacturing and the construction sectors significantly mitigates the effects of the pandemic on employment. It reduces the impact on employment in more than two million workers in the short term (losses of 5.9 instead of 8.2 million jobs) and 3.2 million for extended lockdown. Of course, we are still talking about the loss of six or more million jobs associated with the still closed sectors and their production chains.

On the negative side of the easing of lockdown measures, the risk of contagion at work increases for those who resume their activity in the workplace. This risk implies the urgent need to implement measures to protect workers. Much effort and discussion has been invested in social distancing protocols at work for these sectors. Its implementation is essential. Equally important are measures to:

  • Expand the capacity of the public transport system to decrease its density. It is urgent that local policymakers establish that the entire available fleet is used to provide transport services at high frequencies in order to ensure low occupancy. Surely it will also be necessary to have the private service buses (inter-municipal, schools) to support this capacity. This is also a way to mitigate the impact of the emergency on the private passenger transport sector.
  • Strengthen in a much more determined way the ability to test for the virus and antibody development and put it into practice to isolate new cases and their contacts. Here, again, it is urgent that local and national governments make efforts to mobilize the capacity of local laboratories to produce the necessary test kits given the shortage in the international market. The massive performance of these tests has allowed South Korea and other Asian countries to continue operating their economies and educational systems without falling into unmanageable spikes of contagion.
  • Continue strengthening the UCI's ability to avoid the risk of reaching its limit, which would lead to new closings.
  • Allow workers to report violations of distancing measures and equipment in the workplace and ensure the effectiveness of measures to monitor these complaints and deliver sanctions if necessary.

It is important to note the limitations of this analysis. On one hand, it only examines the effect of the lockdown in contrast to the situation in 2019. But lifting these measures will not lead us to that original situation, rather to a much more precarious one due to the precautions that people would take even in the absence of those measures: limited visits to shopping malls, hotels and restaurants, limited non-necessary expenses in a scenario of uncertainty. More generally, we have not incorporated any effect of the reductions of the demand: neither the aforementioned nor the one that will derive from income losses and that will multiply the damages related to productive paralysis.

Relaxing the lockdown is essential to mitigate the epidemic effects over livelihoods and future prospects of all Colombians. But it involves health risks that we must be aware of and ready to manage. The most effective way to do this, which is probably also the cheapest way, is to continue strengthening, and in a much more decisive way, the ICUs capacity and conducting COVID tests, as well as strengthening the capacity of transport systems to minimize the risk of its congestion.