1st Place Essay: Graduate Category

DID COVID-19 DESTROY JOBS?

MAHITA REDDY GOGIREDDY

The role of entrepreneurs as portrayed by Joseph Schumpeter in his 1934 book, The Theory of Economic Development, is mainly one of innovation. Innovation is often realized when an entrepreneur combines various resources, then reacts to and anticipates a customer’s needs in order to create something more valuable than an existing product or system. Profits act as incentives for entrepreneurs, who become part of a competitive market. The “break the old and build the new” process, which they embrace and which is also famously called “‘creative destruction,” leads to society’s long-run economic prosperity.

This essay explores the implications of Schumpeter’s idea of creative destruction under the haunting shadow of the COVID-19 pandemic. It is easy to blame the pandemic as the cause for job losses, but as this essay will argue, the pandemic has brought about a change that society would have likely experienced anyway. COVID-19 has just sped up the process.

There is an often unrecognized, positive side to the pandemic. In a speech he gave to the Economic Club in New York on Feb. 10, 2021, US Federal Reserve Chair Jerome Powell focused strongly on the US labour market. He noted dramatic layoffs in the US during the pandemic, both permanent and temporary (Figure 1). It looked like COVID-19 was the culprit. But actually, the sharp jobless spike is the economy’s way of recognizing that the fundamental shift brought about by creative destruction has been going on for some time.

Figure 1: Permanent and Temporary Layoffs

Source: Powell, 2021.

What is this fundamental shift? Sobel and Clemens (2020) highlight the economic necessity for getting rid of substandard combinations of resources while at the same time indirectly hinting to other competitors what those bad combinations are. Long before the pandemic, the world had already embarked on the Fourth Industrial Revolution – an era of robotics, artificial intelligence, quantum computing, genetic engineering, and many other far-reaching technologies. These new advancements interact with the job market in many ways, some of which have been observed over the past couple of years and some of which are yet to be explored.

Since the pandemic, many fundamental shifts have occurred—examples of creative destruction in action. One of them is highlighted by a survey conducted in August 2020 which revealed that many companies plan on permanently getting rid of nearly 30 percent of their office space by switching to partial remote work and reallocating resources accordingly (McKinsey & Co., 2021). Further, with limited face-to-face interaction, customer service in many sectors like banking, health care, and retail has gone virtual with the help of conversational AI bots, and this practice is likely to be permanent because of its cost-effectiveness (Drenik, 2021). Figure 2 shows that the organizations that have been able to survive the uninvited effects of COVID-19 are those that embraced digital initiatives faster, filling their gaps in technology by experimenting and innovating. These cases illustrate the ongoing change in the nature of work that has been sped up due to COVID-19.

Figure 2: Increase in speed in creating digital offerings across regions

Source: McKinsey & Co., 2020. A recent Automatic Data Processing (ADP) report reinforces this observation. The report talks about the current supply changes in the job market—changes resulting from the shift in the nature of work that are causing a mismatch in skillsets. As a result of the pandemic, over one in three (33.33%) of the 2,058 small firms sampled stated that they are having trouble finding qualified employees in the short-run (Richardson, 2021).

Let us look at the supply side in the labour market a little closer. How are the perceived gaps going to be filled? These gaps will likely force people to reconsider their capabilities and look for ways to improve their skills. While profits give companies incentives, better pay and better quality of life give labourers incentives (Emanuel and Harrington, 2020). In a world with open access to knowledge and training like never before, self-learning has become easy and affordable. As just one example, note the recent rise in graduate enrollments in the United States for fall 2020 – an increase of nearly 3.6 percent over fall 2019 (St. Amour, 2020). Figures compiled by the Chronicle of Higher Education show that in spite of the disruptive effect of the pandemic on higher education, approximately 21 percent of the institutions surveyed saw an increase in their undergraduate enrollments, 10 percent in Associate programs, 27 percent in Baccalaureate, 22 percent in Masters, and 17 percent in Doctoral degrees (Gardner, 2021: 9-10). In short, individuals seem to be responding to the expected technical demand of the future voluntarily.

Once labourers develop new skills, they become part of a strong labor market that has the potential to deliver substantial benefits and drive economic development. Figure 3 provides some evidence of the labour market’s recoverable nature. Over the last 30 years, even though the unemployment rate in the US has fluctuated quite a bit, it maintained an approximate average rate of 5 percent between each peak and trough cycle.

Figure 3: Unemployment Rate in the United States, 1990 to 2020

Source: US Bureau of Labor Statistics, 2021. in the United States alone increased by 73 percent (Koop, 2021). Similar trends have been observed in many other parts of the world. These observations illustrate why it is important not to overreact to the loss of jobs caused by pandemic lockdowns.

The Fourth Industrial Revolution has been around for many years and labour markets are re-shaping themselves in response. Labourers improving their skills, either through employer-offered specific programs and facilities, or through their own selfmotivation, has always balanced the effect of the changing work landscape and readjusted the overall unemployment rates. Indeed, if supply and demand are to work, people must adapt to the market conditions and evolving situations, and the development cycle continues. Figure 3 can be seen as a graph of this cyclical pattern. Business leaders should recognize this Schumpeterian cycle as they seek to manage unemployment in the US economy.

COVID-19 has seen the closure of many businesses (especially brick-and-mortar stores), but it is hard to ignore the simultaneous rise in the number of other start-ups in the past year. By January 2021, the number of new business applications over a 12-month period We often hear that the disruption of existing processes might pose a threat to the labour market by decreasing the number of jobs (for example, through automation). While creative destruction can create a zero-sum game for ideas and enterprises, the job market operates as a positive-sum game (Oster, 2015). In the words of economist Charles Wheelan, “Technology displaces workers in the short run but does not lead to mass unemployment in the long run. Rather, we become richer, which creates demand for new jobs elsewhere in the economy” (Oster, 2015). Developmental changes might eliminate the jobs in a few areas, but new jobs are simultaneously created in many unknown areas. As a result, the hiring process never ends. According to Filipowicz and Lafleur (2020), between 2001 and 2019, Canada’s economy employed approximately 4.1 million more people for new jobs (an increase of 27.6 percent). In short, while creative destruction might cause structural changes in the labour market, the argument of market shrinkage due to it is not supported by facts. Past studies, as well as the ADP presentation cited earlier, should be highlighted. Although many low-skilled jobs are being replaced as a result of the pandemic, government unemployment relief could very well contribute to the short-term shortage for workers. Palagashvili and Suarez (2020) highlight the negative correlation between the intensity of government regulations and the overall birth of firms. The ADP suggestion that future hiring incorporate a retraining process beyond the matching of a job description to a task could be a path to a new normal. Schumpeterian creative destruction provides good guidance on how to search for that path.

To conclude, the apparently alarming number of jobs lost

during the pandemic is likely an illusion because the world is going through a Schumpeterian cyclical change. The transition phases of such changes are, most of the time, rough. However, situations evolve and eventually become normal. The economy’s current move to a new normal will probably be the outcome of voluntary actions by both the job and labour markets. The future question to consider, though, is to what extent the government can help improve and empower this free market process. 

Mahita Reddy Gogireddy is an MBA student at New York Institute of Technology, Vancouver. She takes special interest in academic research and analysis of various socio-economic topics, and hopes to incorporate these interests in her future career advancements.

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