Working Paper: NBER ID: w29713
Authors: Fernando Cirelli; Mark Gertler
Abstract: As is well known, during the pandemic recession firms directly exposed to the virus, i.e. the “contact” sector, contracted sharply and recovered slowly relative to the rest of the economy. Less understood is how firms that “won” by offering safer substitutes for contact sector goods have affected this unequal downturn. Using both firm and industry data, we first construct disaggregated measures of revenue growth that distinguish between contact sector losers, contact sector winners, and the non-contact sector. We show that contact sector losers contracted roughly fifty percent more than the sector average, while winners grew. Further, forecast data suggests that the gap between winners and losers will persist at least through 2022. To explain this evidence, we then develop a simple three sector New Keynesian model with (i) a sector of firms that offers safe substitutes for risky contact sector goods and (ii) learning by doing. Overall, the model captures the unequal sectoral recession. It also accounts for inflation, including the sharp runup in 2021.
Keywords: Pandemic Recession; Economic Inequality; Sectoral Dynamics
JEL Codes: E3; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID exposure (I14) | revenue decline (H27) |
| ability to offer substitutes (D43) | revenue growth (O49) |
| learning by doing (losers) (C92) | productivity decline (O49) |
| learning by doing (winners) (C90) | productivity increase (O49) |
| revenue performance (losers) (H27) | persistent gaps in revenue growth (D25) |
| revenue performance (winners) (H27) | persistent gaps in revenue growth (D25) |