Labour Demand During the COVID-19 Pandemic: Did Firms’ Expectations Matter?

In early 2020, the COVID-19 outbreak famously triggered a massive wave of unemployment. Less famous are the channels through which the shock of that outbreak transmitted to labour markets. Using the World Bank Enterprise Survey data for Italy, I studied whether firms’ decisions to reduce employment following the outbreak were associated with their sales recovery expectations. I document four key findings. First, many Italian firms dismissed their employees following the outbreak, but most dismissals were temporary. Second, firms’ sales recovery expectations, measured by their expected sales rebound time, ranged between 0 and 24 months, and averaged 6 months. Third, expected sales rebound times were longest among firms that suffered COVID-related operational difficulties such as business closures, sales crunches, and financial stresses. Fourth, expected sales rebound time was positively correlated with decisions to dismiss employees, even after controlling for firm-specific attributes. Overall, these findings paint a picture in which firms who expected the adverse economic perturbations of COVID-19 to last the longest were also the likeliest to dismiss their employees.