Understanding the impact of government aid to firms in the COVID-19 pandemic
By Morten Bennedsen, Birthe Larsen, Ian Schmutte, Daniela Scur 28 June 2020
Much of the economic turmoil caused by the COVID-19 pandemic is channelled through firms and their managers’ decisions. Responding to the pandemic, governments have closed non-essential workplaces and imposed social distancing measures while offering firms various forms of aid. Using firm-level survey data from Denmark, this column examines the impact of these measures on firms, and the uptake and effects of certain policy tools used in Denmark, which are similar to those used in many other countries. It shows that while most firms suffered pronounced revenue declines, targeted government policy helped many stay afloat, and created incentives for job retention.
The COVID-19 pandemic has caused – and continues to cause – widespread economic havoc to lives and livelihoods throughout the world. Social distancing measures imposed in countries required all but the most essential employees to either work from home, or not to work. Governments worldwide have sought to help businesses cope in various ways by offering employment subsidies, cost subsidies, and tax payment delays.
As a result, important questions are being raised about the impact of such measures on firms, the choices they make regarding aid, and the comparative effectiveness of various policies. Firms and their managers will determine the ultimate allocation of trillions of dollars in aid globally, so studying their choices can reveal which policies are most likely to be effective and help limit wasteful spending. In particular, encouraging firms to preserve employment has been a key component of the policy response early on in the pandemic. This is because preserving job matches may accelerate recovery and also mitigate the long-term ramifications of job loss for workers. Barrero et al. (2020) estimate that 42% of recent layoffs will become permanent job losses, while Montenovo et al. (2020) show that job losses take a greater toll on certain groups – minorities, women, young workers (ages 20-24), and those with high school degrees and some from college.
We also need to better understand where government aid flows, and why. Is help reaching the firms that need it most? Or is it simply flowing to the most powerful? Cororaton and Rosen (2020) report some evidence from the US Paycheck Protection Program showing that while half of public firms were eligible, only 13% ultimately became borrowers. Chetty et al. (2020) further show that the programme had limited impact likely because those who did take up the loans may not have intended to enact layoffs anyway. Indeed, in the wake of negative publicity, some US firms have returned the government aid.
How did the pandemic affect firms?
We explore these issues by asking firms themselves how they were affected both by government measures implemented to halt the spread of the disease, and by those intended to help firms cope (Bennedsen et al. 2020). We surveyed a representative sample of 10,642 firms in Denmark between April and May 2020. The sample covers small, medium, and large firms across all industries. We estimate that the survey respondents represent between 25-40% of the private labour market in Denmark.
We asked firms about pandemic-related disruptions to their normal operations, with a focus on alternative labour arrangements and government aid take-up. We also collect data on baseline firm employment, costs, and liquidity, along with perceptions on the crisis and the recovery period.
The situation in Denmark offers a window into the situation faced by firms in many European and North American countries. As shown by Dingel and Neiman (2020), roughly 40% of workers have jobs that allow them to work from home – a level that is similar to those in other OECD countries. Furthermore, the government’s response in Denmark was very much like that of other European countries, where active labour market policies have played a central role.
The toll of the pandemic on firms
Danish firms report unprecedented declines in revenue in April 2020. Nearly 70% of firms report a revenue decline, with the median firm experiencing a decline of 20% (Figure 1). In nearly all industries, more than half of the firms expected decreases in revenue. In any given year, many firms experience decreases in revenue, including substantial decreases of more than 35%. By comparison to this year, however, only about 6% of firms in 2016 had declines larger than 35%, and roughly 37% had any declines at all.
In Denmark, as has been the case worldwide, certain industries were particularly hard hit (Figure 2). Our survey shows average declines in revenue of 73% for firms in accommodation and food services, 69% for arts and entertainment, and 50% in education. Retail and manufacturing were also badly affected, with 70% of firms reporting decline in revenue.
The most badly hit sector took up aid
Reassuringly, firms experiencing declines in revenue were the primary takers of government aid. Further, we find a strong relationship between government aid and how firms manage their employment relationships. While firms’ primary response to the crisis was to furlough a large share of their workforce, they report that without government support they would have likely enacted layoffs instead. The average firm that took aid furloughed 30% and laid off only 2% of its workers. Without aid, firms indicate that they would have furloughed closer to 17%, and laid off 25% of the workforce.