Four types of labor and the epidemic

I wrote in a recently published article in Foreign Affairs [foreignaffairs.com] that the attention of policy makers and indeed of the public is wrongly directed to the preservation of some fictitious parameters (like stock market quotes) or equally wrongly on the financial viability of companies. It is not that they are unimportant. But in conditions of severe disruption of economic activity, of a crisis which is akin to a war, focus on financial indicators is distractive. The focus should be (as indeed it has been in all wars, including in the US during the World War II) on physical quantities.

Consider today’s problem from the point of view of labor allocation. Assume that there are 4 types of labor: (A) doctors and medical personnel, (B) on-line retail workers, (C) people producing physical goods (factory workers), and (D) professionals (teachers, engineers, designers etc.). Their numbers stand at the beginning of the crisis in some relationship that has been established by economic demand, as well by the supply of these professions.

What a tremendous shock like that of the epidemic does is to totally unbalance the new demand for these four types of labor. Their current allocation becomes entirely out of the whack with the desired allocation under the new conditions. The shock increases exponentially demand for As, increases similarly to the demand for Bs as people move to on-line shopping and retailing, decreases the demand for Cs, and more or less leaves the demand for Ds unchanged. There is a further element, specific to epidemics. If activities of B, C and D continue as before, we are likely to have more infected people (assuming that most of infections take place as people interact at work) and more overburdened and overwhelmed As, so much so that the death rate will rise. To see that assume simply that B, C and D stop working and producing. New infection will surely decline as people are made to stay at home in enforced idleness. This is indeed what the quarantine is supposed to achieve.

The problem though is that if all work ceases, people will soon starve. Thus the trade-off between continued production and spread of the diseases cannot be pushed to its extreme point of 0 production. We have to find a position along the trade-off curve which would allow economic activity to continue at a modest pace until the epidemic is under some kind of control.

So, let’s go back to out nomenclature of laborers. The supply of As (which we would dearly like to increase) is more or less fixed in the short run (says, weeks or months with which we deal here). Thus, there is not much to do short of calling back to work all the retired nurses and doctors as New York City has just done. Bs should be fine in terms of their income as the demand for their services is on the rise. Note however that some of their additional work may produce additional cases of disease. However, there too we can do very little lest we want to stop all life.

The key category is Cs. Their incomes will be severely impacted by the epidemic. They are likely to lose their jobs, often be left without any resources. Do you want them to be impoverished and let loose to roam the streets in search of job? No, the policy-makers’ interest should be to preserve as much as possible their income while encouraging them not to work. In other words, these are the people who should be the main focus of policy-making: you do not want them to fall below some income threshold (for the reasons of both humanity and broader social interest), and you also do not want them to work in order to slow the rate of new infections.

The last category (Ds) are workers whose income may be relatively unaffected, in the short-run at least, because the demand for their services may neither decrease nor increase much and they can perform these services remotely. So from the point of view of the policy-maker they are not the key constituency to worry about.

In this way we can formulate, I think, a much more reasonable direction for economic policy during the epidemic: try to the extent possible to increase the supply of As, limit the work perfumed by all others (again to the extent that this is possible), and keep workers Cs economically afloat and unconditionally so during the duration of the crisis. And of course change the entire focus of policy from financial indicators to household incomes.