This study draws on employer-employee data for Latvia to investigate how participating in a job retention scheme (JRS) impacts the within-occupation composition of skills in participat- ing firms. The findings of this research reveal that involvement in JRS positively affects the likelihood of employees retaining their employment with the same firm after the end of the pro- gramme. This positive effect is independent of the employee’s skill level. However, individuals that perform higher-skilled tasks in the same occupation are less likely to participate in the JRS because of legal restrictions on the maximum amount of the benefit and the income replacement rate. Taken together, these findings suggest that JRSs may have a detrimental impact on the within-occupation composition of the skills of the workforce at the firms that participate in such schemes. Keywords: Job retention scheme, short-term work scheme, Covid-19, employment, skills JEL Codes: E24, H12, J62, J68 This paper studies the margins and heterogeneity of adjustments to trade shocks by estimating how Covid-19 restrictions affected imports and exports. We use data from Lithuania, Latvia and Estonia on foreign trade at the level of the firm and the partner country and at monthly frequency from January 2019 to December 2020. The focus is on the short-term adjustment and on the first wave of the pandemic. We find that the adjustment to the restrictions mostly occurs through the intensive margin, meaning trade values are reduced rather than trade in cer- tain markets or products ceasing. It is further observed that quantity played a more important role in the adjustment process than prices and that both upstream and downstream restrictions played an equally important role in the decline of foreign trade. It is shown that differentiated products that are difficult to replace are responsible for this adjustment pattern. Keywords: transmission of shocks, input-output linkages, global value chains, Covid-19, work- place closing JEL codes: F14, F61, D22Konstantīns Beņkovskis, Oļegs Tkačevs, Kārlis Vilerts
Konstantins Beņkovskis, Jaanika Meriküll, Aurelija Proškute
International working papers co-authored by the researchers of Latvijas Banka
Occasional Paper Series No 341 This paper studies the short-term and long-term consequences of the COVID-19 pandemic for productivity in Europe. Aggregate and sectoral evidence is complemented by firm-level data-based findings obtained from a large microdistributed exercise. Productivity trends during the COVID-19 pandemic differed from past trends. Labour productivity per hour worked temporarily increased, while productivity per employee declined across sectors given the widespread use of job retention schemes. The extensive margin of productivity growth was muted to some degree by the policy support granted to firms. Firm entries declined while firm exits increased much less than during previous crises. The pandemic had a significant impact on the intensive margin of productivity growth and led to a temporary drop in within-firm productivity per employee and increased reallocation. Job reallocation was productivity-enhancing but subdued compared to the Great Recession. As confirmed by a granular data analysis of the distribution of employment subsidies and loan guarantees and moratoria, job reallocation and also debt distribution and “zombie firm” prevalence were not significantly affected by the COVID-19 policy support. The pandemic and related lockdowns accelerated changes in consumer preferences and working habits with potential long-term effects. Generous government support muted the surge in unemployment and reduced permanent scarring effects. Keywords: labour productivity, productivity-enhancing reallocation, COVID-19, adjustment of firms, government support, cross-country analysis, micro-distributed JEL codes: D22, H25, J38, O47 Occasional Paper Series No 337 In the low inflation and low interest rate environment that prevailed over the period 2013-2020, many argued that besides expansionary monetary policy, expansionary fiscal policy could also support central banks’ efforts to bring inflation closer to target. During the pandemic, proper alignment of fiscal and monetary policy was again crucial in promoting a rapid macroeconomic recovery. Since the end of 2021 an environment of higher inflation, lower growth, higher uncertainty, and higher interest rates has changed the nature of the required policy mix and poses different challenges to the interaction between monetary and fiscal policy. Following up on the work done under the ECB’s 2020 strategy review (see Debrun et al., 2021), this report explores some of the renewed challenges to monetary and fiscal policy interactions in an environment of high inflation. The main general conclusion is that, with an independent monetary policy that aims to bring inflation back to target in a timely manner, it is still possible to design fiscal policy in a way that protects vulnerable parts of society against the costs of high inflation without pulling against the central bank’s effort to tame inflation. This is more likely to be the case if fiscal measures are temporary and targeted, and if priority is given to structural reforms and public investment in support of potential growth. The latter is particularly effective in reshaping the supply side of the economy in a manner that is likely to have a lasting positive structural impact. Key words: monetary policy, fiscal policy, public investment JEL code: E22, E52, E58, E62Co-authored by Oļegs Krasnopjorovs and Konstantīns Beņkovskis
exercise, EuropeCo-authored by Ginters Bušs