Bankruptcies, unemployment and reallocation from Covid-19

Key takeaways

• The expected wave of business failures in the Covid-19 recession has yet to materialise, due in part to policy support, but also reflecting the inherent lag between declines in GDP and insolvencies.
• Bankruptcies weigh heavily on labour markets. Unemployment typically increases three times more if a fall in GDP is accompanied by a similar-sized increase in bankruptcies.
• Concentration of bankruptcies in those sectors hit especially hard by Covid-19 could exert a significant drag on the labour market.
• The natural renewal process where young, dynamic firms displace those who exited takes two to three years, leaving a protracted period of lacklustre activity. This underscores the need to reallocate resources quickly and efficiently to drive growth in the post-pandemic world.