New research from MIT Sloan and Northwestern Kellogg reveals the devastating economic consequences of businesses unable to work remotely

CAMBRIDGE, Mass., June 30, 2020 /PRNewswire/ -- Congress and the Federal Reserve have pumped nearly $3 trillion into the U.S. economy to combat the damage caused by the coronavirus, and are currently considering a fresh relief package. But while payrolls are being subsidized by the government, it's being done uniformly without taking into account the differential impact of COVID-19 on individual sectors, some of which have fared far worse than others due to an inability to create remote workforces.

A new research paper co-authored by an MIT Sloan School of Management and a Northwestern Kellogg School of Management professor led the researchers to conclude that more targeted intervention is necessary to support the sectors hit hardest by the coronavirus crisis. The study offers policymakers a blueprint with which to deliver a second round of stimulus.

"It seems crazy that you could run an IT consulting firm seeing a trebling of demand and you're just as eligible to receive payroll subsidies as a movie theatre that hasn't opened in months," says Lawrence Schmidt, Assistant Professor of Finance at MIT Sloan, who co-authored the study. "A more targeted policy would provide more bang for the taxpayers' buck."

The paper analyzed federal data and nationally representative surveys that asked Americans how they allocate their time—including questions about ability to and past experience with working from home—in order to isolate the supply-side disruption from other factors that have shut down entire sectors and roiled the economy, such as a collapse in consumer demand caused by uncertainty. The research found remote work was a key determinant of whether businesses could maintain operations during the pandemic. And it showed that sectors unable to telecommunicate—such as hospitality, entertainment, food services and travel—suffered more severe disruption compared with industries such as technology, that could perform tasks remotely.

In one finding, the study found heavily disrupted firms suffered an 8% slide in analysts' revenue forecasts for the second quarter of 2020; a 7% fall in stock market performance to date; and a 0.22% rise in chance of default in the next six months. And while analysts expect the worst effects of the crisis to be short-lived, the study concluded that an inability to work remotely is still a predictor of expected revenue growth over the next two years.

"The supply-side disruption is setting off a series of cascading effects that have proved devastating for the US economy, which contracted by 5% on an annual basis in the first quarter of 2020 and is expected to shrink further," says Schmidt. "Mortgage delinquencies amid mass unemployment could freeze credit markets while many companies face a liquidity crisis."

In an additional finding from the study, the researchers showed that the supply-side shocks are worsening the already stark inequalities in American society. In sectors unable to remote-work, lower-paid workers, particularly women with young children, were significantly more likely to be unemployed through the crisis. Compared to sectors where working remotely is an option, these workers were 15 percentage points more likely to be unemployed—three times the increase in likelihood of joblessness overall in industries that cannot work remotely.  

"The pandemic is worsening societal inequality," says Dimitris Papanikolaou, Professor of Finance at Northwestern's Kellogg School of Management, and co-author of the study. "COVID-19 may reverse the gains made in narrowing the gender gap in wages, driven by the decline in manufacturing and the growth in the services sector, which employs a disproportionate number of women. It's also the sector suffering the most from COVID-19, and it tends to employ blue-collar workers without a college degree, who are bearing the brunt of the economic crisis."

About the MIT Sloan School of Management
The MIT Sloan School of Management is where smart, independent leaders come together to solve problems, create new organizations, and improve the world. Learn more at mitsloan.mit.edu.

SOURCE MIT Sloan School of Management

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