Impacts on the U.S. macroeconomy of mandatory business closures in response to the COVID-19 Pandemic

ABSTRACT

We estimate the macroeconomic impacts of mandatory business closures in the U.S. and many other countries in order to control the spread of the COVID-19. The analysis is based on the application of a modified version of the GTAP model. We simulate mandatory closures in all countries or parts of countries that had imposed them as of 7 April for three-month and six-month cases. For the three-month scenario, we estimate a 20.3% decline of U.S. GDP on an annual basis, or $4.3 trillion. The employment decline of 22.4% in the U.S. for the three-month closure represents 35.2 million workers for that period. If the mandatory closures are extended to six months because of a second wave, these negative impacts would slightly more than double. The employment impacts are slightly greater in percentage terms than the GDP impacts because most service sectors, which are generally more labour-intensive, are more negatively impacted by the closures than are ‘essential’ sectors. Our results should be considered upper-bound estimates given such assumptions as businesses laying off workers no longer paying them wages or salaries. Note also that the article examines the mandatory closures alone and does not factor in any countervailing fiscal or monetary policies.

KEYWORDS:

• COVID-19
• mandatory closures
• economic impacts
• employment

JEL CLASSIFICATION:

• C68
• E37
• I18
• F19

Acknowledgments

The authors wish to thank Scott Farrow, Richard John, and Aaron Strong for their helpful comments on the manuscript, as well as Juan Machado and Konstantinos Papaefthymiou for their valuable research assistance. The authors are, however, responsible for any remaining errors or omissions.

Disclosure statement

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ See also Walmsley and Minor (2020a) for a detailed explanation of model and data used in this analysis.

² The taxes are set at a level that achieves a reduction in output reflecting the business closures. It is a ‘phantom’ because the ‘taxes’ are implicitly returned to the businesses as revenue increases associated with the higher price; essentially, the business customers (both other businesses and consumers) cover this revenue by their expenditures at the higher price, and there is no effect on government revenues.

³ The same situation applies to services trade, where the mandatory closure of businesses and increased unemployment cause imports and exports to decline further than the decline expected due to restrictions on the tourism and the movement of people.

⁴ The equivalent three-week mandatory closures in China is calculated based on actual closures of businesses in Hubei Province and Wuhan City in China and extension of the Chinese new year holidays in rest of the country, as well as partial closures as the businesses across the country gradually resume production in late February through early April. The six-week closure for China assumed under the six-month scenario for the U.S. represents a combination of the equivalent three-week actual closures occurred in the country between February and early April and the contingency of a possible further need for China to shut down some of its economic activity due to the re-emergence of the COVID-19 threat in the country.

⁵ The numbers of deaths and hospitalizations during the mandatory closures were considered to be too small to have any perceptible effect on the labour force. However, we note that this study does not estimate the cost of death separate from the impacts on GDP, which can be calculated by applying the value of statistical life.

⁶ Based on GTAP trade data, we estimate 19% of U.S. exports are in non-essential goods and services, compared to 3% of ROW exports.

⁷ In some sectors subject to mandatory closures, these general equilibrium effects led to overall production declines larger than the exogenously imposed declines directly emanating from the mandates.

⁸ See section A (6b) of Appendix for details on the type of telework covered in the analysis.

⁹ Since the pandemic is global and uncertainty is high, the impact on foreign capital flows is unclear and best analysed using a more sophisticated model of investment. We, therefore, assume that this tendency for capital to flow out of the U.S., due to the more severe mandatory closures, is counteracted by the increase in global uncertainty, which tends to draw investors towards the U.S. This is achieved by fixing the trade balance.

¹⁰ Partial or full lockdowns have occurred in Argentina, Australia, Austria, Belgium, Bolivia, Colombia, Czech Republic, Germany, Denmark, Spain, France, Britain, Hungary, Indonesia, India, Ireland, Israel, Italy, Jordan, Kenya, Kuwait, Morocco, Malawi, Malaysia, Norway, New Zealand, Panama, Peru, Poland, Portugal, Saudi Arabia, El Salvador, Singapore, Slovenia, Thailand, Tunisia and South Africa.

¹¹ In terms of geographic area, the dividing line between large and small countries is exemplified by Germany, UK, South Korea, Egypt, and Thailand as the lower limit. Countries that have not implemented shutdowns are assumed to have reduced production of non-essentials by 5%.

Additional information

Funding

This material is based upon work supported by the U.S. Department of Homeland Security under Grant Award Number 17STQAC00001-03-00. The views and conclusions contained in this document are those of the authors and should not be interpreted as necessarily representing the official policies, either expressed or implied, of the U.S. Department of Homeland Security.