Infection, GDP and Employment during the Second Quarter in Israel and Worldwide
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Authors:  Zvi Eckstein, Benjamin Bental and Sergei Sumkin

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The global data on infection and negative growth during the second quarter of 2020 indicate a negative relationship between these two variables. Thus, in developed countries with higher infection rates in terms of confirmed cases per million inhabitants, the decline in GDP has also been larger. In Israel, the drop in GDP per capita of 8.6 percent during the second quarter is consistent with the average incidence of infection during the quarter, and the relationship between the two variables is near the average for the OECD countries. Infection and reduction in GDP per capita of a similar magnitude and even greater are characteristic of Germany, Austria, Sweden, Denmark, the Netherlands, and the US, while in South Korea, Singapore, Taiwan, Hong Kong, and Finland, the rates of infection and decline in GDP were significantly smaller.

Most countries that adopted a full lockdown at the onset of the crisis in order to prevent the spread of the virus and thus brought on a slowdown in their economies, operated a system of Testing Tracing Tracking (TTT) during the months of May and June. This allowed them to control infection while maintaining economic activity. Based on the simple econometric model presented in the study, the lockdown on its own, even if it had managed to achieve the rates of infection observed in the latter group of countries, would have caused a GDP per capita contraction of about 7 percentage points in excess of that observed in the countries that adopted a TTT policy from the outset.

In view of the lessons learned from the first wave, many countries in Europe adopted and implemented the TTT policy and, at least until the end of August, avoided a second wave of infection while returning most of the economy to routine levels of activity. In particular, the health policy changed from a strategy of “flattening the curve” to one of “eliminating the epidemic,” by means of quickly responding to the chain of infection in an effort to reduce the number of new confirmed cases as much as possible. This policy is based on the recognition that in the absence of a vaccine and without absolute control over the spread of the coronavirus, economic activity will not return to its previous high levels, in view of the natural reaction of many people whose fear of being infected prevents them from returning to their routine consumption and work habits.

Unlike the EU countries, Israel has not as yet created an efficient system for reducing the spread of the virus and is only now organizing a system of testing, tracking, and epidemiological investigation. As a result, it is experiencing a peak in the second wave and is paying a high cost in terms of health, the economy, and social interaction. According to Bank of Israel forecasts, under a scenario in which the pandemic is out of control, Israel’s GDP per capita will decline by about 9 percent in 2020 – about 2.5 percentage points more than in a scenario where the pandemic is under control – and unemployment will reach about 13.6 percent. Should this happen, it will set Israel’s standard of living back by about 7 or 8 years. The employment policy in Israel is adding to the damage caused by the pandemic. Between March and June 2020, there were on average about 750,000 people on unpaid leave receiving unemployment benefits, which constitutes about 17 percent of the total employment level in February 2020. Workers have been sent on unpaid leave without any consideration of the impact of the pandemic on employers, and only those sent for an unpaid leave of at least one month are eligible for unemployment benefits. In contrast, employment programs in Europe condition assistance on actual harm to the employer’s business and include government compensation also to workers whose work hours have been reduced only partially. As a result, the data appear to indicate that the trend in employment in those countries is superior to that in Israel. Thus, it can be presumed with a high degree of certainty that if Israel had adopted a flexible system of unpaid leave, conditioned it on the situation of the employer and allowed for reduced work hours — whether with the original employer or with a different employer —the average number of workers on full unpaid leave between March and June would have been much smaller and the employment and GDP trends would have been more favorable.

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