Page 7 - IDEA Kurzarbeit zahranicni zkusenost Covid19 duben2020 13
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SHORT-TIME WORK AND RELATED MEASURES TO MITIGATE
THE CONSEQUENCES OF A (PARTIAL) ECONOMIC SHUTDOWN IDEA 2020
B. Costs of Adjustment to New Long-run Conditions after the Crisis
Causes and Examples
Relevant real-world conditions will change during the suspension. There are likely to be severe negative effects, such as reduced demand during a recession and reduced tourism, but also positive adjustments, such as innovative ways of working honed during the crisis, and other adjustment strategies that prove advantageous in the long run. These changes imply that if it were possible to completely suspend and then wake up the economy, the economy would wake in a suboptimal state and would need to adjust rapidly. While these costs only occur after the crisis is over, they can be substantial: Being in a suboptimal state is costly by definition and the costs of adjustment (high separations and firm destruction, coordinating expectations, temporary reductions in revenue, necessary investments, etc.) can be high. Such adjustment costs are likely to harm recovery. They will probably cause severe long-run problems if the health crisis lasts longer, causes more severe changes or is followed by a steep recession. Such adjustments are likely to be important for the Czech Republic, since the economy depends heavily on demand from other countries and on tourism. Both are likely to be different after the epidemic passes.
In economic terms, these are costs of suspending the incentives to adjust to changes and thereby smoothly transit to a new equilibrium. They can probably best be thought of as the costs that arise from delaying and accumulating necessary policy reforms or the cost of artificially keeping inefficient parts of the economy running (e.g. coal mining).
Bottom line
Changes in the global economy will result in adjustment costs to the new long-run state. Preventing or reducing adjustments to the future long-run state during the crisis will increase the economic shock at the end of the crisis. Adjusting to these changes after the crisis is likely far more costly than doing so during the crisis, because the costs of adjustment are lower during the crisis (job search, planning a new business) and because adjustments are less costly if they are less sudden. Therefore, the more completely the economy is suspended, the higher these costs will be. The key to minimizing these adjustment costs is to allow for responses to long-run changes during the crisis as much as possible. The difficulty in doing so lies in the lack of knowledge of which changes will be long-term. Thegovernment can incentivize responses to changes that it knows are (likely) long-run in cases where the changes are due to government policy or when
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