The Economic Shadow of COVID-19

NOMIS Research Project

Current choices about spending, savings and investment depend on individual beliefs about future economic conditions. Economists use history-based models to estimate how these beliefs are formed in normal times. However, in turbulent times such as 2020 when COVID-19 is raging, experience provides little guidance on what to believe about the future.

The Economic Shadow of COVID-19: Contingent Prediction Following an Unprecedented Shock project aims to pioneer methods to improve prediction of economic responses to significant economic shocks. In addition to advancing the science of economic prediction, our approach is designed to shed light on individual differences. It is understood that expectations vary systematically across the population—what is not known is how these differences in beliefs are related to actual outcomes. Do the workers who are optimistic about their ability to recover from the COVID-19 shock in fact turn out to do better in the labor market? In as much as they do, is this due to such standard factors as their work abilities, or is there a significant psychological component that identifies them as robust in the face of many different types of shock? Can planning abilities, memory and other factors serve as “biomarkers” for differences in beliefs and in actual market outcomes?

Our project implements new survey methods for measuring beliefs and plans of workers and business owners in turbulent times and uses these to predict what is likely to happen depending on the actual path that the virus takes. To gauge the scientific value of these measures, we will compare expectations with the outcomes measured in the Danish administrative registries, which contain information on about 5.5 million individuals gathered throughout the 1980s, and provide complete histories of labor market performance with employer–employee links and information about earnings, hours worked, the employer and the industry for each job. By randomly sampling both firms and workers, we will obtain a uniquely broad coverage of both, enabling the generalization of results to the broader population.

The Economic Shadow of COVID-19 project is being led by Andrew Caplin at New York University (NY, US) and Søren Leth-Petersen at the University of Copenhagen (Denmark).