How Have Formal Firms Recovered From the Pandemic? Insights From Survey and Tax Administrative Data in Zambia

This paper examines how formal firms have been impacted by and recovered from the COVID-19 pandemic, by drawing on two distinct but complementary data sources. This is the first attempt to use both survey and tax administrative data to measure the impact of the pandemic in a developing country. The findings of three rounds of follow-up surveys to a standard World Bank Enterprise Survey completed immediately before the pandemic are compared to the universe of value-added tax and personal income tax returns filed by firms in Zambia. Despite substantial differences in the breadth and depth of these data sources, they show a very similar pattern. The sales of formal firms recovered from the pandemic far more strongly than their employment levels. By July 2021, both the survey and tax administrative data show that most firms experienced a complete recovery in sales, while levels of employment worsened throughout the pandemic for many firms. The tax administrative data show that even two and a half years following the start of the pandemic, employment in formal firms remained well below pre-pandemic levels. The key insight that emerges from this analysis is that formal firms appear to have adjusted their operations in a way that reduced their need for as much labor to achieve the same (or higher) level of sales. As such in response to an unprecedented shock, productivity gains within formal firms were possible through the shredding of somewhat unproductive labor inputs, which can often be more challenging in a stable setting.