Firm Responses to Aggregate Shocks and Implications for Workers: Lessons from the Pandemic

Developing countries frequently face aggregate shocks. We use the lens of the pandemic to understand how such shocks propagate through labor markets, from firm responses through to implications for workers. Our analysis uses a panel of Ugandan firms and workers, tracked with high frequency from 2012 to 2022. We find that firms’ response to the fall in product demand due to the pandemic was to reduce labor demand and change the skills composition of retained workers. Firms disproportionately laid off skilled employees, namely those that received vocational training (VT) before joining the firm, rather than lay off non-VT workers who instead are trained on-the-job. We calibrate a model of firm profits to assess the relevance of three mechanisms driving such VT-biased responses: laying off non-VT workers is more costly because future hires need to be trained on-the job, non-VT workers are socially tied to firm owners, and the demand for goods/services produced by VT workers falls more than for those produced by non-VT workers. We then study the impacts of firms’ VT-biased responses on workers’ labor market trajectories, exploiting the fact that we randomly assigned individuals to the offer of VT in 2013. We confirm that VT workers are more likely to be laid off early in the downturn, but document that VT workers remain resilient, with the returns to VT remaining positive over the downturn. The mechanisms driving VT workers resilience are the certifiability of their skills and their greater accumulation of sector-specific experience pre-pandemic, enabling them to switch firms in the same sector later in the downturn. Our findings provide new insights for low-income labor markets on firm responses to aggregate shocks and consequences for workers across the skills distribution.