Firm Responses to Uncertainty and Implications for Workers: Experimental Evidence from Uganda During the Pandemic

The Covid-19 pandemic represents one of the most rapid and severe shocks to hit global labor markets. We study how firms reacted to the heightened uncertainty and consequences for workers, in a developing country economy: Uganda. Our analysis is based on a panel of firms and workers, tracked from 2012 to 2022, including high frequency surveys during the pandemic. We find that firms’ common response to the heightened uncertainty of the pandemic was to immediately lay off the highest earning workers, that is, the most experienced or skilled employees. We then study the differential impacts of such firm survival strategies on workers’ labor market dynamics across the skills distribution, exploiting the fact that we randomly assigned individuals to the offer of vocational training in 2013. We find that high skill trained workers, who enjoyed better labor market outcomes pre-pandemic, were more likely to be laid off early in the pandemic given firm’s survival strategies. However, trained workers recovered from this job loss and were resilient to the shock. Cumulatively over the pandemic, trained workers spend 61% more time employed than untrained controls, and earn 17% more. Hence, the returns to training survive the pandemic. The mechanisms driving the resilience of trained workers are the certifiability of their skills and their greater accumulation of sector-specific experience, both of which enable them to switch employers within the same sector during the crisis. Our findings provide new insights on firm responses to fast-moving aggregate shocks in low-income settings, consequences for workers’ labor market trajectories, and drivers of the returns to training in good times and bad.