Politics

Little evidence of post-Covid ‘scarring’ to Irish labour market, new paper finds

Covid study finds when restrictions were lifted there was a sharp increase in spending as consumers spent their accumulated pandemic-era savings

A Covid study found that the introduction of strict public health measures to reduce contact between people was a 'profound shock' to the economy, triggering a 14% decline in modified domestic demand
A Covid study found that the introduction of strict public health measures to reduce contact between people was a 'profound shock' to the economy, triggering a 14% decline in modified domestic demand
Jack Horgan-Jones
Mon May 05 2025 - 06:00

There is little evidence of post-Covid “scarring” to the labour market as consumers spent their lockdown savings to drive recovery, a new paper from the Department of Finance has found.

Research published today marks five years since the pandemic. It finds the introduction of strict public health measures to reduce contact between people was a “profound shock” to the economy, triggering a 14 per cent decline in modified domestic demand, a key measure of the performance of the domestic economy.

However, officials in the department found that the economy bounced back, with the jobs recovery “remarkable, with little evidence of ‘scarring’... despite the scale of the initial shock”.

The paper outlines that at their peak, wage subsidies supported 1.2 million people in some form – around half the labour force.

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When restrictions were lifted there was a sharp increase in spending as consumers spent their accumulated pandemic-era savings which had grown due to the closure of large parts of the economy while incomes were protected by exchequer spending.

After lockdown the labour market rapidly rebounded, with employment returning to pre-pandemic levels in the second quarter of 2021. The maintenance of a link between furloughed workers and their employers was a key factor in this, it finds. Since the pandemic employment has in fact exceeded the trend that existed before Covid.

The paper found the typical household saved €1 in every €4 during lockdown, compared to €1 in €8 normally. This rate has fallen again but is above its pre-Covid average, meaning not all the savings have been spent, instead bolstering household balance sheets on a lasting basis. And while the public finances proved strong, the direct supports came with a significant upward shift in public debt. The paper argues that the rebound, however, has helped drive the debt-income ratio down.

As cash flooded into the economy there was a further shock as the impact of the Ukraine war drove inflation skywards.

When compared to a hypothetical “no pandemic” scenario, demand in the domestic economy is still lagging behind where it otherwise might be by 4 per cent.

When compared with the sovereign debt crisis, Covid hit faster and also impacted the global economy with similar severity everywhere, the paper finds.

But by the third quarter of 2021, even as Covid restrictions ebbed and flowed, demand and consumption were above the pre-pandemic peak, before a significant bump when all restrictions were removed in early 2022.

The paper finds that a key factor in the bounce back was the relative health of Irish households’ balance sheets on the verge of the pandemic, as Irish people had reduced debt and rebuilt their financial assets after the recession.

Another element was the role of the State – public consumption grew 14 per cent from its pre-pandemic trend, and was up a third from 2019.

Jack Horgan-Jones

Jack Horgan-Jones

Jack Horgan-Jones is a Political Correspondent with The Irish Times