In her recent Financial Times article, Rana Foroohar (2020) asserts that the pandemic period is creating opportunities for new enterprises to offer new, and mostly digital services. She posits that the COVID-19 crisis will yield Schumpeterian-type creative destruction, similarly to the 2008-2009 financial crisis and might reshape the asset structure of firms away from tangible to even more intangible assets.
One direct impact of the more digitalized companies coming into the market is that knowledge economy workers are in more demand, while the lesser educated workers will suffer long-term structural unemployment and their incomes will decline or become more difficult to sustain (Foroohar, 2020; Scott, 2020). This structural change in developed economies is accelerated by the pandemic, indicating 1980s style market and labor widespread change (Gathergood, 2020). However, this time the change is not from industry to service economy, but rather from some types of services to other, more digital and contact-less. This is expected to increase the number of “discouraged workers” and therefore decrease the overall economic productivity of nations and impede long-term economic growth (Erken, 2020). A possible solution is the re-skilling and upskilling of the newly-unemployed youth as they have higher fluid intelligence than the older workforce segments (Gathergood, 2020). However, the current gap in skills is relatively wide and cannot be bridged within short-term intervals given the complexity of communication and IT skill acquisition processes (Gathergood, 2020).
Secondly, given the higher investments into in-house generate intangibles, including brand equity and human capital, these investments are not well represented in the balance sheet structures of accounting principles. Investors might have to change their assessment metrics of firm profitability away from the focus on productive assets to intangibles which are not present on the balance sheet (Foroohar, 2020). Hence, the financial market will become more accepting of higher price-to-book value in order to incorporate the value of the digital assets and intangibles not well-represented by the 20th century manner of accounting for firm value. Currently, the S&P 500 already have over 60% of their value incorporated by intangible assets, meaning that R&D investments are becoming more important for long-term competitiveness (Taylor, 2020). There is also a higher importance of addressing market “externalities” such as blurriness of work and personal life in remote employment and the move from shareholder to stakeholder capitalism for companies that want to stay competitive in the post-COVID market (Taylor, 2020).
To conclude, it will be interesting (and costly) to see whether the labor market resilience and the economic systems will withstand the long-term damage imposed by the COVID-19 crisis. How will the European economies will adapt to the new realities that are still not clear given the second wave that is coming onto us like a tsunami? The hope is that digital technologies will drive economic growth and help deal with environmental problems, yet we can have no assurance of either one. Will the “COVID-generation” be the one to pro-actively change the system not only be the victim of it?
References:
Erken, H. (2020). Looking beyond the COVID-19 crisis. Retrieved 5 October 2020, from https://economics.rabobank.com/publications/2020/april/looking-beyond-the-covid-19-crisis/
Foroohar, R. (2020). Covid recovery will stem from digital business. Retrieved 5 October 2020, from https://www-ft-com.eur.idm.oclc.org/content/4a1da405-b452-4e4f-adb8-c44afb9163d0
Gathergood, J. (2020). COVID-19, mass unemployment and structural change. Retrieved 5 October 2020, from https://www.nottingham.ac.uk/vision/covid-19-mass-unemployment-and-structural-change
Scott, J. (2020). What effect will COVID-19 have on the global risk landscape?. Retrieved 5 October 2020, from https://www.weforum.org/agenda/2020/05/covid-19-global-risk-landscape/
Taylor, A. (2020). COVID-19 has ushered in the ‘intangible company’. Here are 4 ways it will change business. Retrieved 5 October 2020, from https://www.weforum.org/agenda/2020/06/covid-19-intangible-company-leadership-remote-working/
Hi Gheorghe,
Very interesting read! It’s kind of ironic that such disasters are always beneficial for somebody.
I can read that you dived deep in this topic. Especially the causes of the rise of digitized companies are described very extensively. Interesting to read about the effects of the Covid-crisis on the labour market. Maybe you could have elaborate a bit more on how the Covid-crisis would affect highly educated people. For example, I red about consequences that young professionals would suffer from the crisis at least 5 for 5 years from now, with 10% reduction in average salary and a significant lower chance of finding a job.
I’m also very curious for the answers on your final questions. Let’s hope the digital world will help us to survive this crisis!
Hi Gheorghe, thank you for the insightful article and the questions you raised. I wrote an article on the topic of COVID-19 and digital business myself, and it will be interesting to see how the consequences of the pandemic will play out on the economy, especially in Europe. My take is that the current struggles will lead to more entrepreneurial activity, also of long-established companies. These businesses are now striving to adapt to digital business and create new initiatives. This will lead to a demand for digital skills. I agree with you that it is challenging to train the older workforce for these jobs, but although COVID-19 kickstarted this process, it will not happen immediately. It might be that after an extended period of struggle, the European economy will adapt to the new circumstances of the market and generate new digital businesses which can compensate for the loss of current jobs.