St. Louis Fed
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St. Louis Fed

How Closing Restaurants and Hotels Spills Over to Total Employment

By Carlos Garriga, Vice President and Economist; Juan Sanchez, Assistant Vice President and Economist; and Ryan Mather, Research Associate

The social distancing policies being used to slow the spread of COVID-19 are having direct negative effects on the accommodation and food services industries due to their contact-intensive nature.¹

Data provided by opentable.com from the nearly 60,000 restaurants that use their platform for table reservations indicate that restaurants are facing serious challenges to remain open.²

Photo by Gor Davtyan on Unsplash

On March 1, 2020, the number of diners seated in restaurants was up 2% relative to the same day last year. Since then, however, the number of seated diners has steadily declined as cities and states began imposing restrictions. Diners seated in restaurants had declined over 50% by March 16, and essentially all restaurants in the OpenTable network had stopped seating diners altogether by March 21.

Something similar has occurred in the hotel industry, with some states restricting lodging to residents and nonresidents traveling for business, but not allowing nonresidents to stay (i.e. Utah).

Ripple Effects through Local Businesses

Reducing the scale of operations in the accommodation and food services industries not only reduces their employment, but also indirectly affects the employment of other sectors that provide them with goods and services.

For example, if a hotel contracts with a transportation service to shuttle guests from the airport, a reduction in business for the hotel also means a reduction in business for the shuttle service. This lack of business may, in turn, keep the transportation service from making repairs to its vehicles. Thus, it can also be said that the hotel’s losses contributed to losses for local vehicle repair companies.

The Bureau of Labor Statistics publishes input-output tables which trace the full effect of a loss in employment in one sector to employment losses in all other sectors. By its estimate, 10 workers employed in restaurants and bars generate 2.86 additional employments, whereas 10 workers employed in the hotel industry generate an additional 6.67 workers in the broad economy.

According to the Bureau of Economic Analysis, the food services and accommodation sectors produce 3.1% of gross domestic product and employ 5.6% of the total employment.

This implies that a partial shutdown of hotels, restaurants and bars due to social distancing is going to have important spillover effects for employment in the rest of the economy.³

By BLS estimates: 10 workers employed in restaurants and bars generate 2.86 additional employments, whereas 10 workers employed in the hotel industry generate an additional 6.67 workers in the broad economy.

Effects of a Decline in Accommodation and Food Service Employment

According to our calculations, a 50% decline in accommodation and food services employment in the second quarter should imply a loss of about 3.1 million jobs in these industries and an additional 1.2 million jobs in the rest of the economy through the aforementioned spillover effects.

Suppose that instead of affecting both sectors, the shock only affects one in isolation (i.e., either accommodation or food services). In this case, the implied job losses in the accommodation sector would make total employment decline by about 364,000 jobs. In the case of the food services sector, the total employment decline would be about 823,000 jobs.

That brings the total loss in employment to around 4.3 million jobs, which was 2.8% of total nonfarm employment in February. This should, in turn, increase the number of workers potentially collecting unemployment benefits to about 10 million (the 5.8 million currently unemployed according to the BLS, plus an additional 4.3 million from the accommodation and food services industries).

Also, the unemployment rate in the second quarter should increase from 3.5% to 6.1%.⁴ Notice that most of the decline comes from restaurants and bars, which account for 86% of the direct loss of employment and 69% of the 1.2 million jobs lost due to the spillovers.

The 10 Largest Sectors Affected by This Decline

The table below summarizes the distribution of total job losses predicted by the input-output tables.

For example, the food services sector is not very affected by the decline in accommodation sector, as the direct job loss is 2,644,746, whereas the combined loss is 2,674,889.

However, the loss in the food services sector is important for the accommodation sector. The direct effect of decreased demand for hotels reduces their employment by 444,720, but the combined effect due to less food services raises the number to 514,524.

One might view these estimates as either too optimistic or too pessimistic. Since the relationship is proportional, one can easily adjust the numbers to scale them up or down. For example, a 75% decline in the value-added of these industries would decrease the total employment by about 6 million workers and increase the unemployment rate to over 7%. Conversely, if the decline is only 25%, then the unemployment rate would increase to 4.85%.

The other important issue to keep in mind is that this sector employs a nontrivial number of informal workers. For them, a job loss increases the unemployment rate but might not increase the cost of unemployment insurance as they are not eligible.

Rebound Potential?

A baseline assumption in much of the economic analysis of COVID-19 assumes that the negative effects will be severe and temporary. Many analysts predict that the sharp fall in output from COVID-19 will largely be made up in the latter half of 2020.

However, the food services and accommodation industries provide services that likely cannot greatly increase production in a short period. When the pandemic has passed, consumers are not likely to double the amount they eat out and go on vacation. This implies that a significant portion of the lost production from these sectors during the pandemic will remain lost.

Effects of Social Distancing

Finally, the effect of social distancing on these sectors is not evenly distributed in the U.S. The incidences of COVID-19 have been concentrated in areas such as New York, San Francisco and Washington, D.C., where the accommodation and food services sectors employ and account for a larger share of the local economy. For these areas, these numbers might provide a very conservative estimate for the size of the shock. (We will provide these numbers in a follow-up blog post.)

Conclusion

The key takeaway from this article is that-due to the increasingly interconnected nature of our economy-employment losses to one sector will quickly spread to other sectors. In the case of COVID-19 and losses in the accommodation and food services sectors, our analysis predicts that the total effects will be almost 50% higher than the initial losses in these sectors would suggest. This underlines the need for policymakers and consumers to support vulnerable businesses as we continue to pursue social distancing.

Notes and References

  1. A recent blog post assigned an index value to each occupation describing the degree to which workers needed to complete their job’s tasks in close physical proximity to others. On that scale, food and beverage workers tended to work with one another at an arm’s length distance away.
  2. Their data are freely available and updated daily at their page “The state of the restaurant industry.”
  3. For reference, the construction sector accounts for 5% of value-added and total employment, but also has important spillovers to the rest of the economy. For example, the 2013 working paper “Reconstructing the Great Recession “ calculated that the decline in construction activity during the last recession accounted for between 25% and 50% of the drop in total employment and value-added.
  4. In other words, the direct effect would increase the total unemployment rate from 3.5% to 5.4%, and the additional 0.7 percentage points would be due to the spillover effect.

Carlos Garriga is a vice president and economist in the Federal Reserve Bank of St. Louis’ Research division. Prior to joining the St. Louis Fed, he was assistant professor of economics at the Department of Economics, Florida State University, and assistant professor of economics at the Universidad de Barcelona (Spain).

Juan Sanchez is an assistant vice president and economist in the Research division. He received his Ph.D. from the University of Rochester and has published papers in the American Economic Review, Econometrica, the Journal of Monetary Economics, the Journal of Economic Theory, the International Economic Review, and the Review of Financial Studies, among others.

Ryan Mather is a research associate with the St. Louis Fed.

Originally published at https://www.stlouisfed.org.

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Federal Reserve Bank of St. Louis — Central to America’s Economy