top of page
  • Writer's pictureYasir Aheer

Pandemic: An Economic Disruption

by Yasir Aheer, Rahul Rao and Varun Rao


  • The global economy is in a state of hibernation with governments around the world pumping stimulus as life support. Is there an economic slow-down on the horizon? Will labour rights and real wages increase? What can we learn from the past Pandemics to guide the recovery process?

  • A recent research examined more than a dozen pandemics through history and puts forward two key findings for the decades that follow a Pandemic: a) a statistically significant rise in real wages, and b) a decrease in the natural rate of interest suggesting limited economic activity in the post-pandemic years.

  • Will this time be different? Perhaps yes; some things have changed. Governments are taking a more active role earlier than in the past pandemics, through various monetary and fiscal policies.


Covid-19 is one of the biggest disruptions of our generation. It will shape our lives and society for years to come. It is hard to believe how quickly the world changed. When social distancing and other restrictions started around mid-March, we thought it would last a couple of weeks at most. We now know that some form of restrictions and social distancing measures will continue for the near future. 

Like most people, we have been focused on its immediate implications: staying disciplined while working from home, Zoom’ing with family & friends and passing strangers awkwardly in the grocery aisles while trying to maintain appropriate social distance. All the while nervously looking at the daily numbers from across the globe.

The global economy is in a state of hibernation with governments around the world pumping stimulus as life support. The longer this continues, the more curious we have become about the long-term implications on our lives, society and especially on the economy. While there is general consensus that a pandemic is followed by a sluggish economy, a study published by the Federal Reserve Bank of San Francisco suggests that labour gains power and achieves a statistically significant increase in terms of real wages.

As part of the study, researchers explored more than a dozen pandemics with death tolls greater than 100,000; starting with the Black Plague in 1347 through to the H1N1 Pandemic in 2009. Their research puts forward two key findings: a) a statistically significant rise in real wages for about four decades post the pandemic (Figure 1), and b) a decrease in the natural rate of interest in the decades following a pandemic (Figure 2), suggesting limited economic activity in the post-pandemic years.

Another interesting observation shared by the study is that there is no quick recovery after pandemics. Researchers observed the real natural rate of interest post-pandemic and compared it to post-war years, and found opposite effects (Figure 3) - the natural rate was depressed post-pandemics while high in the post-war years. This implies that there is greater economic activity during the post-war period, while investment needs to be encouraged in the years following pandemics through lower rates of interest.

For us, some of the study’s findings made more intuitive sense than others. For example, it makes sense to us that pandemics would be followed by a depressed economy. The suggested potential economic difference between post-war years compared to the post-pandemic period is also intuitive. Wars result in capital destruction, in terms of buildings and infrastructure, necessitating investment resulting in greater economic activity. However pandemics are different, there is no infrastructure to re-build; if anything the slower economy can push society into a savings mode further complicating the matter.

On the other hand, it is hard for us to reconcile the notion that labour gains power or there is an increase in real wages in a slow economy, or worse, in a recession. Wage growth was sluggish at best during the recovery period post the recent Great Recession. Unemployment is already soaring and is expected to reach double digits in Australia for the first time since April 1994. It is counter intuitive that high unemployment could improve labour rights and real wages. 

One of the events considered in this study is the Black Plague (1347-1351) which resulted in a significant drop in European population. Some estimates put this drop at 60%. Such an event lends itself more easily to the idea of the balance of power shifting towards labour in post-pandemic years, as surviving workers are in an environment short on labour. Support for this hypothesis can be found in Figure 4 which shows the drop in the British population relative to the real wages over the following decades.

We would like to believe that improvements in pharmaceutical technology and social restriction measures will ensure that the total death toll will be nowhere near the worst-case scenarios we have seen in history and hence we should not experience labour shortage at the scale observed in earlier pandemics. And hence, to us it seems unlikely that in this instance labour rights or real wages would improve. Having said that, there seems to be some recent push to increase minimum wages in Australia, despite the projected state of the economy and workers around the world. The trajectory of wages would be an interesting metric to monitor over the coming years.

Once the immediate spectre of Covid-19 has passed, countries will face the challenge of rebuilding their ruined economies. Previous pandemics have seen very slow recoveries. Will this time be different? Perhaps yes; some things have changed. 

Governments are taking a more active role earlier than in the past pandemics, through various fiscal policies involving stimulus. Governments around the globe are introducing stimulus packages to support the economy, with the US approving by far the greatest at a staggering USD2.3T. Australia has introduced around AUD194B (9.9% of GDP), to provide broad-based economic assistance such as wage support, income support for households, cash flow support to businesses etc. The Reserve Bank of Australia has also cut the interest rate to a record low of 0.25%.

Such measures will cushion the more immediate blow, and hopefully provide a steady landing point for the economy to build from. While most of these measures are targeting the immediate need of an economy in hibernation, a heightened public spending may be required for the next few years in order to shift the gear from a recession to growth.

Unbridled optimism notwithstanding, there is limited opportunity available for the governments to pull macro-economic levers. Interest rates have been at an all-time low for several years now, with some regions even at a negative yield. Slashing borrowing rates to encourage investment can only go so far.

Whether all these measures are enough to avoid an extended period of recession, only time will tell. While there is no doubt we will go through a period of economic uncertainty, on a personal level we feel optimistic in our collective ingenuity, creativity and adaptability to ride it through to the post-Covid world.



Dr Rahul Rao

Dr Varun Rao


Disclaimer: This article is based on our personal opinion and does not reflect or represent any organisation that we might be associated with.


Recent Posts

See All
bottom of page