C4: COVID-19 and Human Capital: Cataclysm and Catalyzer

The COVID-19 pandemic has had major consequences for many Norwegian companies, and thus also for many Norwegian employees. A key question is how Norwegian companies respond to a shock of this kind. To what extent do they respond by lowering investment, cutting investment in human capital, reducing the number of employees (permanently or temporarily), and does the shock trigger increased or reduced innovation? Findings made by the C4 project show that there is a significant connection between all these issues. Some companies appear offensive in the face of the crisis, while others appear more defensive. The latter group are the companies that try to deal with the crisis by hunkering down, and to rely on a combination of cost cutting, own reserves and government support until the crisis blows over. They cut costs and investments, it takes less before they turn to redundancies and layoffs, and they are much more inclined to postpone and cut investments in innovation. At the opposite end we find companies that are significantly committed to dealing with the crisis through innovation (in a broad sense). These companies innovate more, invest more, hold on to their employees to a greater extent and invest more in competence and human capital. What determines which group a given business belongs to? There are two prominent characteristics of the offensive group of companies in particular. Both of these relate to characteristics the companies had heading into the crisis. One is the company's strategy before the crisis. Companies that had a strategy where innovation and development played a central role are clearly more inclined to belong to the offensive group. Having expertise, systems and experience with innovation makes it to turn to innovation as a solution to problems you face, which means that you have higher expectations regarding the long-term value of the innovations you make in response to the crisis, and it seems that this also makes companies more optimistic and willing to invest in both people, technology and physical capital. Conversely, companies that have a strategy built around low costs and low prices will be most inclined to belong to the defensive group. Companies that have strategies built around factors such as close customer relations, branding and reputation seem to be somewhere between these two in terms of offensive/defensive handling of the crisis. The other prominent feature is the extent to which the enterprises had advantages related to organizational flexibility (or agility) before the crisis hit. Those companies that had an advantage in responding quickly to new threats and opportunities before the crisis seem to have benefited greatly from this during the crisis. This characteristic has a similar effect as having knowledge and experience with innovation. Note that this finding is robust even if we control for the effect of whether the company had an innovation-oriented strategy, so this is not about the same characteristic measured in two different ways. We should also note that even though both these characteristics are correlated with the level of digitalization, both findings remain significant even if we control for digitalization A somewhat surprising finding is that the company's financial position before the crisis (e.g. debt ratio and liquidity) appears to have had a very limited effect on corporate offensiveness or defensiveness during the crisis. This differs significantly from findings from previous crises such as the financial crisis. Part of the explanation for this is probably relatively generous public support schemes directed against particularly the weakest companies.

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The COVID-19 pandemic started as a medical crisis that quickly turned into a recession as governments introduced measures that locked-down large parts of the economy. Even for firms not in lockdown, a steep decline in demand forced a large number of firms to make dramatic changes to how they invest, deploy, and manage their human capital. This raises the general question of how the pandemic impacts firms’ human capital decisions, and the economic and labor market consequences this implies - both for firms and individuals. Independently of the crisis, firms were already (to varying extent) going through processes of digitalization. It seems reasonably clear that the pandemic will accelerate this digital transformation. It pushes a wide range of business activities online, some of which will lead to lasting changes in organizational- and consumer-behavior. The crisis has thus encouraged firms to implement digital technologies earlier than anticipated, and it seems to have rewarded firms that were highly digitalized before it started. We therefore believe that to understand the economic- and labor market consequences of the COVID-19 pandemic, it is important to realize that human capital decisions following the crisis and the process of digital transformation of the economy are intertwined. The key key to make significant progress on all these issues are two things. One is higher quality data. We need to be able to integrate data on characteristics of firms and industries, with data on the characteristics of individuals and government interventions in a common dataset to understand their interactions and relative effects. To better understand the dynamics of the crisis we also need real time data to observe changes as the crisis unfolds, rather than retrospective data. The other key thing needed is an interdisciplinary group of researchers who can bring a multitude of theoretical and analytical approaches to the data. Our project aims to do both.