Economic Consequences of the Crisis Hit Cities Hardest

In economic terms, cities have been hit the hardest by the coronavirus crisis. Unemployment rose more significantly there and companies’ business situations deteriorated more so than in Germany’s other regions. The rise in short-time work is hitting the industry-heavy southwest the hardest. These are the key findings from a study conducted by the ifo Institute.

“Social consumption plays a bigger role in cities, and the effects of the pandemic dealt a particularly harsh blow here. And because cities are home to less industry, they also benefited less from the recovery of the manufacturing sector in the second half of 2020,” explains Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys.

The researchers examined four clusters of regions, each with similar demographic, structural, and infection-related characteristics. The impact of the pandemic is most evident in the development of the unemployment rate: between January and August 2020, it increased by nearly 1.5 percentage points in the city cluster. For the other clusters, this increase was a moderate 0.3 to 0.8 percentage points. This trend exacerbates regional disparities, as the absolute unemployment rate is also highest in cities, at 8.2 percent in August 2020 (northern Germany: 5.9 percent, southwestern Germany: 4.3 percent, eastern Germany: 6.6 percent). As for the business situation, companies in the city cluster have also seen a greater slump of around 5 to 10 percentage points that started in spring 2020. It is also striking that since fall 2020, the business situation of companies in the eastern German cluster (especially in Saxony and Thuringia) has declined more sharply than in the other regions. The ifo scientists suspect that this development is related to the very high infection rates there in the second wave. In terms of short-time work, the economically strong southwestern German cluster has the largest average share: around 15 percent of employees subject to social security contributions. This is probably related to the high importance of industrial companies in this cluster, which according to the study make greater use of the instrument of short-time work.

“It’s hard to say whether these effects will last over a longer period. Cities could benefit more than the average from catch-up effects after the crisis. On the other hand, it’s possible that digitalization and working from home will benefit rural regions in the long term,” Peichl says.