The Effect of COVID-19 on Firms and Employment in Central America

This paper assesses the effect of the COVID-19 pandemic on firms and employment in El Salvador, Guatemala, Honduras, and Nicaragua. We use data from The World Bank COVID-19 Business Pulse Surveys and other complementary sources. Our analysis shows that since the COVID-19 outbreak, 1 in 4 formal businesses in El Salvador, Guatemala, Honduras, and Nicaragua have closed, with monthly sales dropping by a third on average across countries. To counter the impact of the crisis, firms opted to decrease total hours worked, reduce wages or furlough workers. Small firms exhibited the largest declines in sales and employment and faced greater liquidity constraints. Firms response in terms of employment was highly correlated to the change in sales and affected by labor regulations. Even though the possibility of telecommuting is limited across Central America, over half of formal firms among Northern Triangle countries and a quarter in Nicaragua started or increased remote work, which helped to cushion the impact on employment. Despite increases in public spending and policies to mitigate the economic and social impacts of the pandemic, few formal firms received government assistance.