Exploring the impact of Covid-19 on the labor market

Three surprising ways the COVID-19 pandemic has rocked the U.S. labor market

September 8, 2021 | By Professor Lisa Kahn

For an economist whose research focuses primarily on labor economics, the past year and a half has been nothing short of astonishing. The first wave of the COVID-19 pandemic hit the U.S. labor market like a tsunami, resulting in a degree of dislocation that is unusual even for the deepest recession. While the forecast will change as new data emerges, we can already identify three surprising ways in which the pandemic has reshaped the labor market landscape.

1. The labor market collapse was truly universal.    

After the onset of COVID-19, the U.S. workforce experienced an unprecedented level of layoffs as employers across industries closed their doors to the public. The ranks of the unemployed swelled from 6.2 million people in February 2020 (a 3.8% unemployment rate) to 20.5 million in May 2020 (a 13.0% unemployment rate).

Additional data from the U.S. Bureau of Labor Statistics indicates that the number of Americans who wanted a job but were not in the labor force grew from 5 million in February to 9 million March, pointing to an actual unemployment rate that exceeded 13%.

Compare these numbers to the Great Recession, when the number of unemployed Americans increased by 8.8 million people between late 2007 and early 2010. During the pandemic, roughly 6 million people were going onto unemployment insurance every week in late March/early April, far exceeding the 1 million people per week in the darkest days of the Great Recession.

At the end of 2020, I co-authored a research study in the Journal of Public Economics that examines the contours and causes of the labor market collapse. My colleagues and I were surprised to find that the first wave of COVID-19 truly capsized all boats. Mass layoffs were present across geography, regardless of state and local stay-at-home and mask orders, and they were present in both essential and non-essential industries. While workers in leisure and hospitality took the biggest hit, we still noted broad job loss across types of occupations, even those that allowed employees to work from home. This data points to the overall drop in demand for goods and services, not solely the stay-at-home orders, as the primary driver of widespread collapse in the labor market.

2. Employer-employee relationships remained intact even with temporary layoffs.

Often in times of recession, we worry that employers will respond to a temporary shock by permanently laying off their employees. The severing of these ties can be incredibly damaging for workers whose life cycle earnings never completely recover. It’s the reason why countries like Germany have programs in place to absorb some of the shocks and incentivize employers to maintain a tie with their workers. The U.S. has yet to develop a similar policy, partly out of the recognition that these types of programs inevitably create winners and losers. While keeping an employee linked to an employer can protect employees from future wage loss, severed ties can have a positive cleansing effect, reallocating resources toward more productive endeavors. But that’s in a typical recession, and COVID-19 is anything but typical.

During COVID-19, employers and employees have voluntarily maintained ties. The phenomenon of temporary layoffs during the crisis is more widespread than any economist could have predicted. Within the pool of workers who reported being unemployed in April 2020, a full 80% expected their employer to recall them, suggesting that most employers thought the economic shock was temporary enough that they didn’t need to reallocate resources or close their doors permanently.  

Based on previous patterns, I expected the searching unemployment market to increase as workers decided they could no longer wait around for a call from their previous employer, but it never happened. Patience paid off when the majority of employees actually returned to the positions they occupied prior to the onset of the pandemic. Some may speculate that federal and state aid, including unemployment insurance, economic impact payments, and Paycheck Protection Program (PPP) loans, has played a central role in incentivizing employers and employees to stick together. But when we look at the fluctuation of unemployment benefits and direct payments over the past year, we don’t observe a corresponding fluctuation in metrics like the number of people going on and off unemployment insurance or the number of job vacancies posted.

3. Labor demand is surging as labor supply lags behind.

Over the course of 2020, we observed a number of false starts. The job market made a comeback in early summer, when U.S. workers recovered half of all jobs lost, only to sputter in July and crash again in the fall and winter. It’s only this spring that we’ve seen a major rebound in job vacancy postings. Employers are ready to go.

On the other side of the supply and demand equations, employees are less enthusiastic about returning to work. During a typical recession, the number of people searching for work outstrips the number of jobs available. During the pandemic, in contrast, job boards have displayed far more vacancies than there are workers to fill them. Driving around town, I constantly notice windows displaying “Now Hiring” signs.

The slower rebound in labor supply could have any number of causes. For a while, the searching unemployed population was lower than usual during a recession because employees were waiting for their employer to call them back. That judgment call turned out to be sound because in most cases, the employer did call them back. In other cases, people living with a preexisting condition are hesitant to return to an environment with a high percentage of unvaccinated people, especially as the Delta variant fuels a spike in COVID-19 cases this summer. In still other cases, workers at home are unable to find childcare provisions for their children that would allow them to return to their place of employment.

We do know that employees in low-skilled, customer-facing jobs were more likely to lose their job during the pandemic, and these workers, in particular, may need to see more wage growth to return. It’s also worth noting that in the future, many of them will require additional training and retraining through nontraditional pathways like apprenticeships and vocational programs. The declining labor participation rate among men, especially in places exposed to automation, underscores the need for more nontraditional career pathways.

Ultimately, the factors that contribute to the gap between labor supply and labor demand are complex and evolving. Unanswered questions and incomplete data sets abound. As new data trickles in, I look forward to producing research that sheds more light on how the COVID-19 pandemic has impacted the labor market and what trends we can expect to see going forward. 

University of Rochester Professor Lisa Kahn 

Professor Kahn is a Professor of Economics at the University of Rochester.

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