The curious case of the labor market recovery has been saved
Cover image by: Jaime Austin
Article
6 minute read
27 August 2021
The curious case of the labor market recovery
The reaction of labor markets to the economic recession and recovery brought on by COVID-19 has been nothing short of odd.
Prior to the pandemic, the United States had never experienced such a swift onset of a recession, with a precipitous drop in GDP and employment. Some 22 million jobs were lost between February and April 2020. While it’s expected for employment to fall during recessions,1 during the two-month COVID-19 recession, even as the number of unemployed swelled from 6 million to 23 million, an additional 8 million people left the labor force. We do not usually experience such a large decline in the labor force during recessions. However, given the nature of the COVID-19–led recession and the health, safety, and caregiving challenges it presented, it is not surprising that many did drop out.
Another notable difference compared to prior downturns is the speed of the economic turnaround. It took three years for GDP to regain its prerecession level following the global financial crisis of 2008–09, while the post–COVID-19 recovery regained its prepandemic level of GDP in just a year and a half. Even more remarkable was how fast the demand for labor returned. Job growth started almost immediately after the recession trough (April 2020). This recovery is the opposite of the “jobless recoveries” that have been the norm in the last few business cycles. Even so, employment seems to be growing relatively slowly—but job openings are at an all-time high. The big question is how willing and able are those currently unemployed or out of the labor force to return to work. We look to some detailed industry data for possible explanations.
Turning the COVID-19 corner
The unique nature of labor market dynamics during the COVID-19 recession and recovery is shown in figure 1. In the two prior recessions (recessions are denoted by gray bars), the number of unemployed people continued to rise even after the recessions officially ended, and job openings were slow to pick up. In the two years prior to the pandemic, the labor market was particularly tight, with less than one unemployed person per job opening. Somewhat surprisingly, the May Job Openings and Labor Turnover Survey (JOLTS) report from the Bureau of Labor Statistics (BLS) found that the ratio of unemployed persons to job openings was almost back to the prepandemic level, with job openings and the number of unemployed about equal. However, this does not mean that the labor market has recovered, as the record number of job openings in June (10 million) was higher than the number of unemployed. Yet, before the pandemic, the unemployment rate was 3.5%; it is currently 5.4%—a substantial improvement over the 14.8% recorded in April 2020, but still high.
The large spike in the job openings rate (share of jobs available and unfilled) has not been uniform across industries. For example, job openings in mining and logging, construction, information, financial activities, and educational services are at rates similar to those prior to the pandemic. And in industries such as retail and transportation, warehousing, and utilities, the job opening rates—while currently high—are not in record territory. However, in the remaining industries (those boxed in figure 2), the current job openings rates are substantially above their prior norm. Accommodation and food services and arts, entertainment, and recreation not only have the highest job opening rates, but their hire rates (the number of hires as a share of total employment) are even higher. This is not surprising given how fast these industries shed jobs early in the pandemic and how quickly business leaders in those industries wish to return to “normal” levels.
So, are wages going to make a difference?
Given the high rate of job openings, are employers trying to lure new employees with higher wages? Despite lots of stories in the press, the answer is oddly—not particularly. While many of the industries with a higher-than-average job openings rate have seen above-average increases in wages since January, only accommodation and food service employers are paying, on average, significantly higher wages than before the pandemic. Therefore, even though we are hearing anecdotal reports of large signing bonuses and wage increases for employees in certain specialties, these specific wage hikes have not translated into large rises in the aggregate.
Wages are not the only factor that may be affecting potential employees’ willingness to take those open jobs. Many employees and potential employees are emerging from the pandemic with a different set of priorities. Two key areas that may be having an impact on the labor market are:
- An increased desire for benefits, including health insurance, child care, and paid leave: Some of the key pandemic-affected industries provide relatively skimpy benefits, and postpandemic employees may be leaving those industries for the ones that offer better benefit packages. For example, only 36% of private industry workers in leisure and hospitality have access to health care compared to 91% in manufacturing.2
- Potential workers likely valuing flexible work arrangements more: The June 2021 American Perspectives Survey (APS) reported that 86% of Americans have stated that having flexibility to balance work and family is one of the most important criteria personally when choosing a job, especially for full-time working mothers.3 According to a recent Joblist survey, more than half of the employees across hotels, bars, and restaurants do not wish to go back to their previous jobs. And another third of respondents are thinking of switching to other industries. The survey listed difficult work settings as the top reason, followed by higher pay and better benefits.4
What does all this mean to employers? To meet their employment needs, firms will need to search outside of their usual recruiting pools to include diversity of all types in the candidates—race, gender, sexual orientation, age—and modify their interview strategies so that candidates are not excluded early in the process by background factors, such as extended absence from the workforce. Assuming that prepandemic employment processes will serve in the postpandemic world is a recipe for continuing recruiting problems. And according to our earlier research,5 about half of the decline in the labor force is due to workers aged 55+ years retiring. This group, in particular, might be persuaded to rejoin the workforce—but employers can’t assume it will happen automatically. More accommodations and benefits tailored to these older workers may be required to entice them back to the job market.
It’s true that the upcoming expiration of enhanced unemployment benefits might be sufficient to cause some workers on the sidelines to return to some jobs. But employers might not want to count on this, given the lack of evidence from the 26 states that have withdrawn from federal unemployment programs.
- All data in this report is from the Bureau of Labor Statistics unless otherwise noted.View in Article
- BLS, “Industries at a glance, Manufacturing: NAICS 31-33 and Leisure and Hospitality: NAICS 70-72,” accessed August 2021.View in Article
- Brent Orrell and Daniel A. Cox, The Great American Jobs Reshuffle, American Enterprise Institute, July 2021.View in Article
- Joblist, Q2 2021 United States job market report, July 8, 2021.View in Article
- Daniel Bachman, Will they, or won’t they return? Addressing the postpandemic labor force deficit, Deloitte Insights, May 27, 2021.
View in Article
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