Robert F. Mulligan
Any observer will draw two things from recent news media coverage of the U.S. economy, and that is today’s high inflation and low unemployment. GDP has been growing, albeit not too strongly, as it In 2020, due to the lockdown due to the pandemic. Unemployment always rises in recessions, and it usually takes two years to fall back to pre-recession levels. The recession is considered over once output starts growing again, but higher-than-normal unemployment typically persists for a year or two. The COVID-19 recession is a fairly unique event, and its uniqueness and severity can only be understood by looking at its impact on employment and labor markets.
Figure 1 shows total employment in the United States from 2000 to 2022, excluding farmers and agricultural workers. The series peaks at or near the beginning of each recession, indicated by the grey bars. After the tech bubble recession of 2001 and the Great Recession of 2007-2009, total nonfarm payrolls continued to decline even after those recessions officially ended, only starting to grow again a few months after each recession ended.
The 2020 COVID-19 recession looks very different — this one is much shorter, and the job losses are much bigger. The COVID-19 recession has lost roughly three times as many jobs compared to the longer-lasting Great Recession. Two saving graces compared to normal, more typical recessions are the brevity of the COVID-19 recession and the early start of the labor market recovery. By March 2022, employment had almost recovered to pre-pandemic levels. The COVID-19 recession has given the labor market more room to recover than the recovery from the previous two recessions, and it has also recovered more rapidly, at least so far.
Figure 1 Total non-farm employment, 2000-2022
Monetary policymakers prepare for recessions by keeping interest rates too low for too long. This artificially cheap credit, and the fact that there is too much credit, allows companies to over-expand their businesses with undue optimism. This over-expansion creates additional demand for labor, which reduces unemployment. When a normal recession hits, the market adjusts to make up for the unsustainable expansion of businesses. Some companies realize they are too optimistic about the demand or production costs their products will face. They responded by cutting production and laying off workers, raising unemployment. This starts a necessary austerity process, which will ripple through the economy as newly laid-off workers see their incomes dwindle and in turn cut consumer spending, further spiraling the economy into a vicious circle. Businesses need to stop unsustainable production and assess their newly revealed economic realities to develop and initiate new production plans that are more sustainable and realistic. This is the basis for continued economic growth.
In the recovery from recession, GDP rises ahead of employment, as companies initially increase output by working more intensively the workers they already employ, possibly by giving them more hours or more overtime. As the recovery continued, demand for output eventually rose enough that companies found they had to hire more workers to meet the growing demand. Figure 1. U.S. nonfarm payrolls show a strong trend over time with long-term population and economic growth. A recession can be thought of as an occasional traffic jam, possibly caused by much-needed but ill-planned and inconvenient road repairs. These are temporary disruptions to economic growth, with falling GDP accompanied by rising unemployment; that is, by reducing employment. If this employment sequence is extended beyond 2000, the long-term trend will be more pronounced.
Long-term trends can be removed by dividing total employment by related series with similar trends (in this case population). Figure 2 shows the employment-to-population ratio from 2000 to 2022. This is the ratio of the total employed population (now including agriculture) divided by the total adult population. This ratio provides a clearer picture of the damaging long-term impact of each of the three recessions in the period covered. Figure 2 shows that the ratio has partially recovered from the COVID-19 recession, but still has some way to go before it reaches its pre-recession value—it shows more clearly than Figure 1 how far we have to go. If we push the series back to before 2000, we see that the ratio increased steadily from 1960 to around 1980, mainly due to the increasing number of women entering the labor force during this period, reaching about 70% in 1985 % peaked, but then declined to below 65% at the turn of the century. The ratio drops sharply to varying degrees during each recession, then grows slowly as the economy recovers.
Note that the employment-to-population ratio peaked nearly a year before the 2001 recession. It declined before the recession officially began, and continued to decline for nearly two years after the recession officially ended. The tech bubble recession in 2001 dropped this ratio from about 65% to 62%, and during the recovery that led to the Great Depression, it didn’t actually recover much, rising only to about 63% by the end of 2006. The ratio never fully recovered, suggesting that the mild recession of 2001 brought permanent structural changes to the economy. The tech sector continued to grow during this period, even as many companies outsourced tech employment overseas. Finance, construction and real estate development also grew. U.S. manufacturing has become increasingly automated, increasing the value of total manufacturing output, but not necessarily adding workers.
Likewise, with the Great Recession of 2007-2009, the ratio peaked nearly a year before the recession officially began and continued to decline into 2010. The ratio has not really grown or recovered, reaching a trough of around 57-58% from 2010-2014. The recovery after that has been very slow. Although the economy gained jobs during the recovery, the U.S. population grew at about the same rate, and the employment-to-population ratio remained at a 50-year low until the pandemic hit.
Figure 2 U.S. employment-to-population ratio, 2000-2022
The COVID-19 recession brought that ratio down to nearly 50%, but luckily it has recovered quickly. Employment fell sharply in 2020 as an emergency emergency shutdown of so-called non-essential businesses disproportionately affected the transportation, hospitality, tourism, entertainment and restaurant industries. While government stimulus and relief funds have mitigated the financial impact of the lockdown, they have been poorly managed. All households received non-means-tested stimulus payments, so households with uninterrupted incomes received the same payments as households who lost their jobs during the crisis.
Companies are eligible to apply for stimulus and paycheck protection grants — euphemistically called loans that were never intended to be repaid — but many businesses that should have been prioritized did not, while others that didn’t need grants received them grant. As a result, many businesses had to close completely and never reopen. Some restaurants have switched to a dedicated takeout or delivery model, which has allowed them to cut down on wait staff and, in many cases, improve profit margins even with lower sales. The impact of lockdown policies has been disproportionately borne by poorer households, falling on blue-collar workers who are more likely to be laid off entirely. In most cases, white-collar workers work from home without any loss of income. The burden also falls disproportionately on minorities and disadvantaged groups, further exacerbating widespread income inequality.
The pandemic has also provided business opportunities for vigilant entrepreneurs, as sanitization services, food and product deliveries, teleconferencing services and more face a sharp increase in demand. Zoom is a relatively unknown and rarely used video conferencing software whose usage has exploded. As the economic recovery progresses, many companies are now struggling to find workers they can hire. This suggests that employers clearly need to start offering higher wages. Why are businesses reluctant to do this?
Standard labor market theory is that when supply and demand equalize, the market clears. A labor shortage indicates that prevailing wages are too low to clear the market. One possible explanation for the inability of firms to pay workers more than workers’ marginal income products, and firms not paying adequate wages, is that their assessments of workers’ worth are affected too much by uncertainty about future market conditions – firms think Know if inflation will be contained or continued, and if so, for how long; whether the weak recovery will continue or be derailed by another recession; and whether COVID returns with any severity, and if so, will be implemented What are the restrictions?
Recessions typically follow a prolonged monetary expansion that allows too much investment in less productive activities. This situation culminates when the intricate interrelationships between economic production activities become so complex, conflicting and fragile that too many production activities cannot be successfully completed. Although it is far worse than any recession since the Great Depression, the COVID-19 recession has done little to eliminate the underlying structural problems in the economy. Nowhere is this more evident than in the still booming real estate market. The last few recessions, even going back to 2000, have caused lasting damage to the U.S. economy, especially the labor market, and so far the COVID-19 recession appears to be no exception.
Editor’s Note: The summary bullet for this article was chosen by Seeking Alpha editors.