Not too long ago, we estimated that the economy would generate roughly 625,000 jobs per month this year as vaccines gained broad distribution and the economy reopened. Now, with the vaccines available to most adults and economic activity returning, the economy is poised for even stronger growth.
We expect a decline in the unemployment rate to 5.8% when the data is released Friday.
When the Labor Department releases its jobs data for March on Friday, policymakers, firm managers and investors should prepare for another round of upgraded projections for growth, inflation and a return to full employment, all with a risk to the upside, as the economic recovery begins to take shape.
We expect a net increase in total employment of 1 million, with risk of a much larger gain, and a decline in the unemployment rate to 5.8% in the March jobs report set for release Friday.
Should we observe a gain at or above our forecast, then the Federal Reserve might consider moving up its first rate increase or pull forward into this year the date it begins tapering its asset purchases. Both of which would imply a possible rate hike in the second half of 2023.
A grim anniversary
One year ago, the largest shock to the U.S. labor market since the Great Depression came into view. The nearly 1.7 million jobs lost in March 2020 would pale in comparison to the 20.6 million losses that would follow one month later, yet it does mark a watershed that we think forever changed the American labor market.
Even with expectations of a robust economic recovery this year, the labor market is far from where it was before the pandemic. And that should anchor everyone’s expectations around the risks to the outlook through cost push or demand pull inflation and the sustained outsized gains in employment that we expect for the remainder of the year.
We will start our quick review by looking at job furloughs. Job losses appear to be subsiding. After peaking a 4.7 million in November, the total number of furloughed employees is down to 4.4 million, which is a hopeful sign that the economy is moving toward a sustainable recovery as vaccinations become available for younger adults.
Job furloughs typically stand at a rate of 1.4% of the working-age population during non-recessionary periods, reaching as low as 0.5% at the end of the business cycle upswing and reaching as high as 3.5% in the aftermath of the Great Recession.
So this recession continues to be unique, with job losses limited to 1.7% of the working-age population, federal aid supporting overall spending to some degree and many firms granting work-at-home flexibility that keeps workers on payrolls.
Nevertheless, 3.5 million people have lost a permanent job, and 860,000 have lost a temporary position. This is in addition to those relying on reduced salaries or part-time work, which often does not come with health insurance.
The result is a scarring in the labor force that will be hard to overcome. Studies have shown that the length of time that a person is out of work affects the probability of that person regaining employment.
Our estimate is that once a person is out of work for more than 26 weeks, the probability of finding similar work at a similar wage is less than 10%. So there is the risk of diminished productivity, with out-of-work employees falling behind technology changes and changing business practices.
Triage and policy decisions
Can we identify the industries where the labor force scarring might be the deepest?
Though the coronavirus has affected everyone, it’s commonly agreed that this is not an equal-opportunity disease. For those lucky enough to work at home, there are countless others who risk exposure when they pick up garbage or serve as police officers or shop for others at Whole Foods. And then there are the waiters who brought our food to our tables or served us a drink at the bar who are still out of work and may not have a neighborhood restaurant or shop to return to when it’s safe enough to work again.
Opportunity Insights’ Track the Recovery project finds that while the “recession has nearly ended for high-wage workers…job losses persist for low-wage workers.” The website goes on to say that “declines in high-income spending led to significant employment losses among low-income individuals working in the most affluent ZIP codes in the country.”
According to the latest data from the Bureau of Labor Statistics, the 152.5 million employees who were on nonfarm payrolls in February 2020 are down to 143 million a year later. That’s a 6.2% deficit, some of which is unlikely to vanish even when the vaccination program is complete.
Total payrolls are broken down into the private and public sector. Government payrolls are down by 1.4 million people (or 6.1% of February 2020 levels), with local government employment taking the biggest hit. Private sector payrolls are down by 8.1 million (or 6.2% of February 2020 levels), with the service sector taking the biggest hit.
Private payrolls are broken down into the service sector and the goods-producing sector. The goods-producing sector employed 21.1 million in February 2020, and 20.2 million a year later, for a 4.6% employment deficit of nearly a million people. The service sector that employed 108.6 million in February 2020 now employs 101.4 million a year later, for a 6.6% employment deficit of 7.1 million people.
While we can expect the goods-producing sector to stage a full recovery – or close to it – it’s the service sector that is likely to remain a stumbling block for at least a while longer. There are 3.5 million fewer employees on the payrolls of leisure and hospitality firms, and not all of them will be invited back once they are vaccinated.
Upper-income households might have temporarily put off buying a new car or appliances, and their day-to-day buying habits are likely to have been altered. And the effects of automation and changes in business practices will have accelerated the elimination of repetitive tasks and low-paying jobs.
In fact, we expect the biggest gains in employment will be in those occupations that have the smallest deficits in employment during the pandemic. Construction requires human input no matter what, and if the Biden administration is able to persuade Congress to approve infrastructure spending, then it will take construction workers to establish broadband coverage and charging stations for electric vehicles and to repair bridges, trains and tunnels.
Percentages of employees
Just before the pandemic spurred widespread layoffs, the headline unemployment rate was 3.5%. Though the labor market was tightening during the decadelong economic recovery from the 2008-09 Great Recession, that might have been only on the surface.
Employment in the goods-producing sector peaked in 1979 and is now 20% lower, reducing opportunity for wealth accumulation in what had been a mainstay of American society that increasingly became a source of societal discontent.
Employment in the service sector is now five times that in the goods-producing sector. So with employment opportunities limited to lower-paying service sector jobs, overall wage increases have barely kept up with inflation.
The Federal Reserve became openly concerned with the damage to the economy from the global manufacturing recession, and with persistently higher rates of unemployment and lower wages among minority and disaffected communities.
Arguably, those conditions have not changed materially as we enter the post-pandemic recovery, and there’s not much more the monetary authorities can do.
As the figures below show, at the macro level and after 12 months of the pandemic, there are 6.2% fewer employees on nonfarm payrolls as of February, 6.6% fewer service-providing employees and 4.6% goods-producing employees.
Within the service sector – which accounts for the most jobs in the economy and has been the most adversely affected by the pandemic – there are 20.4% fewer employees on the payrolls of leisure and hospitality providers.
Though we expect employment in the leisure and hospitality sector to revive, there is a strong likelihood of increased discontent if the lack of high-paying employment opportunities were to continue without a substantial and effective policy response. We cannot afford to leave yet another group of workers behind.
We can, however, afford to take the opportunity to provide education and training for everyone who needs help transitioning to the post-pandemic economy. This can be done while providing immediate job opportunities in rebuilding a long-neglected infrastructure and building the schools and hospitals needed to support a growing and healthy economy and a civil society.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
