Just as the coronavirus pandemic is forcing profound changes in the way Americans live and behave, it will also likely prove to be a catalyst for permanent changes in the economy and labor force.
The long-term damage to the economy is already reshaping notions of where we work, how we work and how long we work each week.
The long-term damage to the economy is already reshaping notions of where we work, how we work and how long we work each week. The data are already indicating an alarming increase in permanent job losses over the past six months, and we expect those losses to gather steam in the coming year.
Whether and when those jobs reappear will determine the extent of the damage to the economy and, more important, the extent to which household balance sheets and accumulated wealth are impaired.
The number of those who have lost their jobs permanently, as opposed to those who have been temporarily laid off, has been increasing as the pandemic has spread from the major metropolitan areas in the Northeast to the interior states.
From a low point of 1.8 million permanent job losses earlier this year, permanent job losses have increased over each of the past six months, reaching 4.1 million in August as shown in the first figure below. With federal protections put in place to protect workers at the onset of the pandemic expected to expire on Sept. 30, large firms are announcing large permanent layoffs in final quarter of 2020.
To compare the pandemic recession to prior economic downturns, we have standardized job losses in the different eras relative to the size of the working-age population. As the figure below indicates, the standardized number of permanent job losses was the highest during:
- The early 1980s double-dip recessions, which was world-wide disaster.
- The 1980 recession, which began the exodus of U.S. manufacturing.
- The 2007-09 Great Recession that resulted from the Global Financial Crisis.
Most concerning about the current episode is that the shutdown of the economy because of the pandemic has pushed standardized permanent job losses above their 1.4% non-recessionary average, with losses of this magnitude typically a precursor of worsening employment conditions.
This would imply that those without a college degree should settle in for a long siege in which it will be necessary for that cohort to actively seek out retraining that will permit those workers to gain employment in the growing areas of the new economy.
Areas of the service sector such as food, beverage, leisure and hospitality are clearly not going to return to the way things were once recovery begins and will not be able to support levels of employment commensurate with that of January 2020.
In a separate analysis reported by the Washington Post, the economists Gabriel Chodorow-Reich and John Coglianese have forecasted “that 1.6 million workers laid off in April 2020 remain unemployed six months later. Total long-term unemployment rises thereafter and eventually reaches more 4.5 million individuals unemployed for more than 26 weeks and almost 2 million individuals unemployed for more than 46 weeks.”
People out of work for long periods tend to have difficulty keeping up with skill changes.
The authors find that while the sudden spike in the number of unemployed because of the virus and the subsequent out-of-the-ordinary drop in the unemployment rate might suggest a rapid recovery, the sheer magnitude of job losses presents “re-employment hazards” for those who remain out of work for extended periods of time.
It is here that the 26-week duration of median unemployment becomes critical. Once one experiences an extended bout of unemployment longer than 26 weeks, the probability of regaining similar work at similar wages is less than 10%.
As observed during the slow recovery after the Great Recession, people out of work for long periods tend to have difficulty keeping up with skill changes, and are stigmatized by their absence from the labor force. For younger cohorts, an extended bout of unemployment will dampen lifetime earnings.
The outsize increase in permanent job losses gives credence to our estimate that a so-called “V-shaped” recovery is not in the cards and in fact was never a possibility and underscores our call of a “swoosh”-shaped recovery characterized by growing economic inequality.
In our estimation, the recent drop in the unemployment rate will be seen as only one part of a recession within a recession, with the pandemic serving to hasten long-term changes to the economy and the labor force that have been developing for decades.
Riding the wave of increased productivity
We have made the case that the future of U.S. manufacturing would most likely be tethered to advanced industrial production inside the new economy, with traditional manufacturing having already moved offshore to low-cost and low-wage centers along a global supply chain.
Before the pandemic, we were at the start a new era of higher productivity and profits available through the smarter use of machinery to perform repetitive tasks in both in the goods-producing and service sectors.
This was a continuation of technological advances that have reduced the number of working hours from 60 to 70 hours per week in the late 19th century, which by 1929 gave way to weekends off.
Even the 40-hour workweek, which is unhealthy and potentially dangerous for some types of work – and unnecessary because of advances in how and where we work — has eased. The workweek dropped to 33 or 34 hours by the 1990s as the figure below indicates, allowing workers time for whatever activity and rest they found necessary.
There was a downside, however. The social compact of the mid-20th century that meant getting a union card, a manufacturing job guaranteeing a decent income, health care and an affordable house, dissolved over the past four decades. As policymakers became convinced that prosperity would follow the elimination of worker representation, the stage was set for growing inequality and the conditions that approximate the status quo.
When it became acceptable for factories to up and leave the United States, employment opportunities in the manufacturing sector dried up and new high school graduates were told to head on over to the mall and get a job at Sears or Lord & Taylor.
The service sector was where the action was, and non-supervisory wage growth never recovered from the losses of the 1980s. (Note: the latest spike in wage growth is due to the widespread layoffs of low-wage employees, leaving only the older or higher-paid employees behind.)
With millions of those jobs perhaps permanently lost, what do we tell those who have lost a job? After all, it’s in the best interest of business to lower employment costs, with the elimination of less-productive positions the obvious and most understandable course.
The pandemic is in the process of turning the hospitality sector and shopping malls into a modern-day rust belt. And despite the best efforts to think that life will return to normal, it seems more likely that the pre-coronavirus advances in on-line shopping and delivery will be the new normal and will continue to dominate the retail and wholesale industries.
That leaves a big hole in the service sector to be filled, but with what?
The most obvious role to be filled is health care provider and educator. The governments could sponsor training at state schools, followed by deployment of health and education specialists to assist communities in need of healthier outcomes in terms of physical well-being and intellectual capital, whether in urban or rural settings.
Second would be a multi-decade infrastructure program to modernize essential services (think the water distribution system in Flint, Mich.) that underscores the national economy. That should range from big “I” programs around roads, bridges, highways, waterways and transportation in addition to little “I” projects organized around broadband and 5G that will provide the backbone of remote learning and working.
Third, the private sector will need to take over wide areas of worker retraining to bring educated workers up to speed with skills and offer the opportunity to join the quickly evolving tech sectors.
Fourth would be to rethink the education system in terms of providing civics classes (so students understand the roles that government and personal responsibility play within a democracy) and to provide the basics of vocational training (everyone needs to be able to work with their hands and take care of themselves within a pandemic).
Most important, society needs to shift expectations that everyone will become a hedge-fund manager or AI whiz kid. For every tech person, we need to ensure that plumbers and pipefitters and carpenters are able to earn a decent living.
Finally — and as we’ve written before — there is a need to shorten the supply chain for essential equipment. We need to be prepared if the pandemic were to limit access to offshore supply locations. Stockpiling is one alternative; self-production is another. Whether we treat these producers as a public utility or subject to marketplace competition becomes secondary to saving lives and protecting the economy.
For more information on how the coronavirus is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.