In September 1945 the U.S. economy lost almost 2 million jobs as the military demobilized after the end of WWII. This April, the economy lost over ten times that number. The unemployment rate now stands at 14.7%, the highest since the Great Depression in the early part of the 20th century, when it reached 25%.
Meanwhile, the Congressional Budget Office projects that unemployment will reach 16% in the third quarter, before starting to drop — but will average around 10% for 2021. The actual numbers may be much higher, as many workers become discouraged and leave the workforce. (The CBO assumes about 8 million people will exit the labor force.)
Still, as the economy returns to growth, jobs will start to return as well, but it will be a long road back to the low levels of unemployment that existed at the start of the year. Growth might be fast at first because of demand that was suppressed during the shutdown, but it will likely return to its pre-pandemic level of about 2.8% next year.
All told, given the relationship between economic growth and job creation, it could take until 2026 to return to an unemployment level of 3.5%. And that is an optimistic scenario. Unfortunately, several factors argue against this.
A Jobless Recovery
Historically, economic downturns have been followed by periods of robust job growth, but in the last 30 years, recoveries have tended to see much slower increases in employment. The proximate cause has been increased automation, which helped eliminate some middle-skill occupations, especially those focused on routine tasks. This has led to job polarization, increasing concentration of employment in the highest- and lowest-wage occupations, or a hollowing-out of the middle.
And now, with so much work being remote, the need for workers in many even low-level occupations will be less. Previously thriving downtowns will see much fewer commuters and correspondingly will have much lower needs for workers in food service, retail, and transit. Also, much less business travel will force airlines, car-rental companies, and hotels to permanently lay off temporarily furloughed staff. By one estimate, over 40% of the job losses that have happened due to the pandemic are permanent.
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Economic growth depends on increases in the total number of hours people work, in productivity, or how efficiently workers are at getting their work done. U.S. productivity growth has been stagnant for a long time. In the year before the pandemic, productivity increased by just 0.3%. Moreover, low increases in productivity have been the norm for the last 20 years. The offsetting factor — increases in the number of hours worked — was not likely to improve even before the current crisis, since population growth was slowing and the workforce has been aging. It’s even less likely now.
The Liquidity Trap
If interest rates get very low, which is already happening, this can create a situation where most people and companies prefer holding cash instead of holding debt. Hoarding of cash is also more likely when an adverse event, such as an economic crisis, occurs because it provides a sense of security. This is what happened in Japan from 1991 to 2000, a period known as “the lost decade.” Consequently, when companies hoard cash, they don’t invest in capital equipment, R&D, and labor, further reducing the potential for job growth.
The Silver Lining
Prospects for the labor market look bleak, but there are some bright spots. Many employers are still hiring. Large-scale hiring is occurring at firms like Amazon, Walmart, CVS Healthcare, and Domino’s. Overall, the pandemic has led to three new hires for every 10 layoffs. The real number is likely greater since it does not not include hires at new firms, which continue to emerge. More positive signs include:
- New business formation is still happening, at about two-thirds of the 2019 pace.
- Companies are moving manufacturing out of China in increasing numbers — consulting firm A.T. Kearney’s re-shoring index has climbed to a record high. This trend started well before the pandemic took hold, because of the trade war with China, but it is now only expected to accelerate. Tax incentives and potential re-shoring subsidies are among measures being considered to spur companies to move manufacturing out of China.
- Hiring in the tech sector remains strong.
- Curbs on immigration will also increase job opportunities for Americans, though that could be a case of sacrificing the future to benefit the present.
Aggressive moves by the Treasury and the Federal Reserve may yet result in fast economic growth and job creation, but history argues against it. During the Great Depression, unemployment peaked at 25% in 1933 and thereafter rapidly dropped by over 2% annually. Even at that pace, it will take at least five years to reach the levels of unemployment we had when the pandemic started. It may even take as long as a decade.