The economic impact caused by the COVID-19 pandemic and the public health measures necessary to contain it have had an unprecedented impact on the US job market. The unemployment rate spiked during the first few months of the pandemic, and other measures of labor inputs, such as payroll employment and hours worked, fell sharply. From February to April 2020, the unemployment rate increased from 3.5% to 14.8%. During that same period, payroll employment fell by 22.4 million jobs and total hours worked fell by 17%.
While the impact was immediate and large, the economy is recovering at a rapid pace as vaccines bring the public health crisis under control. The speed of the current recovery is much faster than with many previous economic shocks, which were caused by underlying weaknesses in the economy, such as the financial crisis of 2007-09. However, it can be difficult to determine how far along we are with the recovery of the US job market, especially since some of the economic data has not lined up with the anecdotal information from companies.
So how do we assess the state of the US job market?
Product vs Labor Market
In the second quarter, real gross domestic product (GDP) is likely to surpass its previous peak reached in the fourth quarter of 2019. This suggests that the recession and recovery period is behind us, and that the US economy will continue to grow. The US is moving towards expansion. phase of the business cycle during the current quarter.
While real GDP is poised to come back and break above its previous high, many labor market measures remain below their previous highs, as discussed below. How is it possible? One of the reasons is probably due to the composition of the workforce. Many of the workers hardest hit by the pandemic had “high touch” jobs, which tend to be lower-paying jobs. Conversely, high-wage workers are more likely to be able to continue working, and possibly with higher productivity. This could explain how the economy is able to produce as much output as before the economic downturn with fewer total employees.
Common Measures of Labor Market Performance
A common way to measure how the job market is doing is to count the number of people employed. Payroll employment for April 2021 remained 8.2 million below the February 2020 level, suggesting that the labor market recovery is far from complete. Another way is to count the hours worked. As of April 2021, total hours worked remained approximately 4% below their pre-pandemic level.
Another consideration when looking at the number of jobs is that labor force participation has been on a downward trend since 2000. Relative to a simple trend line drawn from 2000 to the present, the labor force participation rate was above trend towards the end of the pre-pandemic. expansion, but now it is back in the trend, as shown in this graphic of FRED. During the pandemic, people who have dropped out of the workforce include some near-retirement workers who may have decided to move on and retire. These workers, especially those who benefited from increases in the stock market and real estate wealth, are less likely to return to the job market once the pandemic ends.
Given the long-term downward trend in labor force participation combined with retirees who have left the labor force and are unlikely to re-enter it, it is not clear that we should expect labor force participation, and therefore employment, return to pre-pandemic levels. .
Alternative measures of labor market performance
While the workforce is still lower than it was before the pandemic by some measures, anecdotal reports from companies suggest that hiring workers is difficult in the current environment. How can we reconcile these two observations? Additional measures of labor market performance can help provide a more comprehensive read of the state of the labor market than simply looking at the number of jobs or hours worked.
One measure of the tightness of the labor market used in the academic literature is the ratio of officially unemployed workers to job offers. This ratio is close to a record low. In March, it was 1.2, which is lower than during the pre-recession expansion of 2007-2009, but not as low as during the last few years of the pre-pandemic expansion, when it was below 1. However, the latter relationship suggests a very tight labor market, which would be consistent with anecdotal reports that it is difficult to hire workers.
It is also useful to examine broader measures of labor market performance, such as indicators that take multiple aspects into account. The activity level gauge for the Federal Reserve Bank of Kansas City, for example, suggests that current labor market conditions are markedly better than those that followed the 2007-09 recession.
Alternative measures of labor market performance help reconcile the anecdotal reports we hear from companies with what we see from more traditional labor market indicators.
As the pandemic subsides, more schools reopen to in-person instruction, and pandemic-related assistance for furloughed workers comes to an end, more people will want and be able to take jobs. The number of unemployed workers per vacancy suggests that many of these workers should be able to find a job, which is what I expect to happen in the coming quarters.
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