Hiring has weakened for six straight months. Nearly 10 million jobs remain lost since the coronavirus struck. And this week, the Congressional Budget Office forecast that employment won’t regain its pre-pandemic level until 2024.
And yet a hopeful view is gaining steam that, as vaccinations reach a critical mass in the United States, perhaps around midyear, the economy and the job market will strengthen much faster than they did after previous recessions.
“I am not often optimistic,” said Heidi Shierholz, an economist at the liberal Economic Policy Institute. “But I am optimistic now.”
The brighter outlook rests on three premises. The first is that household finances, as a whole, are much healthier now, with less debt and more savings, than after the Great Recession a decade ago. Once the virus is contained, that cushion of cash could drive pent-up consumer spending. That spending, in turn, would support faster hiring.
The second premise is that the pandemic recession has yet to inflict the type of structural damage to higher-paying sectors of the job market that the Great Recession did. In 2008-2009, 4 million construction and manufacturing jobs—many of them highly skilled, well-paying positions—were lost and never fully recovered. Both those sectors still have fewer jobs than they did in late 2007.
And the third dynamic is that the Federal Reserve and the Treasury Department appear more intent on spurring job growth and less concerned about igniting inflation or increasing budget deficits than they were a decade ago. Most policymakers and economists now believe one reason the last recovery was so slow and prolonged was that the government provided too little stimulus.
For now, the economy’s rebound has been highly unequal. The unemployment rate for the poorest one-quarter of Americans is roughly four times the rate of the richest one-quarter, Lael Brainard, a Fed governor, said in a recent speech. People of color have been disproportionately hurt by the job losses. And in December, the unemployment rate for women rose for the first time since April, even as it it fell for men. In addition, many women, especially working mothers, have had to leave the workforce to care for children and aren’t even counted as unemployed.
Yet one consequence of that inequality is that tens of millions of Americans, especially higher-income people, have managed to keep their jobs while working from home. Having spent less, they have built up savings. Once the virus is controlled, many of them will be poised to spend and boost the economy.
“A lot of people have been hit very hard, but there’s also a huge swath that hasn’t been hit,” said Shierholz of the Economic Policy Institute. “They’ll be able to get right out and engage in normal economic activity. That is very different from the last recession.”
Consider that the value of Americans’ homes shrank by $5.6 trillion during and after the Great Recession, a grueling decline that dragged on until 2012 and left millions poorer. That huge loss of one-quarter of home equity—for most Americans, their main source of wealth—put a brake on consumer spending.
This time, despite a deep recession, home values for the nation as a whole have actually risen $1.3 trillion, or about 4%. The stock market has also soared since April, benefiting mainly a narrow affluent slice of the population but also boosting retirement accounts. On top of that, household savings have doubled since the pandemic, to $2.3 trillion.
The prospect of a robust rebound in consumer spending has led economists to upgrade their outlooks. Goldman Sachs forecasts 6.6% growth this year, which would be the fastest since the 1980s. It assumes that roughly $1 trillion, out of President Joe Biden’s proposed $1.9 trillion financial aid proposal, becomes law.
Unemployment would fall from the current 6.7% to to 4.5% by year’s end, Goldman projects. By contrast, after the Great Recession, unemployment exceeded 8% until August 2012—three years after the recession had officially ended. (The CBO’s dimmer outlook assumes that no further government support will be approved.)
There is less certainty about how badly the job market has been damaged by permanent losses at restaurants, airlines, hotels and related sectors. Economists refer to such losses as “scarring,” and it can burden the unemployed for years. They often have to learn entirely new skills and search for work without the benefit of the social networks they developed in their old jobs. A significant portion of Americans who were permanently laid off after the Great Recession ended up taking lower-paying jobs with fewer benefits.
Federal Reserve Chairman Jerome Powell has spotlighted this potential threat as one the Fed is monitoring. Asked at a news conference last week whether widespread scarring has occurred this time, Powell said the “jury is out.” But he added: “We haven’t seen as much of it as we feared. And that’s a good thing.”
At the same time, he warned that some portion of the jobless won’t return to their old jobs.
“It’s not easy to change careers completely mid-career,” Powell noted. “That just again stresses the urgency that we feel and others feel at fully defeating the pandemic.”
During the last recession, construction jobs disappeared because builders had significantly overbuilt new homes. Even as the economy recovered, fewer construction workers were needed. Manufacturing shed jobs because of low-cost international competition and automation.
This time, while restaurants, hotels, bars and entertainment venues have shed millions of jobs, it’s not yet clear how many have vanished because of permanent changes. Still, some analysts worry that the proportion of the unemployed who will have no job to return to may be substantial.
“A bunch of jobs won’t come back,” said David Autor, a labor economist at MIT.
Autor’s research has found that, in recent decades, the U.S. economy has suffered a “hollowing out” of middle-class jobs, especially in manufacturing and office work, as routine jobs are increasingly performed by machines or software. Now, he worries that major sources of lower-paid jobs in many cities—restaurants, coffee shops, gyms, dry cleaning, hotels—will need fewer employees as working from home enables more Americans to leave big cities and business travel never fully recovers.
So far, at least, research suggests that the job market’s scarring has been limited. Eliza Forsythe, a labor economist at the University of Illinois at Urbana-Champaign, and three colleagues who studied unemployed workers and online job openings found that mismatch—the difference between the skills that employers want and the skills job-seekers have—has actually declined during the pandemic.
That’s mainly because companies have been slow to post openings for higher-skilled, higher-paying jobs. Even though more professionals are working from home, their employers aren’t looking to increase their hiring of remote workers, Forsythe said.
The data also suggests that, this time, companies aren’t automating large numbers of low- or middle-skilled jobs.
“The people looking for jobs do have the skills employers are looking for,” Forsythe said. “It’s just that employers aren’t looking for enough of them right now.”
Threats from automation can be exaggerated. After the last recession, worries abounded that self-driving technology would eliminate huge numbers of taxi- and truck-driving jobs. And the use of robots in e-commerce warehouses has long sparked concerns about job losses in that sector. Yet warehousing and delivery jobs have accelerated since the recession began and have surpassed their pre-pandemic levels.
“We won’t have robot waiters when we go back to eat out,” Forsythe added. “Those people will be hired back.”
No matter the depth of scarring in the job market, policymakers and economists stress that more robust financial support from Congress and the Fed can help the long-term unemployed find work. Businesses have more incentive to train new workers if the economy is thriving. Workers can afford to take classes if they aren’t worried about being evicted from their homes. If Congress were to enact far less stimulus than the Biden administration is proposing, the job market might not rebound as vigorously as economists now expect.
“I think there is a consensus that, without further action, we risk a longer, more painful recession now, and longer-term scarring of the economy later,” Treasury Secretary Janet Yellen said at her Senate confirmation hearing last month.
That consensus marks a significant change from the aftermath of the last recession, said Adam Ozimek, chief economist at Upwork.
A decade ago, millions of Americans had stopped looking for work. Economists and policymakers assumed many would never return. The loss of many blue collar jobs, even as hiring in software, information technology and the health care industries grew, was seen as creating so-called skills gaps that government stimulus could do little to address.
“There was an excess focus on concepts like the skills gap and structural change that were largely misplaced even then,” Ozimek said. “People have learned from that.”
Indeed, Powell has acknowledged that the Fed has learned those lessons. He oversaw a shift in the Fed’s policy framework last year under which it plans to keep interest rates ultra-low even as the economy fully recovers. The Fed will no longer raise borrowing costs in anticipation of high inflation; rather, it will wait for annual inflation to exceed 2% for some time before it considers a rate hike.
“I’m much more worried about falling short of a complete recovery and losing people’s careers and lives that they built because they don’t get back to work in time,” Powell said last week. “I’m more concerned about that than about the possibility—which exists—of higher inflation.”