The two things any observer would remove from a recent media report on the US economy are today’s high inflation and low unemployment. GDP has been growing since it collapsed in 2020 due to an epidemic lockdown, though not very strongly. Unemployment always rises in the recession, often taking up to two years for the recession to return to its previous level. A recession is considered when output starts to rise again, but above normal unemployment usually lasts for a year or two. The COVID-19 recession was a fairly exceptional event, and its uniqueness and severity can only be appreciated by looking at its impact on employment and the labor market.
Figure 1 shows the total number of people employed in the United States from 2000 to 2022, excluding farmers and agricultural workers. This series is indicated by the gray bar, at or near the beginning of each recession. After the 2001 tech-bubble recession and the 2007-2009 Great Recession, total non-agricultural employment continued to decline even after these recessions officially ended, beginning to rise again many months after each recession ended.
The 2020 Covid-19 recession looks dramatically different – the recession was much shorter, and job losses were much higher. The COVID-19 recession has lost almost three times as many jobs as the chronic recession. The two savings favor were the brevity of the Covid-19 recession and the early onset of labor market recovery, compared to the normal, more general recession. By March 2022, employment had almost returned to pre-epidemic levels. Compared to the recovery from the first two recessions, the COVID-19 recession has given the labor market much more to recover from, and the recovery has been even faster, at least so far.
Figure 1 Total non-agricultural employment 2000-2022
Monetary policymakers have kept interest rates very low for long periods of time, giving priority to the economy in a recession. This artificially inexpensive credit, and the sheer amount of it, enables companies to grow their operations in a more optimistic way. This excessive expansion creates additional demand for labor, reducing unemployment. When a normal recession hits, markets adjust to the volatile expansion of firms. Some firms realized that they were too optimistic about the demand for their product or the cost of producing it. They respond by reducing productivity and retrenching workers, increasing unemployment. It initiates a necessary retrenchment process that spreads throughout the economy as newly laid-off workers lose their income, and consequently reduce consumption costs, further cooling the economy in a vicious cycle. Farms need to stop sustainable production, and take stock of their newly-published economic realities and start new production plans that will be more sustainable and realistic. It is the foundation of sustainable economic growth.
During the recovery from the recession, pre-employment GDP increases because firms initially increase output by making more already employed workers more intensive, perhaps with a few more hours or more overtime. As the recovery continues, the demand for output eventually increases enough that companies see the need to hire more workers to meet their growing demand. Figure 1, US non-agricultural employment, shows a strong trend over time as both the population and the economy have grown in the long run. The recession can sometimes be thought of as a traffic jam, probably due to the much-needed but poorly-planned and inconvenient road repairs. These are temporary disruptions to economic growth, where declining GDP is accompanied by rising unemployment; That is, by reducing employment. If this employment series is extended before 2000, the long-term trend will be more pronounced.
In this case the long-term trend can be removed by dividing the total employment by a related series with a similar trend of the population. Figure 2 shows the employment-population ratio from 2000 to 2022. It is now divided by the ratio of all working people, including agriculture, to the total adult population. This ratio more clearly shows the destructive, long-term effects of each of the three recessions in the time covered. Figure 2 shows that this ratio has partially recovered from the COVID-19 recession, but it still has a way to reach its pre-recession value – it gives a clear picture of how far we need to go from Figure 1. If we extend this series before 2000, we will see that the proportion has been steadily increasing since 1960-1980, primarily because of the increasing number of women joining the labor force during that period, reaching about 70 percent by 1985, but then below 65 percent. Went down. The turn of the century. During each recession the ratio falls sharply to varying degrees and then gradually increases as the economy recovers.
Note that the employment-population ratio peaked about a year before the 2001 recession. It fell even before the official start of the recession, it continued for almost two years after the official end of the recession. The 2001 tech-bubble recession ratio dropped to about 65 to 62 percent, and the recovery that led to the Great Depression didn’t really recover much, by the end of 2006 it had risen to about 63 percent. The fact that the ratio has never fully recovered indicates that the recession of 2001 brought about a lasting structural change in the economy. During this time the technology sector continues to grow, although many companies outsource technology employment abroad. Finance, construction and real estate development have also increased. US manufacturing became increasingly automated, creating increasing value for the total output produced, but not necessarily adding labor.
Similarly, with the Great Recession of 2007-2009, the ratio peaked almost a year before the recession officially started, and continued to decline until 2010. The proportion has not really increased or recovered, reaching about 57-58 percent lower plateau since 2010-2014. After that the recovery was very slow. While the economy was gaining jobs during the recovery, the U.S. population grew almost rapidly, keeping the population-to-employment ratio at a 50-year low until the epidemic hit.
Figure 2 U.S. employment-population ratio 2000-2022
The COVID-19 recession has brought this ratio down to about 50 percent, but fortunately it has recovered quickly. Employment fell so dramatically in 2020 due to the drastic emergency lockdown of so-called nonprofit businesses, which is disproportionately affecting the transport, hospitality, tourism, entertainment and restaurant sectors. Although government stimulus and relief funds reduced the financial impact of the lockdown, they were poorly managed. All households received incentive payments that were not tested, so households with uninterrupted incomes received the same compensation as those who lost their jobs during the crisis.
Firms were eligible to apply for stimulus and paycheck protection grants, similarly called loans but never intended to be repaid. As a result, many businesses have had to close completely and never reopen. Some restaurants have switched to exclusive takeout or delivery models, which enables them to reduce their waiting staff and, in many cases, increase their profit margins, even reducing sales. The impact of the lockdown policy has been disproportionately borne by poor families, falling on Blue Collar workers who were more likely to be laid off completely. In most cases, white collar workers work from home without any loss of income. This burden also falls disproportionately on minorities and disadvantaged groups, further widening the existing income inequality.
The epidemic also provided business opportunities for vigilant entrepreneurs, as demand for sterilization services, food and product supplies, teleconferencing services, etc., increased dramatically. Zoom was a relatively little-known, little-used video meeting software, the use of which exploded. With the recovery progress, many companies are now having difficulty finding staff for recruitment This points to the obvious need for employers to start paying higher wages. Why might companies be reluctant to do so?
The standard labor market theory is that the market is clean when supply and demand are equal. The labor deficit indicates that the existing wages are too low to clear the market. One possible explanation for why companies can’t pay workers more than the marginal revenue product and why companies don’t pay enough is that their workers’ valuation is very handicapped due to the uncertainty of future market conditions – companies think inflation will be brought under control, or continue, And if so, for how long; Whether the weak recovery will continue, or be derailed by another recession; And whether Covid returns with any intensity, and if so, what restrictions will be imposed?
Recessions usually occur after long-term financial expansion has allowed excessive investment in low-productivity activities. This comes to mind when the complex interrelationships between the productive activities of the economy become so complex, conflicting and fragile that many cannot be accomplished successfully. Although it has been more severe than any recession since the Great Depression, the Covid-19 recession has done little to address the underlying structural problems of the economy. This is still most clearly seen in the booming real estate market. The past several recessions, even going far beyond 2000, have caused long-term damage to the US economy, especially the labor market, and so far the COVID-19 recession has been no exception.