The U.S. labor market is going through extraordinary times: historically fast job growth, severe labor shortages despite a still-high unemployment rate, and the epic shift to remote work. As the fallout from Covid-19 continues, here are the most important U.S. job market trends.
The shift to remote work
1. Remote work is here to stay. Seventeen months after the beginning of the pandemic, most employers believe that remote work does not negatively affect workers’ productivity, and perhaps even improves it. As a result, a growing share of firms expects to permanently shift to remote work models. perhaps the biggest legacy of Covid-19. There has also been a large increase since before the pandemic in the share of office-job ads that mention remote work. This has been especially noticeable in computer-related and finance and insurance occupations. The increase also occurred in office support and clerical occupations that were rarely done remotely before the pandemic.
2. Employers are geographically expanding their potential employee pools. The shift to remote work allows employers to hire workers in cheaper labor markets and save on labor costs. In 2018, less than 40 percent of Silicon Valley tech company jobs ads were posted outside of that area. Now it is about two thirds. Most of the increase occurred during the pandemic, around the shift to remote work.
The employment outlook
3. Job growth is historically fast, but employment is far from recovered. Job growth surged in 2021, especially during June and July, as in-services industries continued to re-open. The unusually strong growth in recent months is constrained to industries such as leisure and hospitality, mining, personal care, and education (both public and private). Most other sectors have grown in the past six months at roughly their prepandemic rates. As a result, the number of jobs in July was still 5.7 million below February 2020 levels. Compared to most other advanced economies, the economic recovery from the pandemic was much stronger in the US.
4. Some industries will not fully recover this year – or in 2022. While there is a lot of uncertainty about permanent trends in automation and consumer tastes, several industries are unlikely to recover to prepandemic employment levels before 2023. These industries include, nonresidential construction, parts of retail trade, business- and work-related transportation, commercial banking, business and facilities-support services and nursing and residential care. The rapid spread of the virus in other countries suggests that international tourism will be very slow to recover.
5. The rapid increase in the number infections had no impact on July’s job numbers. Those figures were gathered the week of July 12, before the full impact of the delta variant surge. Going forward we do expect the new wave of infections to negatively impact economic activity in in-person services. We expect job growth to slightly slow as a result, but to remain relatively strong.
6. Older people staying home will slow employment recovery. As older Americans, more vulnerable to COVID-19, may experience a longer and more isolated period of social distancing, they are likely to cut back on spending on in-person services more than younger people. In several consumption categories, such as travel, lodging and restaurants, older households are responsible for a disproportionately high share of spending. Full job-recovery may take longer in these industries.
7. Severe labor shortages will persist despite high unemployment. Labor markets are extremely tight because of the unusual dynamics of the pandemic. The combination of a demand surge and stagnant labor supply created historic recruiting difficulties from April through July. The share of employers with unfilled positions was the highest ever, according to July’s National Federation of Independent Business survey. At the same time, the share of workers voluntarily quitting their jobs, and the time to fill open positions, are also elevated. Recruiting and retention difficulties are more pronounced in low-paid jobs, especially in blue-collar and manual services occupations.
8. Many potential workers are on the sidelines. Despite the very tight labor market, labor force participation is still well below prepandemic rates. Most noticeably, the labor force participation rate in the 65+ age group is 2.5 percentage points below its prepandemic level, erasing a decade of continuous improvement before COVID-19.
9. Employers are reacting. Data from online job ads show that because of severe labor shortages, employers have downskilled requirements in job postings, and are offering more sign-on bonuses, higher starting salaries and more on-the-job training.
10. Some pandemic-related supply constraints will loosen in the fourth quarter. Elevated federal unemployment benefits are gradually expiring and will fully expire by September. Lower unemployment benefits are likely to bring back many workers to the labor market. Women of color are still disproportionally out of work. If schools return to normal in-person attendance, more women will rejoin the labor force. This may result in some easing in labor shortages.
11. A shrinking working-age population is limiting the labor supply. In the past decade, the growth rate of the number of working-age people has been gradually declining. In 2020, for the first time in U.S. history, the figure itself declined. But the overall narrative about the slowing growth rate in the working-age population masks two opposing educational trends. The number of working-age people with a bachelor’s degree is solidly and uninterruptedly increasing by about 2 percent annually. On the flip side, the number of workers without bachelor’s degrees, who are willing to take blue collar and manual services jobs, is shrinking. This will increase the likelihood of a labor shortage among blue-collar and manual services occupations for this coming decade.
12. Automation and productivity may surge. After a decade of historically-slow labor productivity growth, one must be cautious about predicting the opposite trend. But the events of 2020 and 2021 may indeed fuel stronger automation and other cost-savings actions from employers. First, after massive layoffs during the early months of the pandemic, some have learned to operate with fewer workers by using more automation and other process improvements. 2021’s severe labor shortage and accelerating wages may have incentivized other employers to do the same. Finally, the accelerated digital transformation of both business and consumer activities makes it easier to eliminate routine jobs.
Wage growth and inflation
13. Wage growth is the fastest in 20 years. Much of the wage acceleration comes from blue collar and manual services occupations. Between March and July 2021, average hourly earnings increased at an annual rate of 17 percent in the leisure and hospitality sector and by 14.7 percent in transportation and warehousing. Some service-related companies set up their own minimum wage at $15 per hour. Wage growth for management and professional occupations remains below 3 percent.
14. Rapid new-hire wage growth could compress salaries. When the wage premium for experience shrinks or even turns negative, more-experienced workers feel that their pay advantage is no longer significant. Such salary compression can lead to higher labor turnover as these workers can often find new jobs at higher wages in a tight labor market.
15. Inflation is making a comeback. After being a non-issue in wage determination for several decades, strong inflation in 2021, and perhaps 2022, is likely to push wages higher. In a more extreme, and less likely, scenario, high inflation and severe labor shortages could lead to a wage-price spiral, where higher prices and wages feed each other, leading to faster growth in both.
U.S. regional variation
16. The coasts are further behind in job recovery. Pandemic job losses were much bigger in the Northeast and Pacific regions, where the spread of the virus occurred earlier, and state-mandated social distancing measures were more restrictive. Job losses were larger in vacation destinations, where hard-hit industries such as travel, lodging, and dining comprise a large share of the economy.
17. The donut effect. Because of the pandemic, fewer people are going into the office and spending money in city centers, while more people have moved to cheaper housing markets. Within large U.S. cities, households, businesses and real estate demand have moved from dense central business districts toward lower density suburban zip codes.
Source: Gad Levanon via Forbes.com