Key Themes and Takeaways
• The US economy recovered employment in every month from April to November 2020; but the pace of recovery slowed to near zero in the fourth quarter. The total number of unemployed increased modestly from November to December.
• At year-end 2020, four out of five lost jobs are concentrated in service sectors characterized by high physical proximity and low essentiality; two out of five lost jobs are in Leisure and Hospitality.
• Risks going into 2021 include an increasing share of permanent layoffs, economic distress among low-wage earners and small businesses, and a massive virus resurgence.
• US employment, and hence total workers compensation premium, is likely to recover more slowly during 2021 than during the summer and fall of 2020.
• The federal stimulus bill passed in late December reinstates several programs—direct payments to individuals, supplementary unemployment benefits, and small business loans—that were in the March stimulus package but expired last fall.
• The first coronavirus vaccines began distribution in December. Comprehensive vaccination of the US population faces difficult challenges and may take into the second half of 2021.
• The post-COVID economy is likely to see employment shifts across industries; intensification of existing trends toward digitization, automation, contract work arrangements, and remote work; and diffusion of economic activity away from city centers to suburban locales.

US Employment During the Coronavirus Recession

As in previous issues of the Quarterly Economics Briefing (QEB), a key focus of this report is job losses (and occasionally gains) during the coronavirus recession from spring 2020 to the present. We measure changes in the number of jobs via employment gaps: the employment gap for a given economic sector in a given month is the percentage difference in the sector’s actual employment relative to its expected employment in that month, including seasonal variations. A related concept, the employment gap contribution, is the percentage of the national employment gap contributed by an economic sector. The main advantage of the employment gap concept is that it allows quarterly job losses (or gains) to be expressed as a change in actual employment rather than as a difference in seasonally adjusted annual run rates.For a more detailed explanation of employment gaps and contributions, see “As US Employment Recovers From COVID-19, Services and States Are Key,” Quarterly Economics Briefing, October 30, 2020.

The Pace of Job Recovery Has Slowed. From a trough of –16% at the onset of the coronavirus pandemic in April, the national employment gap has narrowed in the following months through December. However, the pace of job recovery slowed in July and came to a near halt in October. December employment was 6.4% below its expected level, a shortfall of 8.3 million jobs nationwide.

With coronavirus infections spiking across the country from October through year-end, new unemployment claims rose in December to their highest levels in several months.

More Unemployment is From Permanent Layoffs. The number of unemployed persons in the United States peaked in April at 22.5 million, about one out of six in the labor force. Unemployment had fallen in every month since then to 10.3 million in November, a reduction by more than half. But the decline stalled in October, and the most recent data for December show an uptick to 10.4 million unemployed.

Job recoveries during spring and summer were driven by recalls of workers on temporary layoffs. As their numbers declined and as companies began to announce that workers on temporary layoff would not be rehired, the share of permanent layoffs in total unemployment has increased. From September to November, the total number of unemployed dropped by 2 million, but the number of unemployed via permanent layoffs stayed nearly unchanged. December’s 10.4 million unemployed is nearly twice the total from Fourth Quarter 2019; and 3.3 million unemployed via permanent layoffs is close to three times the year-ago number.

The increasing share of workers unemployed by reason of permanent layoffs suggests that the future pace of employment recovery will be slower than it has been so far. Workers permanently laid off from their jobs are more likely than workers temporarily laid off to experience extended unemployment spells. They may also need to relocate or change occupations, especially those leaving hard-hit sectors, like Leisure and Hospitality, where employment may stay depressed for a long time.

Service Sectors Are Hardest Hit. The table below presents actual and expected national employment levels in December, as well as employment gaps and contributions from different economic sectors. Negative employment gaps indicate employment shortfalls relative to seasonally expected employment levels for the month.

As in every month since April, the Big Four service sectors—Leisure and Hospitality; Retail Trade; Professional, Business, and Other Services; and Education and Health Services—account for about four out of five lost jobs. In general, the Big Four service sectors are characterized by high physical proximity, low essentiality, or both. Physical proximity refers to the degree of interpersonal contact among workers or between workers and customers, and essentiality refers to the degree to which a service is non-discretionary and cannot be postponed.“Job Losses and Physical Proximity,” Quarterly Economics Briefing, NCCI, June 19, 2020.

• The Leisure and Hospitality sector continues be hardest hit, with two out of five lost jobs coming from this sector alone. Restaurants lost employment from October to December following six consecutive months of employment increases. One-half of restaurant operators expect staffing levels to decline from December through February.“The restaurant industry employment recovery stalled in November,” National Restaurant Association, December 4, 2020.

• Retail Trade gained jobs from October to December, but in line with the seasonally expected increase; its employment gap remains below the national average.

• Excluding Retail Trade, the three remaining service sectors in the Big Four accounted for 77% of the national employment gap in December.

• December employment gaps in Construction and Manufacturing were around 3% to 4%. The Transport/Warehousing/Utilities sector gained jobs and is close to recovering its pre-pandemic employment trajectory. Employment growth in Transport and Warehousing reflects the expansion of digital trade, and includes recent hiring surges at FedEx, UPS, and Amazon.“Amazon, FedEx, UPS Boost US Warehouse Jobs Amid Online Boom,” Transport Topics, October 27, 2020.

Perils: Economic Distress and a New Wave of Infections

Employment recovery stalled during the fourth quarter, including a reversal in December following a massive pandemic resurgence. As the coronavirus recession persists, stresses for households and businesses have increased. This section summarizes key risk factors going into 2021.

Low-Income Households Are Under Stress. Financial stress on households affected by the coronavirus recession has gradually ratcheted up with the passage of time, intensified by the expiration in August and September of direct cash payments and federally augmented unemployment insurance benefits under stimulus and relief programs enacted in March. The recession has most strongly reduced employment in service jobs that involve high interpersonal proximity and cannot be performed remotely. These jobs are performed disproportionately by low-wage workers, including younger and less-skilled workers. As a result, employment losses during the coronavirus pandemic have fallen most severely on lower income households, while upper income households have been relatively unaffected.

Figure 3 groups economic sectors by average annual earnings per worker and indicates the share of the national employment gap for November contributed by each.Earnings groups include two-digit NAIC sectors for which average annual earnings per worker fall within a $20,000 range. The lowest group includes sectors with average annual earnings between$20,000 and $40,000; the next group between$40,000 and $60,000, and so on to a ceiling of$100,000 average annual earnings for the top group. Workers in the lowest group, comprising Retail Trade and the two subsectors within Leisure and Hospitality, earned only $25 thousand per year on average but accounted for close to half of the job shortfall. Subsectors which make up the Big Four service sectors are almost entirely concentrated in the lowest two earnings groups (with the exception of Professional and Technical Services). The pattern of job losses has affected average wage statistics. During Third Quarter 2020, average weekly employment earnings increased by 5.6% compared to the previous year, but not because of wage growth. Rather, the anomaly of rising average weekly wages is a mix effect due to employment losses being concentrated in low-wage jobs.“Average Wages During the Coronavirus Pandemic,” Quarterly Economics Briefing, October 30, 2020. A US Census survey for mid-December estimates that 50% of the US adult population experienced a loss of household employment income (either themselves or a family member) since the beginning of the pandemic in March 2020, and that 31% expect a loss of household employment income through mid-January 2021. For respondents from households with annual incomes less than$75,000, these percentages increase to 55% and 37%, respectively.“Household Pulse Survey: December 9‒December 21,” US Census Bureau.

Financial distress from prolonged earnings losses risks severe consequences to households. The mid-December Census survey estimates that 43 million Americans found it “very difficult” to pay usual household expenses during the survey week, and over 20 million were not current in their rent or mortgage payments. Moody’s Analytics estimates that more than 11 million households may be more than three months behind in rent, on average by $6,000 per household.“US Renters Could Owe 70 Billion,” Bloomberg, December 10, 2020. On the other hand, for households less severely impacted by earnings losses, and especially at higher income levels, reduced discretionary consumption during the pandemic has translated into increased household savings and lower debt levels. For the United States overall, savings rates rose dramatically from April through November, and credit card debt in December fell to its lowest level in three years.Household savings are discussed in the next section; see also “Despite COVID, Credit Card Debt Sinks to Lowest Level Since 2017,” Bankrate, December 1, 2020. Increased household savings balances and lower debt levels may help to spur demand recovery in 2021. Small Businesses Are Under Stress. Small businesses contribute a big share of US jobs. One-quarter of US workers are employed at firms with fewer than 50 employees, one-half at firms with fewer than 500 employees. Small businesses also contribute to workers compensation premium in greater proportion relative to their employment because they are less likely than large businesses to self-insure and more likely to purchase non-deductible policies. The coronavirus recession has been hard on small businesses, especially those in service sectors most impacted by reduced demand. A US Census survey from early December found that the 31% of US small businesses had experienced a “large negative” pandemic effect; for small businesses in various Big Four service sectors, this percentage ranged from 30% to nearly 70%.“Small Business Pulse Survey: December 7–December 13,” US Census Bureau. Small businesses often have tight cash operating margins, limited cash reserves, and poor credit access.See “Cash is King: Flows, Balances, and Buffer Days,” JP Morgan Credit Institute, September 2016; and “Small Business Credit Survey,” 12 Federal Reserve Banks, April 2020. As a result, they are at greater risk of permanent closure during prolonged business slowdowns than larger businesses with stronger cash reserves and better ability to borrow. For many small businesses, the greatest concern during the coronavirus recession has simply been staying afloat from month to month. The December US Census survey found that the most prevalent needs of small businesses looking forward to the first half of 2021 are to: • Increase marketing or sales (32% of all respondents) • Obtain financial assistance or additional capital (28% of all respondents; 52% of respondents in accommodation and food services). Access to credit is a particular problem for small businesses, many of which lack long-standing banking relationships and have difficulty establishing creditworthiness. Consolidation in the banking industry has reduced the number of small banks, traditionally a major source of small business lending.“Small Businesses, Hit Hard by Pandemic, Are Being Starved of Credit,” The Wall Street Journal, December 20, 2020. Small businesses perceive critical needs differently than large businesses. Only 12% to 14% of small businesses identified short-term needs to improve supply chains, develop online sales channels, or improve workplace safety—all among priorities cited in surveys of large businesses. However, access to credit is not among major concerns cited by executives at large businesses.McKinsey and Gartner surveys of large businesses are discussed in the section on Prospects: Looking Forward to the Post-COVID Economy. COVID-19 Is Surging. A national surge in coronavirus infections began in October 2020 and intensified during November and December. Total cases in the United States doubled from 1.9 million in October to 4.4 million in November; and December’s new case total hit 6.3 million. Many states extended restrictions on business activity and some imposed new restrictions or curfews in November and December.See “Coronavirus Restrictions and Mask Mandates for All 50 States,” The New York Times, December 18, 2020 From November to December, Leisure and Hospitality lost nearly half a million jobs; its employment gap widened from -20.1% to -23.1%. This offset employment gains in almost every other sector and left the national employment gap virtually unchanged. Comparing the Federal Stimulus Packages From March and December The March Stimulus Package. Among a plethora of pandemic-related programs, the federal stimulus package enacted in March 2020 counteracted lost employment income during the initial phase of the coronavirus recession in spring and summer. Among other provisions, the March stimulus package provided direct income transfers to individuals via two main channels: one-time economic impact payments and federal supplements to state unemployment insurance benefits.Federally guaranteed payroll protection loans to businesses, another part of the March stimulus package, supported employment but did not provide direct income transfers to individuals. For several months, the scale of pandemic-related income transfers was massive. In April, the most severe month of the recession with over 22 million people—about one of six workers—laid off or furloughed, the sum of economic impact payments and unemployment insurance exceeded transfers for all nonpandemic government transfer programs, including Social Security, Medicare, and Medicaid. For comparison, unemployment insurance payments contributed less than 2% of government transfers during the First Quarter 2020 and economic impact payments did not exist. For the next three months, from May through July, pandemic-related transfer payments—mostly unemployment insurance—stayed high, then dwindled later in the year. The massive scale of pandemic-related income support programs in the March stimulus package supported personal income levels despite losses in employment income due to the coronavirus recession. Aggregated nationally, personal disposable income in April—the worst month for job losses but also the month with the highest rate of transfer payments—was 14% higher than personal disposable income in First Quarter 2020, and has remained above pre-pandemic levels through November, the latest month for which data are available. For households that suffered severe earnings losses during the pandemic, income transfers supported as-if normal consumption levels; for other households, transfer payments flowed more into savings than consumption. Nationally, the savings rate for the eight months from April through November averaged 19% of disposable income, much higher than the 7% savings rate for 2019. Under the March stimulus package, economic impact payments were a one-time measure; and federal supplements to state unemployment insurance benefits as well as the Paycheck Protection Program (PPP) expired in August and September. The December Stimulus Package. A new federal stimulus bill enacted in late December reinstates some expired programs and extends certain other relief measures that had been scheduled to expire otherwise at year-end 2020 or early in 2021. • Direct Payments to Individuals. The December stimulus package provides for a one-time payment of$600 to individuals who earned less than $75,000 in 2019, with higher payments to qualifying households and families with dependent children. An earlier version of this program under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of March 2020 provided a single payment of up to$1,200 per individual last spring.

• Supplementary Federal Unemployment Payments. Supplementary unemployment payments of $600 per week under the CARES Act expired at the end of July; they were temporarily extended to early August at a reduced level of$300 per week and terminated thereafter. The December stimulus package reinstates the federal top-off to state unemployment benefits at $300 per week for 11 weeks, until mid-March 2021. • Extended Eligibility and Benefit Periods for Unemployment Insurance. Another provision of the March CARES Act extended the duration of unemployment benefits. The federally-funded extension period began when a recipient’s state-funded unemployment insurance payments were exhausted.Unemployment insurance eligibility and benefits differ across states. See “Policy Basics: How Many Weeks of Unemployment Compensation are Available?” Center on Budget and Policy Priorities, December 14, 2020. Also, workers who lost jobs for reasons related to the coronavirus pandemic but who do not quality for unemployment insurance in their state may receive federally-funded unemployment benefits. CARES Act funding to extend the duration and eligibility of unemployment insurance had been set to expire in the last week of 2020 but was extended by the December stimulus package for 11 weeks until mid-March 2021. • Paycheck Protection Loans to Small Businesses. The December stimulus package revives the PPP, the original version of which expired in August 2020. The new PPP earmarks$285 billion for federally guaranteed loans to small businesses. But it also contains changes to the original program including limitation to businesses with 300 or fewer employees, expanded payroll coverage for accommodation and food-service businesses, and exclusion of publicly traded companies from eligibility.

• Other Provisions. The Families First Coronavirus Response Act (FFCRA) of March 2020 mandated two weeks of paid leave for COVID-related illness, and up to 12 weeks of leave at two-thirds pay to care for family members. FFCRA-mandated benefits are important for workers at mostly smaller firms who did not already have sick leave or medical leave. The December stimulus bill extends these provisions through March 2021 but makes paid leave voluntary rather than mandatory for employers.

A national eviction moratorium for renters, issued by the Centers for Disease Control and Prevention (CDC) in September, was scheduled to expire at year-end 2020. A new moratorium issued by the Department of Housing and Urban Development (HUD) runs until the end of February 2021. The HUD moratorium on rental evictions also protects homeowners from mortgage foreclosure.

What Can We Expect from the New Coronavirus Vaccines?

President-elect Joe Biden announced that his administration will vaccinate at least 100 million people in the first 100 days of his presidency. That goal will be challenging, but fully suppressing the spread of coronavirus in the US population will be even more daunting. In this section, we outline key uncertainties that will need to resolve positively in an effective vaccination program:

• Multiplicity of new vaccines and whether they can provide lasting population immunity

• Difficult distribution logistics

• Achieving a high enough coverage rate for virus suppression

• The problem of vaccine hesitancy

Taking account of these difficulties, completion of a nationwide vaccination program is likely to run into the second half of 2021. Even a successful vaccination program that is limited to the United States is unlikely to completely eradicate the coronavirus, but rather may provide a means for controlling the coronavirus in the same way that other vaccines control endemic diseases such as measles and rubella.“How Much Herd Immunity Is Enough?” The New York Times, December 24, 2020. “Vaccines Don’t Mean We’ll See the Last of COVID, Experts Warn” Bloomberg, December 20, 2020. Potentialities and uncertainties about the new coronavirus vaccines, in addition to public policies like the December stimulus package, will be important to determining the pace and extent of economic recovery in 2021.

Several Vaccines, Some Still in Testing. There is not one coronavirus vaccine, but several. To date, the US has reserved doses of different vaccines from six manufacturers.“U.S. Could Face Months of Vaccine Shortages Amid Global Competition,” Politico, December 8, 2020. Four of the six vaccines are still in phase 3 trials. Pfizer’s vaccine was the first to be approved for distribution in the United States in early December; Moderna’s vaccine was approved later in the month. Both the Pfizer and Moderna vaccines require two doses for full effectiveness. Single-dose vaccines by Johnson & Johnson and AstraZeneca are currently in phase 3 trials for which results have not yet been reported. Assuming favorable results, their approvals may come as early as February. Two more vaccines, one by Novavax and another by Sanofi and GlaxoSmithKline, are less advanced. They may be approved in the spring for distribution beginning in April or May. For all of these vaccines, manufacturers’ delivery commitments in 2021 assume that commercial production can be ramped up smoothly. Counting all vaccines, production and delivery of doses already ordered by the US government is likely to take six months or more.

Vaccine Effectiveness. The Pfizer and Moderna vaccines achieved nearly 95% effectiveness in phase 3 testing. However, the criterion for effectiveness in phase 3 trials is specific and limited: a vaccine is counted as effective if it counteracts a confirmed viral infection in a test patient. What is not known from phase 3 trials is how long these vaccines confer immunity to the vaccinated patient, or whether they prevent virus transmission from that patient to others. A more comprehensive notion of vaccine effectiveness depends not only the 95% prevention rate but also on “what can be assumed about the average duration of vaccine protection” with regard to immunity and transmission.“Challenges in creating herd immunity to SARS-CoV-2 infection by mass vaccination,” The Lancet, November 4, 2020.

Population Coverage. Depending on estimated spread rates for the SARS-CoV-2 virus, the percentage of people needing to be immunized in order to achieve population immunity has been variously estimated as anywhere between 60% and 90%.Estimates of coverage thresholds for population immunity vary, but have tended to drift upwards in later studies which assume higher spread rates: 60% to 70% in “Individual variation in susceptibility or exposure to SARS-CoV-2 lowers the herd immunity threshold,” National Institutes of Health, May 21, 2020; 75% to 90% in “Challenges in creating herd immunity to SARS-CoV-2 infection by mass vaccination,” The Lancet, November 4, 2020. Dr. Anthony Fauci recently suggested a population immunity threshold of 75% to 85%, “Fauci Predicts US Could See Signs of Herd Immunity by Late March or Early April,” NPR, December 15, 2020. In recent interviews, Dr. Anthony Fauci, a leading US advisor on infectious diseases, has said that he believes the true coverage range for population immunity will prove to be at the high end of this range, between 70% and 90%.“How Much Herd Immunity is Enough?” The New York Times, December 24, 2020. These are daunting numbers. In 2019, no state achieved a flu vaccination rate above 51% ‒ well below the 70% federally recommended target for flu vaccination coverage.“How Prepared Are States to Vaccinate the Public Against COVID-19? Learning From Influenza and H1N1 Vaccination Programs,” The Commonwealth Fund, December 3, 2020.

Logistical Challenges. The scale and logistical complexity of the coronavirus vaccination campaign is unprecedented in the history of the United States. The Pfizer and Moderna vaccines both require constant refrigeration–the Pfizer vaccine at an ultra-cold –94 degrees Fahrenheit. Operation Warp Speed, the federal program for coordinating vaccine development, is responsible for delivering vaccine doses to the states, but downstream distribution falls to the states themselves as well as to localities and employers. A November survey found that states are struggling to develop plans for storing the new vaccines and distributing them to high-priority populations.“Most States Aren’t Ready to Distribute the Leading COVID-19 Vaccine,” ProPublica, November 10, 2020. Vaccine coverage gaps relating to the “last mile” of the distribution chain are likely to be a particular problem for people living in areas with limited access to medical services and pharmacies, especially low-income urban communities and rural regions.

Vaccine Hesitancy. A September 2020 survey by the Pew Research Center reported that 49% of US adult respondents said they would not get vaccinated if a vaccine to prevent COVID-19 were available.“US Public Now Divided Over Whether to Get COVID-19 Vaccine,” Pew Research Center, September 17, 2020. Since then, vaccine confidence has improved.

A follow-up November survey reported that 39% of respondents would not get vaccinated, and that nearly half of these (18%) would reconsider their decision as others take the vaccine and more information becomes available. However, 21% of surveyed adults said that they would refuse to be vaccinated and are “pretty certain” that more information will not alter that decision. In the same survey, 62% of respondents said that they would be uncomfortable to be among the first recipients of a COVID-19 vaccine.“Intent to Get a COVID-19 Vaccine Rises to 60% as Confidence in Research and Development Process Increases,” Pew Research Center, December 3, 2020.

Prospects: Looking Forward to the Post-COVID Economy

Although it remains unknown how effective the new, first-generation vaccines will be in controlling the coronavirus, it is becoming increasingly clear that the post-COVID economy will look different than the pre-COVID economy. Workers displaced by permanent job losses in the Big Four service sectors will need to find employment in other sectors where jobs are growing. Employment transitions on a large scale will likely result in slower employment recovery during 2021 than to date, and the result will shift employment away from sectors like Leisure and Hospitality to other sectors. In addition, the disproportionate impact of the coronavirus recession on small businesses suggests that the share of workers employed at small businesses is likely to fall while the share employed at large businesses increases.

Pandemic-induced changes in the nature of the work and in relationships between employees and employers are also likely to persist. These changes are likely to involve the acceleration of trends that already existed pre-COVID—including automation, digitization, contract-versus-employee work relationships, and remote work. A shift of business activity from metropolitan centers to surrounding suburbs, intensified by the rise of remote work during pandemic, has the potential to redistribute regional economic relationships and demographics.

Jobs Lost and Jobs Created. Of jobs lost during the coronavirus recession, four out of five are concentrated in the Big Four service sectors. The Leisure and Hospitality sector alone accounts for two out of five lost jobs. What kinds of new jobs will be available for these workers if their old jobs do not come back? Two big issues are the number of new jobs likely to be needed and their requisite skill levels.

As a case study in relative job numbers, consider the Transportation and Warehousing sectors. Job expansion in these two growing sectors provide employment opportunities for workers who have lost jobs elsewhere. However, the Transportation and Warehousing sectors employed 5.9 million workers in total in December 2020; whereas the December employment shortfall in the Big Four service sectors was 6.8 million workers. This means that to absorb, say, 25% of workers displaced from the Big Four service sectors, the Transportation and Warehousing sectors would need to expand by more than 25% overall—and similarly for other percentages. Because of their sheer scale, employment shortfalls to date in the Big Four service sectors, if they become permanent, will force many displaced workers to look for new jobs more broadly.

A McKinsey survey of 800 executives from eight countries, half of them from the United States, found that 83% of respondents said they would hire more workers in roles related to workplace sanitation and safety; 68% in technology and automation; 45% in digital learning and agile work methods.“What 800 Executives Envision for the Postpandemic Workforce,” McKinsey Global Institute, September 23, 2020. This raises the issue of required skill levels.

Job losses so far during the coronavirus recession have been concentrated among low-wage, low-skilled workers, but many of the new jobs mentioned by McKinsey respondents require specialized skills and higher education levels. While workplace sanitation jobs can employ low-skilled workers, jobs in technology, automation, digital learning, and agile work methods typically require post-secondary educational degrees or certifications.

Stated more generally, the creation of new jobs in technical, administrative, and managerial occupations at mid- or upper-wage levels does not create employment opportunities for workers displaced from low-skilled, low-wage service jobs. For these workers especially, transitions to new employment are likely to be difficult and involve sustained periods of unemployment. Relatively high unemployment among low-skilled, low-paid workers is likely to restrain wage growth in low-wage occupations, while expanded demand for workers with specialized skills may accelerate wage growth at the upper end of the wage distribution. The net effect in the post-COVID labor market may be faster wage growth at higher wage levels coupled with slower, or no wage growth at lower wage levels. This would reverse the pattern of wage growth observed for several years before the coronavirus pandemic.In years preceding the coronavirus pandemic, wage growth was higher at low wage levels than at high wage levels; see “Employment and Wage Growth by State and Economic Sector,” Quarterly Economics Briefing, January 9, 2020.

The coronavirus recession has also had a disproportionate impact on small businesses. As we noted in a preceding section, leading priorities for small businesses for 2021 are staying in business and accessing short-term credit. But neither of these were major concerns among big businesses surveyed by McKinsey. Permanent closures of small businesses implies that in a post-COVID equilibrium, the share of employment at small businesses may decline while employment at large businesses increases.

More Digitization and Automation. The McKinsey survey also found that:

• 85% of all respondents say that their businesses have accelerated implementation of digital technologies to enable greater interaction and collaboration among employees.

• 83% of US respondents (67% overall) have accelerated the implementation of automation and artificial intelligence.

For example, FedEx is deploying more robots—and fewer employees—to mitigate the effect of social distancing. Financial services and technology sectors reported the greatest acceleration of digitization and automation.

In many instances, increased automation and digitization is likely to imply a reduction in employee headcount. For example, a shift to digital banking may mean fewer bank employees, especially in front-office roles. Likewise, increased automation and digitization in the restaurant industry favors a shift away from in-person dining toward pick-up or home delivery—and lower staffing levels.

More Temporary and Contract Workers. Seventy percent of McKinsey respondents said they expected to use more temporary and contract workers in the next two years than they did before the pandemic. This shift was especially pronounced in accommodation, food services, health care, and social assistance. A Gartner survey found that many organizations that reduced contractor budgets at the beginning of the pandemic in the spring of 2020 changed their thinking as the pandemic progressed. By June, “32% of organizations are replacing full-time employees with contingent workers as a cost-saving measure.” “9 Future of Work Trends Post-COVID-19,” Gartner, June 8, 2020.

For many companies, the coronavirus recession emphasized the importance of being able to quickly adjust staffing levels and labor costs to unexpected demand shocks or supply disruptions, including a reconsideration of full-time versus contingent workers in their future hiring plans.

More Remote Work. The coronavirus pandemic galvanized remote work. While only 6% of the workforce was full-time remote before the pandemic, an estimated 24% worked from home in December. Several surveys conducted during 2020 found that most workers able to work from home would like to continue to do so after the pandemic, at least part-time. Employer acceptance of remote work also increased during the pandemic. However, a review of recent research concludes that 60% or more of US workers cannot work remotely.“Ability to work from home: evidence from two surveys and implications for the labor market in the COVID-19 pandemic,” Monthly Labor Review, US Bureau of Labor Statistics, June 2020. As a general observation, occupations most easily adapted to remote settings involve tasks that can be performed on a computer, the internet, or by telephone.

City Centers Down, Suburbs Up. The move to teleworking during the pandemic has encouraged out-migration of economic activity from urban centers, mostly to surrounding suburbs. In New York City, for example, new leases of office space were down 80% in November compared to the previous year and the office availability rate was the highest since 2003 as companies moved out of Manhattan.“Offices for Rent in Manhattan Hit Highest Level Since 2003,” Bloomberg, December 1, 2020.

The increase in remote working arrangements and the abandonment of city-center offices has been accompanied by household relocations from cities to suburban areas, though less dramatically than for businesses. While available data suggest that fewer people moved for job-related reasons during the pandemic than before the pandemic, household moves that did occur tended to go from cities to nearby suburbs. A study of change-of-address data from the US Postal Service from March to October 2020 found that although total moves increased only modestly from the previous year, “most people moved close [to] their home” and “counties near big cities are experiencing the most migration gains.” “8.9 Million People Relocated Since the Beginning of the Pandemic,” National Association of Realtors, December 4, 2020.

Though accelerated by the coronavirus pandemic, business movement out from city centers has been going on for years, motivated by high prices for office space and facilitated by digital technology. What remains to be seen is how strongly the migration of businesses and households away from major cities toward surrounding suburbs will continue when the pandemic subsides, and to what extent smaller cities at a greater distance from large metropolises will gain population as well.

The pandemic-induced movement of businesses away from city centers affects support businesses as well: for example, reducing business for downtown restaurants and merchants, while (relatively) favoring those in suburban locales. A report using smartphone location data found that foot traffic to downtown merchants in five cities—Atlanta, Chicago, Dallas, New York City, and San Francisco—fell by 64% to 77% for a seven-week period from mid-October through November 2020 in comparison with the same period in 2019. For merchants in adjacent suburban zip codes, the comparable year-on-year reduction in foot traffic was roughly half as large, ranging from 31% to 45%.“US Downtowns Yearn for Vaccine as Merchant Traffic Off 70%,” Bloomberg, December 3, 2020.

Metropolitan out-migration also stresses funding sources for municipal bond issues, a matter of concern to insurers whose investment portfolios include large allocations of muni bonds. Municipal bond defaults in 2020 have been at their highest rate since years following the Great Recession.“More High-Yield Muni Borrowers Are Defaulting but Investors Still Want In,” The Wall Street Journal, November 13, 2020. Bonds linked to tourism (for example, convention centers), communal living developments (for example, senior and student housing), and health care facilities are likely to face the greatest funding stresses in 2021. Last fall, Moody’s Investors Service lowered its outlook to negative for most municipal bond sectors. However, downgrades to date have been few and bond prices remain high due to low rates of return on other fixed income assets.

Implications for Workers Compensation

From spring through fall, the US economy recovered jobs lost to the coronavirus recession, but the pace of recovery slowed to near zero in the fourth quarter, and a growing share of unemployed are experiencing permanent rather than temporary layoffs. Job losses are concentrated in service sectors, and especially in low-wage jobs. At year-end, households and affected businesses, especially small businesses, are under stress. Stimulus programs enacted in March expired at the end of summer. But a new federal stimulus package in late December extended many of the earlier programs through early 2021, although at reduced benefit levels.

The coronavirus surge in Fourth Quarter 2020 dwarfed anything the United States experienced during the pandemic so far. The first of the new coronavirus vaccines went into public distribution in December, but much remains unknown about their effectiveness, what percentage of the population will need to be immunized, and how quickly they can be distributed.

It is increasingly clear that the post-COVID economy will be different than the pre-COVID economy. Changes affecting labor markets are also likely to affect workers compensation:

• The slowing rate of job recovery and increasing share of permanent layoffs at year-end 2020 suggests that US employment, and hence total workers compensation premium, is likely to recover more slowly during 2021 than during the summer and fall of 2020.

• Employment shifts out of the Big Four service sectors will reshape the distribution of occupations in the post-COVID economy. Concentration of job losses among low-wage, low-skilled workers is likely to prolong the period of employment adjustment.

• Wage growth in 2021 may be stronger for high-wage workers than for low-wage workers, reversing the pattern observed for several years through 2019.

• Employment shifts from small to large businesses may reduce workers compensation premium via self-insurance and use of large deductibles.

• Increasing digitization and automation may also mean lower employee headcounts in affected occupations.

• Increased reliance on contract workers has the potential to reduce workforce coverage under the workers compensation system.

• At-home remote work may affect the nature and frequency of workplace injuries. As part of this edition of the Quarterly Economics Briefing, a report on how the pandemic has affected remote work will be published later in January.

• Motivated by increased reliance on remote work, a shift in economic activity away from metropolitan centers to surrounding suburbs and outlying areas has the potential to realign the regional economic geography of employment.