Key Themes and Takeaways
  • All sectors of the US economy experienced steady job growth during the second quarter, but the pace of employment recovery has not noticeably accelerated from the first quarter.
  • Almost all economic sectors are gradually approaching pre-pandemic employment levels, with national employment gaps around –2% to –4%. The employment gap in Leisure and Hospitality, remains elevated at –13% but is also closing more quickly than in other sectors.
  • Earnings for nonsupervisory employees are starting to pick up, with the biggest increase in Leisure and Hospitality where earnings have increased by more than 10% since January.
  • The dynamics of labor shortages–the relationship between the rate of employment recovery, earnings growth, and the imbalance between job openings and unemployment–differ significantly across industries.
  • Several factors are contributing to differences in the dynamics of employment recovery and wage growth across industries–diverse impacts of the COVID recession within broad industry groups, comparative demand for low-wage versus high-wage jobs during the recovery, and the role of non-wage benefits including intangibles like job security and worker satisfaction.

The Economic Outlook for Q2 2021

The US Economy Reopens, Vaccinations Continue as the Delta Variant Spreads

As of the July 4 weekend, all US states except Hawaii were fully reopened.See Reopening Plans and Mask Mandates for All 50 States, The New York Times, updated July 1, 2021. Earlier in May, the Centers for Disease Control and Prevention (CDC) had advised that fully vaccinated Americans no longer needed to wear masks or practice social distancing in most settings. This rescinded the CDC’s earlier guidance for mask wearing. In late June, the Biden White House issued a statement that the July 4 holiday in 2021 would “celebrate independence from the virus” as well as national independence. In terms of national and state restrictions on economic activity in place at the beginning of July, the COVID recession was essentially declared to be over. But the COVID pandemic still lingered, and the rapid spread of the Delta variant threatens to upset the narrative of virus independence.

On July 20, Dr. Rochelle Walensky, director of the CDC, testified that the new and more transmissible Delta variant is estimated to account for 83% of new coronavirus cases nationwide, a very rapid increase over the preceding two months.Hearing of the US Senate Health, Education, Labor and Pensions Committee, July 20, 2021. Dr. Walensky’s testimony begins at 00:15:48. During the two-week period from June 20 to July 3, the Delta variant contributed about 63% of new coronavirus cases nationally; its share was 32% during the previous two-week period, and only 3% as recently as late May.Biweekly data on the Delta share of new coronavirus cases are from The Delta variant is believed to be a particular threat to people who are unvaccinated or partially vaccinated, and experience to date indicates that it also carries an increased risk of hospitalization.5 Things to Know About the Delta Variant, Yale Medicine, updated July 15, 2021. On July 27, the CDC walked back its May guidance, recommending that people resume wearing masks indoors in certain parts of the country with “substantial or high transmission.”Interim Public Health Recommendations for Fully Vaccinated People, Centers for Disease Control and Prevention, July 27, 2021. As of early August, only a small number of states either require or recommend that people wear masks even indoors.During July, several states and a number of municipalities reinstated prior masking guidelines or created new ones, some mandatory and others recommended. List of Coronavirus-Related Restrictions in Every State, AARP, updated August 3, 2021.

Vaccination continues and in many communities is available on demand. However, the rate of vaccination has stalled since April, and only half (50%) of the US population is fully vaccinated as of early August.See How Vaccinations Are Going in Your County and State, The New York Times, updated August 3, 2021. This is well short of the 70% to 90% coverage rate projected for population immunity, a goal that is increasingly regarded as simplistic and unattainable because of coronavirus variants.

The Delta variant’s virulence intensifies the risk of local outbreaks in under-vaccinated regions and states. In the one-fifth of US counties with lowest vaccination rates, mostly in the South, only 24% of the population was fully vaccinated as of late June.Growing Gaps in U.S. Vaccination Rates Show Regions at Risk, Bloomberg, June 29, 2021.

Dense regional outbreaks, if they occur, may hold back economic recovery in the affected localities or states. But they are less likely to derail recovery at the national level. Even as the Delta variant drives big percentage jumps in new case rates in several states, total numbers of new cases nationwide remain low. Outside of localized outbreaks in under-vaccinated regions, higher vaccination rates in the rest of the country are believed to offer protection against a national outbreak on the scale of last winter’s surge.Dr. Walensky recently described the Delta upsurge as “a pandemic of the unvaccinated.” White House Press Briefing, July 16, 2021. While the Delta variant now accounts for the majority of new cases across the country, medical professionals believe that intense outbreaks are more likely to be local rather than national. In the opinion of one epidemiologist, “the United States has vaccinated itself out of a national coordinated surge.” Delta Variant Widens Gulf Between ‘Two Americas’: Vaccinated and Unvaccinated, The New York Times, updated July 15, 2021. And last winter’s coronavirus surge demonstrated that even a widespread and massive outbreak, with more than 6 million new cases nationally in December and January, had only a minor impact on the pace of job recovery.The recent coronavirus uptick dominated by the Delta variant pushed national new case rates up to nearly 100,000 per week in the first week of August. During the height of last winter’s surge, driven by the older Alpha variant, daily national case rates averaged around 200,000 in December and January. For a discussion of COVID case rates and employment gaps from the beginning of the pandemic through the winter surge, see The COVID-19 Recession: Economic Recovery is Looking Up (If COVID Stays Down), Quarterly Economics Briefing, NCCI, April 28, 2021.

Job Recovery Continued Steadily in the Second Quarter, But Did Not Accelerate

In the last issue of the QEB, we wrote that strong employment growth in February and March pointed to an accelerating pace of job recovery for the rest of the year. While the national employment gap continued to shrink during the second quarter, acceleration in the rate of job recovery is not clearly evident. Rather, the month-to-month trend in the employment gap from January through June has been steady—a reduction of about 0.4% per month. The national employment gap for June was –4.4%, a shortfall of nearly 6 million jobs relative to the seasonally expected level, ratcheting down from a gap of 7 million jobs in March and 8 million in January.

To date, the national unemployment rate is little changed in 2021, gradually falling from 6.3% in January to 5.8% in May before ticking up to 5.9% in June. This is not surprising. During an economic recovery, the unemployment rate can be expected to remain stubbornly stationary even as employment recovers. This is because workers who drop out of the labor force in the early stages of a recession, and hence are not counted as unemployed, start coming back into the labor force to search for jobs as the recovery gains pace. During the period of job recovery following a recession, re-entrants to the labor force effectively buffer the unemployment rate—adding new unemployed headcount to the labor force at the same time as other unemployed workers are finding jobs.

Employment Gaps Are Converging, Still Highest in Leisure and Hospitality

Through June, nearly four out of five lost jobs (77%) are concentrated in the Big Four service sectors. Three of the Big Four service sectors–Retail Trade, Professional, Business, and Other Services, and Education and Health Care–now have employment gaps in the range from –2% to –4%, comparable to most other sectors of the economy.Mining and Logging has a high employment gap, driven by the drop-off of shale-based oil and gas extraction, but contributes only a small share of national employment. The exception is Leisure and Hospitality, where the employment gap remains elevated at –13%, and still accounts for two out of five (39%) lost jobs nationally. While the United States has steadily recovered employment in all sectors since the beginning of the COVID recession, the share of lost jobs coming from the Big Four service sectors, with Leisure and Hospitality dominating, has remained very stable from April 2020 to the present.

Going beyond the monthly snapshot for June, a comparison of time paths of employment gaps across different economic sectors offers insights on the COVID recession and its recovery to date.

The chart below compares employment gaps from April 2020 through June 2021 for four sectors: Leisure and Hospitality, Education and Health Services, Construction, and Manufacturing. These sectors are of interest in themselves and also illustrate themes in the broader economy.

Worker Earnings Are Picking Up, Most Strongly in Leisure and Hospitality

As national economic recovery proceeds and employment expansion increasingly depends on new hires rather than recalls of laid-off workers, it is natural to expect that wages and earnings will start to go up.

The chart above shows time paths for hourly earnings to nonsupervisory workers in the four sectors for which we previously charted the time paths of employment gaps. At first glance, the results are surprising. In Construction, Education and Health Services, and Manufacturing—all sectors with relatively high hourly earnings—earnings increases during the first, pre-vaccine phase of the COVID recession (April 2020 to December 2020) are comparable to those in the second, post-vaccine phase (December 2020 to June 2021). In none of these sectors did earnings noticeably accelerate as recovery continued, even as vaccines came online and employment gaps diminished in 2021. Leisure and Hospitality is different. With much lower hourly earnings to nonsupervisory workers than the other sectors, earnings growth in Leisure and Hospitality was stagnant during the pre-vaccine period (–0.1%) but eye-catching in the post-vaccine period (10.6%).

In fact, wage and earnings increases have been fairly stable during pre-vaccine and post-vaccine phases of the COVID recession in almost all sectors of the economy. But in Leisure and Hospitality, earnings accelerated dramatically since vaccines came online last January. Why?

Employment Recovery, Wage Growth, and Labor Shortages

A popular narrative is that the United States faces an economy-wide labor shortage during the ongoing recovery from the COVID recession. The idea is usually expressed as an apparent paradox: as job openings increase, many employers report that they are experiencing hiring difficulties even as unemployment remains high. While numerous factors are in play, any labor shortage fundamentally involves the relationship between employment and pay. A labor shortage signifies an excess of labor demand over labor supply at currently offered compensation levels. Viewed from this perspective, earnings should be expected to increase most rapidly in those industries where the number of job openings (labor demand) exceeds the number of unemployed persons (labor supply), and less rapidly in industries where this relation is reversed. However, a simple analysis of selected industries shows that their employment and wage experiences during 2021 are more varied than a simple story of economy-wide labor shortage would suggest.

For the months from March through May 2021, Health Care and Social Assistance had the largest excess of job openings over unemployment. With Educational Services close to balanced and given the much higher number of job openings in Health Care and Social Assistance, one would expect that Education and Health Services, the combination of these two subgroups, should be the best candidate for strong and accelerating wage growth relative to other sectors. In fact, earnings growth in Education and Health Services was somewhat higher (3.7%) than other sectors in the pre-vaccine phase but dropped off in the post-vaccine phase (1.1%). In Accommodation and Food Services—the dominant component of the Leisure and Hospitality sector—the average excess of job openings over unemployment from March to May was much less than that in Education and Health services, and proportionately closer to that in Manufacturing. In Construction, average March-May job openings were well below unemployment. Nonetheless, post-vaccine earnings increases in Construction (2.8%) and Manufacturing (2.7%) were nearly identical, while post-vaccine earnings jumped only in Leisure and Hospitality.

In the four economic sectors profiled here—as well as others—the dynamics of employment growth and wage changes are more nuanced than a simple narrative of an economy-wide labor shortage suggests. In search of better understanding, the following section looks at these sectors in more detail.

The COVID Recession and Its Recovery in Selected Industries

Construction. The construction industry is a tale of two markets. Demand for residential construction stayed strong throughout the COVID recession although it has fallen off its peak in recent months. In contrast, commercial construction suffered throughout the COVID recession with little recovery to date.

Revival of commercial construction may depend on passage of a new federal infrastructure bill. On July 28, the Senate voted to consider a bill for nearly $1 trillion of spending on physical and “human” infrastructure. The new legislation—undrafted at the time of the vote and published days later—includes multi-billion dollar spending allocations for transportation, including roads, bridges, and passenger rail; makeover of the electric grid; and expansion of broadband access in rural and low-income urban areas. A final version of the infrastructure bill must be passed in both the Senate and House before it can be signed into law.

Cost increases for construction inputs are a major issue. From June 2020 to June 2021, bottlenecks and shortages of goods and services caused residential construction costs to go up 24%. Producer prices for lumber doubled during this period before falling somewhat in July. Price increases for construction materials made from steel, copper, aluminum, and plastics ranged from 20% to more than 80%. Other materials prices as well as transportation and fuel costs also jumped.Construction Inflation Alert: June 2021, Associated General Contractors of America, July 2, 2021.

Difficulties in recovering construction employment are tied to soaring materials costs and delivery lags, as well as a shortage of qualified workers. While headcount employment in the Construction sector increased by 115,000 from May to June, this is a shortfall of 14,000 relative to seasonal expectations. In an environment of rapidly rising input costs and depressed demand for commercial construction, new construction hiring appears to be strongest in entry-level positions that are attracting applicants from other occupations. But the biggest wage increases are concentrated among skilled specializations that are especially in demand.

Manufacturing. Different types of manufacturing have experienced diverse recovery paths during the COVID recession, partially driven by input shortages. A shortage of semiconductors has slowed or shut down production in the automotive industry, idling workers and leading to longer waiting times for customers even as demand for new vehicles recovers. A global plastics shortage, made worse by the February storm that shut down chemical refineries in Texas and Louisiana, continues to impact many manufacturers that rely on a wide variety of plastics for fabrication or packaging.

Among manufacturers at large, concern about a labor shortage is long-standing and predates the COVID recession. It is mainly related to generational succession of older workers by younger workers. According to a recent survey commissioned by the National Association of Manufacturers (NAM), shortfalls of new hires relative to departures suggest that manufacturing employment may shrink by more than 2 million workers by 2030 compared to today.2.1 Million Manufacturing Jobs Could Go Unfilled by 2030, National Association of Manufacturers, May 4, 2021 Labor force succession and a shortage of skilled workers have also been perennial topics in NAM’s quarterly outlook surveys.

Notwithstanding materials shortages, many manufacturing businesses have recovered pre-pandemic employment levels and are looking to add employees. As of June 2021, the Manufacturing sector’s employment gap—the shortfall relative to the pre-pandemic employment level—had closed to –3.8%, in line with the economy at large. At present, the perception of a labor shortage in manufacturing mainly relates to expanding production and employment above pre-pandemic levels. Manufacturers in the NAM survey report difficulty in filling entry-level positions even at higher rates of pay than in the past, as well as difficulty in retaining skilled workers.

A second NAM survey points to considerations beyond pay that influence workers’ job decisions. Key reasons why employees remain at their manufacturing jobs, besides pay, are enjoyment of the work (83%) and stability/job security (79%). Interestingly, younger respondents under age 25 were more likely to cite training (69%) and career advancement opportunities (65%) as reasons to stay at a job than older respondents, whose rate of positive response to both benefits was 42%.How Manufacturers Can Retain Employees, National Association of Manufacturers, July 15, 2021. These findings align with surveys on worker satisfaction in other industries.

Health Care Services. During the height of the COVID pandemic, demand soared for critical healthcare providers, such as hospital nurses, while many non-critical providers experienced layoffs and some nursing homes and long-term care facilities closed down. Health care workers laid-off from non-critical specializations in 2020 tended to be lower-paid on average. As health services normalize in 2021, rehiring is therefore tending to emphasize workers in lower-paid specializations. In addition, a switch from long-term care facilities to in-home care is creating additional demand for personal care aides, a relatively low-skilled occupation that may begin to attract workers who had held other service jobs before the pandemic.

As in manufacturing, generational succession and worker retention are long-standing issues in health care services. But they were intensified during the pandemic by accelerated retirements and career switching due to stress and burnout. According to one health care executive, “The pandemic caused a perfect storm in a sense. We saw some nurses retire, others leave because of the risks the job involved, and others are leaving the field because of increasing work shifts.”Pandemic has made shortage of health care workers even worse, say experts, ABC News, May 21, 2021. The same remarks also extend to nurse assistants and other critical health care providers.

Recent job listings indicate the scale of excess demand for different kinds of job specializations as the health care industry recovers. On CareerBuilder, a recruiting website, postings for registered nurses outnumbered applicants by 53 to 1 for the three months from March to May 2020. For nurse practitioners the ratio of postings to applicants was 363 to 1; for home health and personal care aides—specializations in growing demand and requiring a lower level of training—the ratio was 43 to 1.The health care worker squeeze, Axios, May 21, 2021. Vacancies in health care jobs offer a variety of opportunities for workers previously employed in other sectors of the economy, like Leisure and Hospitality, who are looking to switch careers. While specializations like nursing require a high level of training and certifications, other in-demand positions such as nurses’ assistants and health care aides require more limited training and represent an easier entry-level opportunity for job applicants coming from other sectors.

Restaurants. Low wages and scarcity of non-wage benefits, including intangibles like job security, are common characteristics of non-management jobs in the Leisure and Hospitality sector. In a recent survey of restaurant workers, respondents identified top considerations for staying at a job as a “full, stable, livable wage” (78%), paid sick leave (49%), health benefits or insurance (44%), and “an improved working environment with less hostility from customers, co-workers, and/or management” (45%).It’s a Wage Shortage, Not a Worker Shortage, One Fair Wage, May 2021 Apart from wording, these choices are not dissimilar from the survey of manufacturing workers discussed previously. But while restaurant workers evidently value both wages and non-wage benefits like job stability and workplace enjoyment,A work environment with “less hostility” is also more enjoyable. non-management restaurant jobs tend to focus on wages only, with few non-wage benefits. One reason may be that restaurant operators, in comparison to employers in other sectors such as manufacturing and health care, are more likely to perceive employee hiring and retention as a seasonal or annual issue rather than a long-term concern.

From 2015 through 2019, the percentage of restaurant operators who said that recruiting and retaining summer employees was a top challenge steadily increased. During those five years, the seasonal summer peak in restaurant hiring gradually declined, indicating that workers were, indeed, getting harder to recruit. But the seasonal summer demand cycle evaporated completely during the COVID pandemic in 2020 when restaurants shut down or went to carry-out service only and laid off workers en masse. The top concern of restaurant operators during the COVID pandemic was survival, not worker retention. But in 2021, as the economy is recovering and restaurants again anticipated a strong summer season, hiring and retention is again perceived as a top challenge for almost two-thirds of restaurant operators, back from near zero the previous year.A chart like that shown here, but without summer employment numbers for 2020 and 2021, is in Summer hiring likely to be challenged by a shallow labor pool, National Restaurant Association, May 21, 2021.

Because of seasonality in restaurant employment, and with the prospect of widespread layoffs in a bad year, restaurant jobs for non-management employees may have more in common with the gig economy—a forum to trade labor services for wages—than a career path that includes an expectation of continued employment, benefits, and advancement. It is not surprising that big employment increases since January in Leisure and Hospitality, including the restaurant industry, have been accompanied by especially sharp pay increases to nonsupervisory employees. Bigger wage increases are necessary to attract and retain workers in the Leisure and Hospitality sector when entry-level job openings in other sectors offer a broader spectrum of non-wage benefits and more employment stability.

Common Themes for Employment and Wages

Here we highlight several themes relating to labor demand that differ among our four selected sectors, and that extend to other industries as well. These themes help to explain why perceived hiring difficulties, and specifically relationships between rates of employment recovery and pay raises, differ from one sector to another. Our special report, “Is There a Labor Shortage?” takes a broader perspective and identifies issues relating to labor supply during the ongoing recovery from the COVID recession.

While pay remains the top hiring inducement, other non-wage employment benefits figure prominently in decisions of post-COVID job seekers. In addition to traditional non-wage benefits like health insurance and paid vacation or sick leave, the COVID pandemic has heightened job seekers’ sensitivity to less tangible work-related benefits—job security, work enjoyment and a sense of being respected, scheduling flexibility, training, and opportunities for career advancement.

In an economic recovery where low-skill and entry-level workers perceive that they have numerous employment options, industries offering job packages with valued intangibles—a positive workplace culture, regular work schedules, and opportunities for training and advancement—are in a stronger position attract workers than industries that compete on wages alone. In past practice, most non-management restaurant jobs, like most non-management jobs in Leisure and Hospitality more broadly, fall in the second category. Looking forward, if non-wage benefits remain exceptional in Leisure and Hospitality jobs but are more widely available in other sectors also looking to hire, then recent pay increases in Leisure and Hospitality are more likely to prove enduring rather than temporary—they will be necessary to attract and retain workers who are willing and able to switch to new jobs in other industries.