Key Themes and Takeaways
  • US job recovery continued in the third quarter, despite the Delta surge. The Delta surge slowed job growth in August and September after an exceptionally strong July.
  • The US national employment gap is closing steadily but at a decreasing rate, and largely independently of coronavirus surges including the recent Delta surge.
  • Looking ahead, the pace of US recovery from the COVID recession will depend critically on the resolution of snarled global supply chains and persistent labor shortages, including a “Great Reshuffle” of the labor force.

The Economic Outlook for Q3 2021

US Employment Recovery Slogs Ahead Despite Delta

The late summer surge of the Delta variant of COVID-19 dented, but did not derail, US economic recovery in the third quarter. September’s national employment gap of –3.2%, representing the shortfall of actual employment to pre-pandemic employment, is down from –4.3% in June. In fact, the average rate of recovery in the employment gap of 0.4 percentage points per month in the third quarter from June to September matches the monthly average for the second quarter from March to June. Despite the Delta surge, US job recovery from the COVID recession continues to be a steady and slow slog, not the rapid snapback many expected when new vaccines rolled out at the start of the year.

The US economy added 510,000 jobs per month on average during the third quarter on a seasonally adjusted basis, up from the monthly run rate of 470,000 new jobs in the second quarter.The seasonally adjusted change in employment between any two periods is the change in actual employment in excess of the change in expected employment. Because the US seasonal employment cycle peaks in summer and troughs in winter, expected employment increases during the second quarter and decreases during the third quarter every year. For the third quarter of 2021, the average monthly net increase of 514,000 jobs represents an average actual gain of 275,000 jobs per month minus an average expected loss of 239,000 jobs per month. In comparison, the second quarter’s lower average monthly net increase of 469,000 jobs is an average actual gain of 1,163,000 jobs per month minus an average expected gain of 694,000 jobs per month. The employment gap is the difference between actual and seasonally expected employment; therefore, changes in the employment gap net out employment fluctuations due to seasonality. By contrast, changes in actual employment exhibit substantial month-to-month variation due to seasonality, especially during shoulder seasons in spring and fall. On closer examination, however, third-quarter job creation was dominated by 830,000 new jobs in July, compared with only 360,000 per month in August and September, the peak months of the Delta surge. Is this a cause for alarm?

Probably not, for two reasons. First, the apparently sharp drop-off in job creation in August and September may have as much to do with choosing July as a comparison month as with the Delta surge’s effect on hiring in the following months. The average rate of job creation in August and September was less than 50% of July’s rate, but only 25% below the rate of monthly new jobs in the second quarter.

Second, the rate of US job recovery has gradually slowed over time, as is evident from the shape of the employment gap curve, and further hiring is constrained by labor shortages and supply bottlenecks. Some of the drop in employment growth during August and September might have happened even without the Delta surge. An extrapolation of the national employment gap’s monthly trend from January to July indicates that the September employment gap might have been –3.0% if the Delta surge had not occurred, compared with its actual value of –3.2%. The implied difference in employment gaps of 0.2% equates to an estimated Delta impact of about 240,000 lost jobs, indicating that actual employment in September might have been higher by 240,000 had the Delta surge not occurred. Benchmarked against recent employment growth rates, this estimate of job losses due to the Delta surge in September amounts to less than the number of new jobs created in one month during the surge’s peak.The estimated job loss due to the Delta surge is about two-thirds of the average monthly job gain in August and September, equating to roughly three weeks of job recovery at the August/September run rate. Through September, the Delta surge checked US employment recovery only mildly; and by the end of the month new case rates had begun to drop.

The Delta surge’s mild impact on US employment recovery should come as no surprise. Since the initial shock of the first COVID surge in April 2020–in retrospect, the mildest surge–to the present, the US economy has recovered jobs steadily and at a gradually decreasing rate. Over the same period, the country experienced three additional COVID surges, of which the winter 2020 surge and the Delta surge in summer 2021 produced national case rates far above those in the two previous surges. The winter 2020 surge, the most severe to date with more than 6 million new cases monthly at its peak, did no more than stall the national employment gap from November to January. In February, the employment gap resumed its downward trajectory as new vaccines rolled out and the winter surge faded. The employment impact of the summer Delta surge was even milder.

Visual comparison of the two preceding charts illustrates how the steady pace of US economic recovery, proxied by the closure of the national employment gap, during the COVID recession that began in April 2020 and continuing to the present is essentially independent of fluctuations in the intensity of the COVID pandemic over the same period. In previous issues of the QEB, we have referred to this relationship as the delinking of the COVID recession from the COVID pandemic.As US Employment Recovers From COVID-19, Services and States are Key, Quarterly Economics Briefing, NCCI, October 30, 2020; and The COVID-19 Recession: Economic Recovery is Looking Up (If COVID Stays Down), Quarterly Economics Briefing, NCCI, April 28, 2021.

Put simply, delinking means that although the COVID pandemic clearly caused the COVID recession, the US economic recovery after April 2020 has been largely unaffected by successive waves of the coronavirus since then. There are two main reasons for delinking. First, as workplaces acclimated to the coronavirus, the sensitivity of employment to new surges diminished. Most workplaces accommodated quickly, by the second or third quarter of 2020. Second, coexistence with the coronavirus has become more of an accepted reality. With the passage of time, people are resuming economic activities that they had deferred in the pandemic’s early stages. New vaccines introduced in 2021 stimulated economic recovery by reducing infection risk in the general population. They also fostered a sense that “this is as good as it gets” and an acceptance of remaining infection risk as part of the new normal.

Because of delinking, the summer Delta surge had only a modest negative impact on employment recovery in the United States, by our estimate setting back the pace of national job growth by less than a month. For the same reason, we expect that employment growth will not accelerate substantially when the Delta surge ebbs, as it has done so far in October. Instead, we expect that the US employment gap will continue to shrink gradually going into 2022, more or less continuing its current trajectory. More generally, we think that the key determinant of US economic recovery going forward will not be future COVID surges, but rather the dynamics underlying re-equilibration of labor markets and supply chains as the US and global economies emerge from the COVID recession.

Employment Gaps by Sector Follow the National Pattern

The September profile of employment gaps by sector continues to follow the pattern that we have observed since the early days of the COVID pandemic in April 2020.

The chart above shows monthly employment gaps for selected sectors from the early days of the COVID pandemic in April 2020 to the present. It provides some additional insight on the delinking theme as it affected different sectors at the national level.

These observations provide a qualification to the delinking theme as it applies to individual sectors of the US economy. National employment recovery from April 2020 to the present is essentially independent of fluctuations in the intensity of the COVID pandemic across major sectors of the US economy, with the exception of Leisure and Hospitality. In Leisure and Hospitality, the two most recent COVID surges impacted national employment, but the sector’s employment sensitivity to COVID surges appears to have diminished substantially from last winter to the present.

Looking Ahead, What Matters for the US Economy?

If the COVID recession is indeed delinked from the COVID pandemic and future COVID surges are unlikely to significantly impact economic activity and employment, then what does matter for the future course of US economic recovery from where we stand today? In our view, two issues stand out:

Supply Shortages and Bottlenecks. The COVID recession has demonstrated how fragile supply chains can be. Shortages of key components and materials along with delays in delivery are limiting availability and driving up prices of both consumer goods and intermediate goods. An upcoming NCCI Economics Special Report will discuss which goods and economic sectors are most affected and how long disruptions are likely to persist. The report will also explore potential impacts on future employment in residential construction and auto manufacturing. These two industries face critical supply chain issues and are of particular interest to workers compensation.

Labor Shortages and the Great Reshuffle. The idea that labor is in short supply, and is holding back a rapid economic recovery, is often overstated but still real.

Labor supply has, in fact, dropped because of decreased participation rates, especially among women, and early retirements. Some people not actively seeking work now will surely return to the labor force as the lure of better jobs becomes stronger, childcare becomes more available, and the threat of COVID diminishes. But others will not. Rather than snapping back quickly to pre-pandemic levels, labor force participation rates are likely to remain depressed into 2022 and perhaps longer, especially among women and older workers.For more on labor force dropouts and early retirements, see Is There a Labor Shortage?, NCCI Economics Special Report, August 11, 2021.

In addition, the COVID recession triggered an unprecedented wave of job changing–the Great Reshuffle–as workers laid-off from or quitting their old jobs look for more rewarding new employment, enabled by vacancies across the board in many different industries.

Job reshuffling is an important key to labor market re-equilibration in the United States, but it is being experienced differently by blue-collar and white-collar workers. For white-collar workers, job reshuffling typically means changing what their old job looks like–adding perks like flex time and work-from-home–but without changing occupations. But for blue-collar workers, job reshuffling often means leaving a low-paid, low-skill service job in search of a new occupation, which often requires new vocational credentials or upskilling.

Many industries–notably health care, construction, manufacturing, and transportation–are experiencing a shortage of skilled workers at the same time as unskilled workers are leaving low-paid service jobs in industries like leisure and hospitality. For many workers quitting low-paid service jobs, success in moving a new occupation will depend on their ability to acquire new skills and credentials, either at their own initiative and expense or through on-the-job training programs at their new employers.

Among blue-collar occupations, the US labor shortage is increasingly becoming an imbalance of unskilled labor supply and skilled labor demand. The ability of both sides–workers and employers–to bridge skills gaps will be a key question for determining whether the Great Reshuffle produces lasting changes in US employment patterns across occupations and industries . . . or just fizzles out. Whatever happens, the consequences of the Great Reshuffle will matter for workers compensation, whose exposure base consists predominantly of blue-collar payrolls. We look forward to revisiting the topics of labor shortages and the Great Reshuffle in the coming months.