By Leonard F. Herk
Posted Date: February 14, 2022
The Economic Outlook for 2022
US Employment Recovery Keeps Pace in Q4. Job recovery in the US churned steadily forward in the fourth quarter of 2021 as many sectors of the economy converged toward pre-pandemic employment levels. The national employment gap reached –1.6% in January, down by two-thirds from –5.0% in May of last year.The QEB uses employment in private industrial sectors (i.e., excludes government employment) as its benchmark for employment reporting. The employment gap is the difference between actual employment in the current period and a pre-pandemic benchmark for expected employment, taking account of seasonal variations. A negative employment gap indicates a shortfall of current employment relative to its pre-pandemic benchmark; similarly, a positive employment gap indicates that current employment exceeds its pre-pandemic benchmark. However, our employment gaps do not include an adjustment for employment growth that would be expected to occur organically due to population growth over time.
A remarkably durable theme of the US coronavirus experience is the steady pace of job recovery since the beginning of the COVID pandemic almost two years ago. Following the initial COVID shock, the national employment gap jumped from zero in February 2020 to –16% in April, a loss of one out of six jobs. Since then, job gains in almost every month reduced the employment gap by more than half, to –6.4%, in January 2021. The national employment gap declined in nearly a straight line from January 2021 to January 2022—on average by 0.4 percentage points per month.It is worth noting is that the straight-line recovery of the national employment gap during all of 2021 is in part due to a significant data revision released with the January 2022 jobs report from the US Bureau of Labor Statistics (BLS). Employment data previously reported by the BLS for December, prior to the revisions, showed the national employment gap declining by an average 0.4 percentage points from January to October 2021, but slowing to half that rate in November and December. This was despite a barrage of events that might have been expected to cause bumps: the rollout of new COVID vaccines in spring 2021, the Delta surge in late summer, labor shortages and supply disruptions throughout the year, and the latest Omicron surge in January.
Two years into the COVID pandemic, are we getting close to an economic new normal? In fact, it looks like we may already be there. December’s low 3.9% unemployment rate, followed by 4.0% in January, suggest that the US economy is now at full employment, or getting close to it. The US Fed’s January announcement that it will shift away from its policy of monetary accommodation suggests that the Fed shares this view. If indeed the US economy is nearing full employment, then January’s national employment gap—a shortfall of 2 million jobs relative to pre-pandemic levels—indicates job losses that are either permanent or unlikely to come back anytime soon. Looking ahead for 2022, it is time to take seriously that the recovery phase of the COVID recession may be largely over and the current situation is the new normal for the US economy and labor markets.
Many Sectors Are at or Near Pre-Pandemic Employment Levels; Only a Few Are Well Below
Breaking down the national employment gap for January across major sectors shows the degree to which national employment has recovered—and exceeded—pre-pandemic levels in some sectors, while remaining below pre-pandemic levels in several others.
Here are some notes about the January jobs report:
A look at recent time paths of employment gaps in selected sectors provides additional details.
Omicron Appears on the Scene. The Omicron variant, a highly infectious COVID-19 mutation though evidently less severe than previous variants, showed up in the US late in 2021. Following on the heels of the Delta variant that surged in August and September before dropping off in October, Omicron quickly drove new cases in the US to record weekly levels in December.
Total new COVID cases in the US for December were 6.3 million, just surpassing the highest monthly peaks from the winter 2020–2021 surge. Omicron accounted for almost 90% of COVID cases by the end of December despite having less than a 1% share in the month’s first week. Omicron’s explosive spread continued in January, pushing new case rates to more than triple their previous highs during the winter surge one year ago, before the widespread distribution of vaccines. Omicron now accounts for virtually all new COVID infections in the US.
While far more transmissible, experience and research to date indicate that Omicron is also less severe than previous COVID variants, targeting the throat rather than the lungs and carrying a lower risk of hospitalization, especially among people who are already vaccinated.Studies Suggest Why Omicron Is Less Severe: It Spares the Lungs, The New York Times, December 31, 2021. Omicron Variant: What You Need to Know, CDC.gov, accessed on February 8, 2022. In recent experience, Omicron’s very high frequency of infection dominates over the lower severity risk for individuals, overwhelming medical resources in communities encountering the variant for the first time. Having spread explosively across the country, the Omicron surge peaked in January but is subsiding quickly. A consensus appears to be emerging that perhaps COVID will stabilize into a flu-like pattern of seasonal reinfection cycles with the periodic emergence of new variants as COVID passes from pandemic to endemic.For a survey of Omicron forecasts and opinions on COVID becoming endemic, see “Forecasting the Omicron winter: Experts envision various scenarios, from bad to worse,” STAT, December 27, 2021. An emerging consensus that the coronavirus in its successive variants is going from pandemic to endemic supports the more general perception that we are moving from a recovery phase into a new normal.
Unemployment Claims Foreshadow Omicron’s Future Impact. Omicron’s impact on national jobs in January was indiscernible, a surprise for many who had expected an employment setback. But it also raises the question of whether the January jobs report is only a lull before the storm, with a much bigger jobs hit still to come in February. However, a look at unemployment claims through the end of January suggests that a deferred jobs hit from Omicron is unlikely.
Weekly new unemployment claims jumped during January, but to levels comparable to those from last October and below those for August and September at the peak of the Delta surge. Although the Omicron wave has not passed yet, the Delta experience is instructive for what we may expect in February and beyond.
As we noted earlier in this report, the pace of closure of the national employment gap has been remarkably steady throughout the past year, unaffected by the Delta surge from July through September and the Omicron surge to date. In fact, the same observation holds true for Leisure and Hospitality, the sector that has exhibited the greatest COVID-related employment sensitivity since the beginning of the pandemic two years ago.
Taking account that new unemployment claims for January were less than those during the Delta surge, and declining by month-end, there is nothing to suggest that the February jobs report will look worse than January’s. To the contrary, continuing employment growth in January, coinciding with the brunt of the Omicron surge, is consistent with the observation that US economic activity has become progressively less sensitive to fluctuations in infection rates from successive waves of the coronavirus since the pandemic began two years ago—a phenomenon we refer to as delinking.For a review of the history of delinking, including a more detailed survey of Delta’s economic impacts, see the Quarterly Economics Briefing: Q3 2021, NCCI, October 27, 2021.
While we do not expect to see direct impacts of Omicron in future US jobs reports, it is more difficult to foresee Omicron’s impacts on already disrupted overseas supply chains. The most significant consequence of Omicron (and subsequent coronavirus variants) during 2022 may be to lengthen the period of time required for supply chain disruptions to resolve. This would indirectly affect employment growth in exposed US sectors, such as manufacturing and construction.See our special report, Supply Chain Disruptions and Their Economic Impacts, NCCI, December 13, 2021.
Is This the New Normal? It appears so. The US unemployment rate was 3.9% in December 2021 and ticked up to 4.0% in January. In both months, it was at or below 4% for the first time since the COVID pandemic began in 2020.Unemployment rates just before the pandemic were somewhat lower, around 3.5% from December 2019 through February 2020. Unemployment rates below 4% have traditionally been taken as a signal that the US economy is at full employment.
Full employment is a term of art, usually expressed as the lowest unemployment rate an economy can sustain without triggering rapid wage inflation. The full-employment unemployment rate is a theoretical concept—it can be guessed at but not directly observed. However, the conjunction at the start of 2022 of a historically low 4% national unemployment rate, high job vacancies, and dramatic wage gains (though concentrated in certain sectors) does suggest that the US economy may indeed be at full employment right now, or near to it.
The US Federal Reserve appears to share the view that the US economy is near full employment; the Fed is at least wary of the inflationary risk from overlooking that it may be. In late January, the Fed confirmed that it will go ahead with several increases to the federal funds rate during 2022, likely starting in March, and will also roll-off its bond portfolio as it matures. Citing the strong job market and consumer price inflation, Fed Chair Jerome Powell remarked that “the economy no longer needs sustained high levels of monetary policy support.”Chair Powell’s Opening Statement, Board of Governors of the Federal Reserve System, January 26, 2022.
If the US economy is at or near full employment, then it is fair to conclude that the recovery phase of the COVID recession is finished and the post-pandemic new normal has arrived. If so, the new normal comes with fewer jobs than the old normal. The January 2022 employment gap indicates a deficiency of 1.6%—or 2.0 million fewer jobs—compared to US employment in early 2020 just before the pandemic began.For comparison, data from the December jobs report, preceding the January benchmark revisions, shows a similar result. The December national employment gap was 2.0%, a shortfall of 2.6 million jobs versus the comparable pre-pandemic period, while the measured drop in labor force participation was very close at 2.3 million. In calculating the change in labor force participation, we netted out BLS’s 2022 population control adjustment. This is for comparability with our employment gap concept, which does not include population growth over time.
What does it mean to have 2.0 million fewer jobs in an economy that is supposed to be back at full employment? The answer turns out to be remarkably simple: there are fewer people participating in the labor force today than when the COVID pandemic began. From early 2020, just prior to COVID, to January 2021, the US labor force shrank by 2.4 million, close to January’s employment gap.
The observation that the employment gap in January 2021 is close to (in fact less than) the drop in labor force participation during the past two years may be the strongest piece of evidence supporting the view that we are past the recovery phase of the COVID recession and into the new normal. There are several reasons for the decline in labor force participation, including early retirements and women leaving the labor force. But the key takeaway is that the national employment gap is no longer counting jobs lost due the coronavirus pandemic, but instead how many fewer people are seeking paid jobs at all.
This requires a recalibration of perception. Fewer people in today’s labor force means that these “missing” jobs are unlikely to come back soon, and may not come back at all.Being in or out of the labor force is a behavioral boundary that can be crossed at will in either direction. A person’s status of being out of the labor force versus in the labor force (but unemployed) depends on whether that person reports that he or she is currently looking for a job. The basis of the distinction is that job seekers are more likely to become employed in the near future than people not seeking jobs. Although the employment gap still provides a useful comparison of the current state of the US labor market compared to the pre-COVID labor market, it is time to recalibrate our perceptions. With labor markets at or near full-employment, an emerging new normal for the US economy looks different than the pre-pandemic old normal. Among other changes, it starts out with a smaller labor force and a lower level of employment.
The Great Reshuffle
What Is the Great Reshuffle? The Great Reshuffle refers collectively to several related dynamics, either caused or intensified by the COVID recession, that are ongoing today and may reshape the post-COVID US labor market. Among the most important of these are:
Some of these changes may be permanent as the US economy transitions to a new, post-COVID equilibrium.Changes in the labor force, including the wave of early retirements and reduced labor force participation, are topics of our special report, Is There a Labor Shortage? NCCI, August 11, 2021. Changes in labor force dynamics, centering on workers changing jobs, occupations, and industries and the changed expectations about employment relationships are discussed in the same special report and also in the two previous issues of the QEB: Quarterly Economics Briefing: Q2 2021, NCCI, August 6, 2021, and Quarterly Economics Briefing: Q3 2021, NCCI, October 27, 2021. How different sectors of the US economy have fared during the COVID recession and its recovery has been a central topic of the QEB for the past two years. Others that turn out to be transitory may still endure for several years. All are interrelated. For example, high job vacancy rates–caused by demand recovery, early retirements, job dropouts, or a combination of these effects–improves the prospect of finding a job and pushes up wages in the affected industries, encouraging quits by workers looking for new opportunities and feeding back on vacancy rates.
The Great Reshuffle and Workers Compensation. Labor market shifts and wage changes as part of the Great Reshuffle have specific implications for workers compensation:
The Great Reshuffle’s Leading Edge: Job Quits and Wage Inflation
An upsurge of workers quitting their jobs, popularly known as the Great Resignation, is happening now. But the eventual destinations of these workers—in new occupations, in different industries, or with new employers in their old occupations and industries—has yet to be revealed. How the Great Resignation ends, whether it temporarily ruffles labor markets or produces lasting changes, will depend in part on how other labor market dynamics play out, including early retirements, labor force participation rates, and shifts in the demand for labor across different sectors of the US economy. The Great Resignation is part of the Great Reshuffle, and its leading edge.
Workers Are Leaving Their Jobs More Frequently in Sectors Where Wages Are Rising Faster. From the beginning of the pandemic in early 2020, COVID-related job losses have been mostly concentrated in service sectors and among low-wage workers. Supply-chain backups that emerged during 2021 are widespread, but especially disruptive in industries like construction and manufacturing. Reports of COVID-related job stress leading to worker burnout, early retirement, and dropping out of the labor force often focus on front-line workers in service sectors like retail and health care, and among transportation workers like long-haul truckers and delivery drivers.
For the three months from September to November 2021, the average monthly private industry quits rate for the United States was 3.3%, up from 2.5% for the same three-month period in 2019, the last pre-pandemic year.The quits rate is the ratio of job leavers to the employment headcount over a period of time, usually monthly. Because monthly quits rates are volatile, we average the quits rate over a three-month period.
Here are some takeaways:
Workers Are Leaving Their Jobs More Frequently in Some States Than Others. Nationally, the rate of total nonfarm job quits increased from 2.3% during the three months from August through October 2019 to 2.9% during the same three months in 2021.The analysis in this section of interstate variation of job quits uses Job Openings and Labor Turnover Survey (JOLTS) data for all nonfarm workers (including government employees) because the private industry detail used in our sector-level analysis for the total US is not available at the state level. The inclusion of government employees reduces average quits rates in state data compared with national data for the same time periods. In addition, the state-level JOLTS data used is for one month prior to that in the preceding discussion of national quits rates by sector due to the timing of national and state data availability. And they were higher in every state except Alaska.
For the three months ending October 2021, 4.3 million US workers per month voluntarily left their jobs, up from 3.5 million per month for the same period in 2019. This increase in the national quits rate, amounting to about 800,000 more monthly job quits in late 2021 than two years previously, is what underlies the Great Resignation. A 0.6% increase in job quits is, therefore, a big increase.
For nearly half of all states, average quits rates for the three-month August to October 2021 period were between 2.9% and 3.3% (a deviation of +/– 0.2% from the median state), with roughly equal numbers of states above or below those rates.
State variations in job quits are driven by the same influences that are evident across sectors at the national level. Our analysis finds that a few key variables explain most of observed variation in state quits rates.Our model regresses average state quits rates for the three months from August to October 2021 with equal state weights. Hawaii is omitted from the analysis because it is a small state with unusual data values compared to other states. Hawaii has a very large employment share and high average wage in its Leisure and Hospitality sector together with an exceptionally high quits rate in September. The model is linear, so that effects via state wage levels and job vacancies add to, or intensify, effects via sector mix. State quits rates estimated from the model explain about two-thirds of the variation in actual state quits rates.
Sector mix affects a state’s quits rate. Leisure and Hospitality and Manufacturing are two sectors with employment percentages that are much higher in some states than others. Leisure and Hospitality is experiencing high quits rates everywhere, so states with higher employment shares in Leisure and Hospitality tend to have higher quits rates overall. Among other service sectors with high quits rates—including Retail, Professional and Business Services, and Health Care Services—employment percentages are similar across all states, with little state variation.
The story is slightly different for manufacturing. Not all manufacturing lines of business are experiencing high labor turnover. But those that are—like automobiles and food processing—tend to be concentrated in certain states.
State wage levels for low-wage jobs affect a state’s quits rate. Quits rates tend to be higher in states with lower average wages in the Leisure and Hospitality sector. The average wage in Leisure and Hospitality is a proxy for wage rates in low-wage service jobs generally.
State job vacancy rates affect a state’s quits rate, too. States with higher vacancy rates overall in a given month tend to have higher job quits rates in following months. Together with a state’s employment mix, state wage levels and job vacancies act as intensifiers.
Interestingly, we find that COVID-related variables, like state vaccination rates or state rules with respect to employer vaccination mandates, do not help explain variations in state quits rates beyond the variables discussed above. This is not the same as saying that COVID-related variables are irrelevant to workers’ decisions to leave their jobs. In Q4 2021, quits were elevated in all states, and especially in COVID-affected sectors like Leisure and Hospitality and Health Care. This analysis focuses on variation in quits rates across states, a different question.
A comparison of two states illustrates how these influences interact in practice. Kentucky’s quits rate is nearly 50% higher than that for Massachusetts, 3.6% versus 2.5%. Two variables account for most of the difference. Kentucky has a much bigger employment share in manufacturing than Massachusetts, and a much lower average wage for Leisure and Hospitality jobs. However, both states have similar employment shares in Leisure and Hospitality and job vacancy rates overall. The latter two variables do not contribute to the observed difference in quits rates between Kentucky and Massachusetts, although they do matter in comparisons between other states.
A Forthcoming NCCI Special Report: Where the Jobs Are
An important theme of the Great Reshuffle is how employment in the emerging post-pandemic US economy is shifting across sectors and states. Previous issues of the QEB have focused mainly on employment recovery by sector at the national level. But national employment trends obscure a great deal of variation among individual states.
Further, it is not true that most states are growing jobs faster (or slower) than other states across the board. Instead, patterns of job growth differ dramatically across sectors and across states. Emerging pictures of job growth in different sectors—Leisure and Hospitality, Health Care, Professional Services, Manufacturing, and Construction—highlight different groups of states as comparative leaders or followers. An upcoming NCCI special report will dive deeper into interstate profiles for employment growth by sector, addressing the question of where the jobs are.
Technical Note: BLS’s Benchmark Data Revisions for 2021
We do not usually address revisions in labor market data. Typically, these are small and mostly affect employment data from recent months. However, the recently released national jobs report for January 2022 is exceptional. By making substantial retrospective changes to jobs numbers in past months going back to January 2021, the BLS’s benchmark data revision of January 2022 is revising the history of the US labor market during the past year.
To give the flavor of these revisions for national data, the BLS added employment growth to months at the beginning and end of 2021 (January and February, November and December) while subtracting employment growth from summer months (May, June, and July). Employment revisions in these months are very large—from 100,000 to 400,000 jobs gained or lost in each month—compared with more typical benchmark revisions about one-tenth of those magnitudes.
Collectively, the big monthly employment revisions mostly net out; the sum of all monthly revisions for 2021 comes to a net gain of 200,000 jobs. The shift in employment headcount changes month-to-month employment growth, and likewise the historical time paths of employment gaps, both nationally and for individual sectors. Basically, employment growth previously accounted for during in the summer months is now reassigned to the first and fourth quarters.
The change in pre-revision and post-revision employment gaps is particularly striking for Leisure and Hospitality, the sector most strongly impacted by job losses during the COVID recession and with the largest remaining employment gap today. The graph below shows two time paths for the employment gap in Leisure and Hospitality: the first with pre-revision employment data from the December 2021 jobs report, the second with post-revision employment data from the January 2022 jobs report.
As of December 2021, BLS employment data showed that the employment shortfall in Leisure and Hospitality got below 10% in July, reaching 7% by year-end. Also, job recovery in the sector slowed during the Delta surge from July through September, and slowed again after that.
Following the January data revisions, the employment gap in Leisure and Hospitality became much higher throughout 2021, with the jobs shortfall just getting to 10% in January 2022. But month-to-month rate of job recovery throughout the past year also became much steadier than it was with pre-revision data, and unruffled by either Delta last fall or Omicron to date.
To sum up, the BLS’s major data revision in January 2022 shifts employment headcounts for most months in 2021 (and to a lesser extent in 2020 also). These changes affect measured employment gaps as well, both nationally and for specific sectors. The employment history of Leisure and Hospitality is strongly affected, as we have described above.