By Leonard F. Herk and Francesco Renna
Posted Date: April 25, 2022
US Employment Is (Almost) Back to Its Pre-Pandemic Level
Undeterred by the Omicron wave of the coronavirus, the national employment gap reached –1.0% in February and closed the first quarter at –0.6%.The employment gap measures the employment effect of the coronavirus pandemic. The employment gap is the difference between actual employment and an estimate of expected employment based on pre-COVID benchmark, accounting for seasonal variations. A negative employment gap indicates a shortfall of current employment relative to its pre-pandemic benchmark. Likewise, a positive employment gap indicates that current employment exceeds its pre-pandemic benchmark. The employment gap does not account for employment growth that would be expected to occur organically due to population growth over time. For the first time since the COVID pandemic hit two years ago, US employment closed to within 1 million of its pre-pandemic level in March.
A recurrent theme in the Quarterly Economics Briefing (QEB) is the remarkably steady pace of US employment recovery from month to month despite a succession of events—COVID surges, labor shortages, supply chain disruptions—that might have been expected to alter its course. In the last issue of the QEB, we observed that the national employment gap declined on average by 0.4 percentage points per month from January 2021 to January 2022. That pace continued through March, despite the Omicron surge that peaked with 20 million new cases in January, keeping the US economy on track to recover its pre-COVID level of employment sometime during the second quarter of 2022.
Net of Leisure and Hospitality, the US economy is already above pre-pandemic employment. Not counting Leisure and Hospitality, other sectors of the US economy collectively gained 600,000 jobs as of March compared to pre-pandemic levels. This amounts to a 0.5% employment surplus in the US economy net of Leisure and Hospitality, compared to the 0.6% employment shortfall including Leisure and Hospitality. With an employment shortfall of nearly 9%, or 1.4 million jobs, Leisure and Hospitality is the only major sector in which jobs remain well short of pre-COVID levels.
In Leisure and Hospitality, many missing jobs may not be coming back. One reason is decreased labor force participation of both young workers, 16–24 years of age, and old workers, age 55 and over. Both of these demographic groups are important sources of workers in the restaurant industry. Another reason is the reduction in immigrant workers.See our discussion of “missing” workers in a following section. With fewer workers to draw upon, the restaurant industry has had to raise wages by double digits, surpassing wage increases in other sectors. Even so, restaurant managers are finding it difficult to attract and retain staff. This situation is resulting in reduced hours for some establishments and closures for others. The post-COVID US economy has fewer restaurants and fewer restaurant workers, a situation likely to persist at least for the next several years.
Among service sectors, both Retail Trade and Professional, Business, and Other Services are growing employment. Professional, Business, and Other Services is a composite sector with a wide range of services, from accounting to lawn care. It is the largest employer by headcount among all of our sectors and contains many small businesses and start-ups. This sector has gained 430,000 jobs compared to pre-pandemic levels.
Counterbalancing these gains, Education and Health Services lost 450,000 jobs since before the pandemic. As we have noted before, jobs related to health care services constitute the dominant share of the latter category; education is a much smaller contributor. The main reason for the disparity is our focus on private employment: many education workers are public employees.
Construction and Manufacturing are back at nearly pre-pandemic levels of employment. For both of these sectors, interstate variations in employment levels are significant. Some states are now well above pre-pandemic employment levels in Construction or Manufacturing, while others remain below.
Transportation and Warehousing expanded employment during the past two years. This is a result of two related changes in consumer behavior during the COVID pandemic, both of which have endured: a shift in consumption toward goods instead of services, and a shift to direct delivery versus in-person shopping. In the latest data for March, there are 600,000 more jobs in Transportation and Warehousing than before the pandemic.
Mining and Logging, which includes drilling and extraction of oil and natural gas, remained depressed through the first quarter. However, with US prices for oil and natural gas at record highs, domestic drilling is up and employment will follow. Oil and natural gas extraction is a significant contributor to employment in a handful of US states, including Texas, California, Louisiana, Oklahoma, Pennsylvania, and North Dakota, but nonexistent in most others. The first quarter of 2022 was a strong hiring period. This can be seen in the graph below which shows the time paths of employment gaps for several selected sectors.
Although employment in Leisure and Hospitality remains well below its pre-pandemic level, this sector is hiring more workers. We expect to see further job growth during the summer, the peak hiring season for most of the country, but not a return to pre-pandemic employment levels at restaurants, bars, and hotels.
National employment paths for other selected sectors—Education and Health Services, Manufacturing, and Construction—are similar. Each has experienced stable month-to-month employment growth, though at different rates, producing roughly straight-line paths. This is despite the fact that these sectors faced very different challenges during 2021. Demand for manufactured goods and residential construction was strong throughout the year, but both sectors confronted serious material shortages and supply chain disruptions. Health care providers did not face serious supply disruptions, but stress and burnout contributed to high rates of worker resignations and early retirements. At both national and state levels, employment recovery in Health Services has been notably slower than for other sectors of the US economy over the past two years, though stable from month to month.
For other sectors not shown in the chart, paths of national employment recovery since January 2021 are similar to those for the three selected sectors. Starting from single-digit employment gaps at the beginning of 2021, national employment in most of these remaining sectors is now close to pre-pandemic levels, plus or minus a couple of percent.As an aside, job growth paths for 2021 for all major economic sectors are smoother following the US Bureau of Labor Statistics (BLS) benchmark data revisions of January 2022 than they were with the BLS’s earlier, unrevised data. Exceptions are Transportation and Warehousing, which has gained jobs; and Mining and Logging, in which we expect to see job gains during 2022.
It’s not a recovery anymore. It is getting hard to argue that the US economy is still recovering from the COVID pandemic. Rather, the US economy looks to be back at full employment, but with 800,000 fewer jobs in March 2022 than two years previously, before COVID.Full employment is an intuitively appealing but subjective designation for a labor market that is operating at its “full” capacity. A state of full employment is not objectively observable, and it is even difficult to define the concept precisely. Economists generally understand full employment to mean the lowest unemployment rate an economy can sustain without triggering rapid wage inflation. This is an inherently imprecise definition, mainly because the relationship between the unemployment rate and wage inflation is not well understood.
A variety of evidence supports the conclusion that the US economy is at full employment. The national unemployment rate was 3.6% in March and has been at or below 4% since December.Unemployment rates just before the pandemic were slightly lower, around 3.5% from December 2019 through February 2020. At that time, the US economy was generally acknowledged to be at full employment. In living memory, workers have never had such an easy time changing jobs and employers have never faced as many challenges attracting and keeping personnel. Wage growth, stable at around 3% per year since the end of the Great Recession, is now up a couple of percentage points on average, and much more rapid in sectors and skills with severe labor shortages. Today’s Great Reshuffle in labor markets—the large-scale migration of workers across jobs, occupations, and sectors—is enabled by a high demand for workers and the prospect of finding better wages, benefits, and opportunities with a new employer.For more on the Great Reshuffle in labor markets, what it is and what is driving it, see the Quarterly Economics Briefing, Q4 2021, NCCI, February 14, 2022.
In fact, the US economy is running hot. In March, the Consumer Price Index (CPI) showed 8.5% annualized inflation, including big price jumps for food and gasoline. With consumer prices rising faster than at any time since the 1970s, the Federal Reserve is shifting its focus from supporting economic recovery to curbing inflationary pressure.
To paraphrase jazz great “Fats” Waller, if that isn’t full employment then it will have to do until the real thing comes along.Until the Real Thing Comes Along, Thomas “Fats” Waller.
Acknowledgement that the US economy is at full employment implies a fundamental change in perspective. Full employment means that economic recovery from COVID is over and the post-COVID new normal is here. As a consequence, comparisons to pre-COVID employment levels provide a framework for evaluating how the economy has changed in the past two years, but no longer carry the expectation that these changes will be recovered or undone in the future. Employment shifts across sectors—for example, job losses in Leisure and Hospitality and job gains in Professional, Business, and Other Services and Transportation and Warehousing—are more likely to indicate lasting structural changes in the US economy than transitory COVID-era anomalies.
Labor Force Participation and “Missing” Workers
There are fewer people participating in the US labor force today—either working or actively looking for work—than when the COVID pandemic began two years ago. At the onset of the COVID pandemic in spring 2020, almost 8.5 million workers dropped out of the labor force. This huge decline in labor force participation was the result of massive layoffs, plus the expectation that it was either pointless to look for work with few jobs on offer or too risky to take jobs that were offered.
Most workers have returned to the labor force in the past two years, but a large number still have not. A primary cause of labor shortages, and ultimately of the Great Reshuffle in labor markets, is that there are fewer workers in the labor force today than there used to be.
In the first quarter of 2022, the US labor force was smaller by roughly 2 million people compared with early 2020, just prior to the COVID pandemic.In calculating the change in labor force participation, we net out BLS’s 2022 population control adjustment. This is to allow comparability with our employment gap concept, which does not include population growth over time. This is extraordinary. Ordinarily, the labor force increases every year, growing at a rate roughly commensurate with the rate of population increase.
The demography of the US workforce changed during the COVID years from early 2020 to the present. Who are the 2 million “missing” workers? In large part, they are women, young and old workers, and immigrants.
Women. Women account for three-quarters of the decline in the labor force from February 2020 to February 2022. There are 2% fewer women in the labor force over the same period.
Young and old workers. Labor force participation among prime-age workers (25 to 54 years) has almost completely recovered to less than 1% below its pre-pandemic level. But 3% of young workers (16 to 24 years) and 2% of old workers (55 years and over) have not returned. Young and old workers constituted about one-third of the labor force in February 2020, but account for almost two-thirds of the drop in the labor force from that time to February 2022.Rising consumer prices are starting to push some retirees to come back into the labor force, while also deferring retirement decisions for other workers, Everything Costs More, and That’s Disrupting Retirement for Many, The Wall Street Journal, April 11, 2022.
Immigrant workers. Immigration fell markedly during the COVID pandemic. The chart shows the number of work visas issued for the 12 months ending in June of each year. Fewer work visas were issued during the year ending in June 2020, including the first few months of the pandemic, than in any of the five preceding years. The drop-off accelerated after that. For the year ending in June 2021, the United States issued 242,000 fewer work visas than during the same period in 2019, a reduction of almost 60%. Assuming a similar reduction in visa issuance through last February, eight months into the year ending in June 2022, there may be as many as 480,000 fewer immigrant workers with work visas in the United States today than before the pandemic, amounting to almost 25% of the decline in the US work force.Estimating the number of immigrant workers in the US labor force is challenging. Our analysis relies on the number of immigrant workers with work visas. The Bureau of Labor Statistics publishes data on the number of foreign-born workers, a much broader designation. Other research cites the decline in annual immigration to the United States, Add Declining Immigration to Problems Weighing on the Labor Market, The Wall Street Journal, April 5, 2022. All estimates indicate a significant decline in the number of immigrant workers in the labor force during the past several years, but it is difficult to quantify a magnitude.
Is a Recession on the Horizon?
It is hard to imagine a recession on the near horizon with the US economy at full employment, households armed with high savings balances, labor markets tight, and wages rising. Nonetheless, a burgeoning cottage industry of prognosticators is contemplating to what degree a recession sometime in the next year, while not exactly likely, is at least more likely now than a few months ago. Recent polls and forecasts from various sources put the risk of a US recession by year-end 2022 (or sometime later in 2023) anywhere from 25% to 33%, while a few go as high as 50%. Rather than opine on whether the odds of a recession are 1-to-3 or even, and on what time horizon, we consider a few leading narratives for how a recession might come about.
A global recession caused by the Russia-Ukraine war. The Russia-Ukraine war is already having a negative impact on global economies, mainly by disrupting supplies and raising prices for food, oil, and natural gas. In a prolonged war, lasting through the end of this year and perhaps into next, economic consequences are likely to become increasingly severe.
If the war lasts into 2023, a global recession precipitated by food shortages and high energy prices is the most likely scenario for a recession in the United States. Economic effects of the war are global, and the United States will not escape a global recession. But the Russia-Ukraine war alone is unlikely to tip America into recession. Neither Ukraine nor Russia are significant trading partners, and America is a major producer of both food and energy—the two products most impacted by the war. The war is pushing up already high prices for food and oil in the United States and intensifying price inflation as measured by indices like the CPI. As the war continues, sustained high prices for food and oil can be expected to cool consumption demand and slow down the pace of US economic growth for the remainder of 2022 and beyond. But absent a global recession, higher food and oil prices alone are unlikely, in our view, to push the growth rate of US output and employment from positive to negative—as would be necessary to start a recession.
A US recession caused by an overheated economy, price inflation, and a too-strong-too-late Fed. This is the position of economist Larry Summers. Summers has been critical of the Federal Reserve’s policy stance favoring support for economic recovery over fighting inflation since 2021. More recently, he has been critical of the Fed’s shift to monetary restraint. While Summers’ conviction of a pending US recession does not presume a global recession and predates the Russian invasion of Ukraine, his argument has gotten more play since February.Summers Sees Consensus Building Toward Inevitable US Recession, Bloomberg, April 8, 2022.Summers’ belief that the Fed has been too slow to respond to inflationary pressures is shared by others, and he is a prominent advocate of the viewpoint that past recessions have been caused by the Fed waiting too long to respond to inflation and then applying monetary policy “brakes” too hard.Other forecasters share Summers’ concern about the policy risk faced by the Fed in trying to restrain price inflation without driving up unemployment and provoking a recession, but not his conviction that a US recession is inevitable Goldman Sachs Sees US Recession Odds at 35% in Next Two Years, Bloomberg, April 17, 2022.
In our view, the circumstances of the post-COVID recovery during the past two years are historically unique. While the Fed may indeed fail to achieve a “soft landing” for price inflation, and in so doing cause an unintended recession, we are less inclined to believe that perceived historical trade-offs between inflation and unemployment are likely to be predictive in the aftermath of the COVID recession.
A US recession foretold by an inverted Treasury yield curve. This perspective is perhaps the most mysterious of the lot. In normal times, yield curves slope upwards—meaning that long-dated bond maturities have higher yields (lower prices) than short-dated maturities. This is essentially because of investors’ uncertainty about the future, plus risk aversion.
However, yield curves sometimes invert—longer dated maturities have lower yields (higher prices) than short-dated maturities. And these inversions sometimes precede recessions. The theory goes like this: investors anticipating a coming recession undertake a “flight to quality,” cashing out of riskier assets and parking money temporarily in the comparatively safe haven of long-dated bonds. The US Treasury curve briefly inverted for a couple of days at the beginning of April, putting this theory in play.
Strictly speaking, an inverted yield curve does not cause a recession but merely predicts it. Along with polls of economists, an inverted yield curve is actually just another poll—putatively conducted among bond traders. While inverted yield curves are intriguing, we are inclined to be skeptical of their predictive power.