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How COVID-19 Has Damaged the Labor Market—and How to Fix It

June 25, 2020

How do we get Americans back to work safely again, and more quickly than ever before?

This past weekend marked 100 days since the president declared the COVID-19 pandemic a national emergency. In those 100 days, the prior 10 years of job gains were erased, and 45.7 million people (more than one in every four workers) sought unemployment benefits.

Usually, after unemployment peaks in recessions, it only recovers very slowly. An exceptionally rapid, deep, and broad employment crisis such as this one should prompt businesses, policy makers, academics, and civil society organizations to focus on one question: How do we get Americans back to work safely again, and more quickly than ever before?

Phase I of the Crisis: Temporary Layoffs in Face-to-Face Service Industries

Initially, the pandemic forced restaurants, theaters, hotels, gyms, clothing stores, salons, and dentists’ offices to close and place workers on temporary layoff. Between February and April, the number of Americans classified as employed fell 16.0% from 158.8 million to 133.4 million. Younger workers under age 25 (-31.3%) and Hispanics (-20.9%), who are heavily overrepresented in the restaurant industry, saw the largest declines. The least-educated workers, whose jobs were least amenable to remote work, were also disproportionately affected. (Employment declined “only” 6.2% for college graduates, but 26.0% for high school dropouts.)

But as temporary lockdowns were extended again and again, many service sector businesses realized they would not recover, and temporary layoffs became permanent. Household-name brands filed for bankruptcy or announced store closures—among them  J.C. Penney, Neiman Marcus, J.Crew, CMX Cinemas, Gold’s Gym, 24 Hour Fitness, Hertz, and Chuck E. Cheese. The restaurant industry prepared for permanent closures of up to 200,000 locations.

Closed due to COVID sign

Phase II: Permanent Layoffs Everywhere Else

Losses in travel, tourism, and face-to-face service industries quickly rippled through the economy. Declining retail sales reduced demand for wholesale purchases and erased the sales tax revenues on which state and local governments depend. A dramatic pullback in advertising spending forced closures or cuts in dozens of newspaper and radio newsrooms and slashed tech industry revenues. So after March saw record-smashing layoffs in the leisure and hospitality and retail sectors, April saw record layoffs almost everywhere else: mining and logging, construction, durable goods manufacturing, wholesale trade, information, financial activities, and state and local government.

Phase III: A Fragile, Partial Recovery

The May jobs report showed a partial recovery, with 15% of those who had been on temporary layoff in April recalled in May. But not all groups recovered equally. Workers aged 65 and older recovered almost none of the jobs lost in the prior two months, a sign that the pandemic has likely pushed many older workers out of the workforce for good, causing a permanent productivity loss. There was also little recovery in black employment (just 1.7% growth in employment levels between April and May compared to 3.3% for whites and 2.9% for Hispanics).

Workers aged 65 and older recovered almost none of the jobs lost in the prior two months.

Meanwhile, the number of unemployed Americans who reported having lost their jobs permanently actually rose by 295,000, with losses appearing in even the highest-paying white-collar industries, such as computer systems design, management, film, telecommunications, and broadcasting. And job postings, which had fallen 47% since February, according to ZipRecruiter data, remained stubbornly low. Not only were too many workers still being laid off in May, but too few workers were being hired.

The Tragedy of COVID-19’s Labor Market Impact

older male worker

This is all particularly tragic given the labor market conditions that prevailed before the pandemic struck. Over the past half century, skill-biased technological change and globalization caused a strong shift in relative labor demand towards more-educated workers and against less-educated workers. The result was increasing educational wage differentials and slow real wage growth for low-income workers. Less-educated workers had experienced the greatest difficulties adapting to the emerging economy.

But after the longest employment expansion in U.S. history between 2010 and 2020, employment growth had finally delivered real wage growth, especially for minorities, workers at the bottom of the wage distribution, and low-wage industries. Recruitment and retention challenges were encouraging employers to expand their talent pools, trim skills requirements, offer greater schedule flexibility, and invest more in job training. Many workers who finally got a chance now feel as though they’ve gone back to square one.

The Labor Market Needs Urgent Attention

Despite the pandemic’s toll on the labor market, vast federal support through expanded unemployment benefits, relief checks, and forgivable loans to small businesses have averted an increase in poverty. More renters have paid rent on time than was expected. But policy makers will soon need to transition from passive income support to interventions that support re-employment. Here are some ideas worth exploring:

Restructuring unemployment insurance (UI). UI needs to be restructured to encourage re-employment, not punish it. Re-employment bonuses could accelerate the return of UI recipients to work, and partial benefits for people who accept part-time or temporary jobs, gig work, or internships could help people find stepping stones to permanent positions. Partial UI payments that support workers while they start a small business could also encourage entrepreneurship.

As a first step, it may soon be time to reinstate the requirement that UI recipients search for work. The CARES Act removed that condition and workers’ recall expectations removed the impulse to proactively seek employment. But past research suggests that many temporarily laid off workers who initially expect to be recalled never are. Delaying one’s job search tends to lead to extended unemployment spells and lower reemployment wages (PDF). Thanks to online job search options, drive-by job fairs, video interviews, and growth in remote work opportunities, an increasing number of Americans can apply, interview, and work safely, even during the pandemic.

Investing in skills training. The U.S. invests far more in educating youth who go to college than those individuals who don’t attend college. It is time to explore direct investments in schools, expanded tax credits for employer-provided job training, and funding for training programs with a track record of success that award GEDs and vocational certifications. Those steps could enhance workforce adaptability and improve the labor market prospects of the most vulnerable workers.

The U.S. invests far more in educating youth who go to college than those individuals who don’t attend college.

Expanding access to quality child care. Female employment was thriving at the start of the year, not only due to a tight labor market, but also due to recent public policy changes. With bipartisan support, the Administration had doubled the child tax credit and signed the biggest funding increase to the Child Care and Development Block grants, increasing access to quality child care. With schools and daycare centers closed during the pandemic, working mothers have been 20 percentage points more likely to take a primary role in home education and caregiving than working fathers. That may partly explain why female employment has fallen more steeply during the pandemic. Innovative programs to expand access to safe, quality child care are an urgent matter.

Getting rid of barriers to employment growth. Policies that restrict the supply of affordable housing in key job growth centers restrict access to opportunity. It’s time America’s state and local governments conducted thorough audits of zoning laws and building codes to encourage housing growth. Some economists believe the tax code is biased against labor and in favor of automation. Reducing taxes on labor could make it relatively more attractive to hire workers. We could keep state-sponsored certificates that professionalize occupations and signal to employers that workers have completed training, but remove licensing laws that serve as barriers to entry and forbid people from practicing in their occupation. And we could expand tax credits for low-wage workers that provide support while encouraging work.

A Call to Action

There are hundreds of highly promising evaluations of public, private, and civil society programs that improve labor market outcomes—especially for the most vulnerable workers.

The unprecedented coronavirus recession is the time to pull them off the shelf, disseminate the success stories widely, and put them into practice on a larger scale than ever before.

Labor Economist at jobs marketplace ZipRecruiter