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Pandemic Could Be Reshaping The Labor Market

  • Publication: 
    Federal Reserve Bank of Atlanta
    Date: 
    March 29, 2021

    Will yesterday's front-desk clerk be tomorrow's pharmaceutical technician?

    That question, and countless ones like it, could face millions of American workers in the coming years, as the COVID-19 recession appears to be intensifying a reshuffling of employment across the economy.

    Millions of jobs in restaurants, travel-related industries, and other sectors that rely on people gathering have disappeared because of COVID-19. Meanwhile, job losses were smaller or nonexistent in sectors where people can more easily work from home.

    Demand for labor is being redistributed across occupations and industries on a scale not seen in decades, a reshuffling that could last for years, according to a growing body of research. A January working paper by Atlanta Fed economist Brent Meyer and three coauthors, 'COVID-19 Is a Persistent Reallocation Shock,' finds that businesses expect the rate of job shifts will more than double from the prepandemic average over the next year (see chart 1). The paper is based on the Atlanta Fed's ongoing national Survey of Business Uncertainty, which detected significant shifts in executives' thinking, such as plans to substantially reduce business travel.

    'That could fundamentally change the makeup of the economy,' Meyer said. 'This reallocation could shift labor demand away from travel and industries that support business travel, and toward industries that support housing, retrofitting housing for offices, and other sectors.'

    An August 2020 paper by Chicago Fed senior economist Joel David suggests that the shuffling of jobs across industries could increase unemployment for years, because workers who had been in affected industries would need to acquire new skills to work in different industries and, in some cases, move to new locations-all of which takes time.

    It's early yet. Identifying long-term trends in the $20 trillion-plus U.S. economy is complex, particularly amid a societal earthquake like a global pandemic. But it's safe to say that the postpandemic employment outlook is highly uncertain, said Atlanta Fed research economist John Robertson, who studies labor markets.

    A counterargument to the reallocation theory holds that labor market fallout from this economic downturn could differ from that of the Great Recession. It took nearly five years after that downturn for total nonfarm employment to recover its losses, constituting what many observers called a 'jobless recovery.' The 2007-09 downturn wiped out about 2.3 million manufacturing jobs, and just before the pandemic, factory employment was still down nearly a million jobs-and it's fallen further since. Hundreds of thousands of jobs in general department stores and mining and logging wiped out in the Great Recession also have not returned, according to the U.S. Bureau of Labor Statistics.

    But the current situation could be different because many manufacturing jobs were readily automated. By contrast, the bulk of jobs lost in the pandemic recession are in leisure and hospitality jobs where robots are not quite as well suited to serve food, clean hotel rooms, provide security services, and in general perform the type of work involving personal interaction.

    Still, firms are increasingly automating tasks like ordering fast food and checking into hotels, Robertson said. Fed officials, including Board of Governors chair Jerome Powell and Atlanta Fed president Raphael Bostic, have noted signs of businesses speeding adoption of labor-saving technologies during the pandemic.

    In fact, in a January news conference Powell said the jury is out on how long a reallocation of jobs might last, but added, 'We're going to a different economy.' For instance, as working at home is likely to remain widespread, restaurants, dry cleaners, and other businesses near office districts could face a tougher future. And Bostic said hospitals' growing reliance on telemedicine could reduce the need for an array of related facilities such as onsite cafeterias and parking decks.

    Atlanta Fed contacts and data reveal that sales and economic growth, as measured by gross domestic product, have in fact rebounded faster than hiring, another sign that companies may be doing as much, or even more, with fewer workers.

    Numerous business contacts have told the Atlanta Fed's Regional Economic Information Network staff that, even as business improves, they are hesitant to hire because of deep and lingering uncertainty. They don't want to bring on staff they might later have to let go.

    If a wholesale shifting of jobs is occurring, technology and agile business practices are probably not the only reasons. Another potential cause flows from the increasing concentration of sales in certain industries, according to the work by Meyer and coauthors and separate research by economists including the Atlanta Fed's Salome Baslandze. The pandemic-induced economic downturn appears to be accelerating a decades-long migration of market share to a few industry titans.

    One or a small number of buyers that dominate a given market can gain what economists call 'monopsony power.' When the good those firms purchase is labor, a small number of employers with outsize power will tend to offer lower pay and benefits, Meyer said. Such a scenario leaves workers with fewer choices, so they must adjust to suit the employers offering jobs.

    A lasting reallocation of work could present formidable challenges in retraining and otherwise equipping millions of people to change careers. During the pandemic, most people who lost jobs were in lower-paid occupations and therefore tend to be comparatively ill-suited-in terms of both their finances and job skills-to change occupations nimbly.

    Research has established that the longer someone stays out of work, finding a new job and making up lost income become harder-and it's impossible if they give up looking for work and leave the labor force entirely.

    In fact, the number of people who dropped out of the labor force has grown by nearly 5 million during the pandemic. And the share of workers with an extended spell of unemployment has risen dramatically (see chart 2). It is important to note that despite the long period of being out of work, many of the long-term unemployed still say they are on temporary layoff. Whether that proves true isn't certain.

    Though all this may appear discouraging, the outlook isn't entirely gloomy. For one, Bostic and other Fed officials are not ruling out a vigorous economic rebound once the pandemic is under control, which would presumably reignite job growth even in leisure and hospitality. Already in February, the economy generated 379,000 new jobs and employment growth was broad-based across industries. Still, the country is more than 9 million jobs down from before the pandemic. Based on February's pace of employment growth, according to calculations by Atlanta Fed economists, it would take until March 2023 for employment to recover to pre-COVID levels.

    To boost longer-term prospects, workforce development researchers at the Atlanta Fed and elsewhere have accrued critical insights on how to sharpen job training and 're-skilling' programs to prepare workers for occupations likely to be ascendant in coming years (see chart 3).

    Fundamental needs include better coordination among employers, training organizations, and other elements of the nation's workforce development ecosystem.

    'But today, the wiring is all wrong,' Bostic, Philadelphia Fed President Patrick Harker, and Tracy Palandjian, chief executive officer and cofounder of a nonprofit called Social Finance, write in the foreword to a forthcoming book titled Workforce Realigned.

    'Students choose education and training programs without any assurance of better jobs down the line; governments spend money on services without any guarantee of their impact; employers hesitate to fund employee supports or upskilling for fear their investments won't pay off,' their foreword says. 'Each actor in our fragmented workforce system acts independently, in the face of daunting risks and uncertain rewards.'

    Too often, rather than focusing on whether people land jobs, programs have been designed mainly to comply with benchmarks such as numbers of people trained, said Stuart Andreason, director of the Atlanta Fed's Center for Workforce and Economic Opportunity (CWEO).

    The workforce development system also would benefit from greater attention to local market conditions because they differ greatly from one place to the next. And training curricula need to be grounded in current data because the labor market is changing so rapidly, Andreason added.

    CWEO and its partners have published extensively on these issues and devised tools such as the Opportunity Occupations Monitor to help workers and employers. The Atlanta Fed also has formed numerous partnerships aimed at streamlining the country's workforce development ecosystem.

    In August, for example, the Reserve Bank partnered with other organizations to launch the Rework America Alliance. This initiative aims to help workers emerge from the pandemic crisis better positioned to move into good jobs regardless of formal education.

    The Atlanta Fed has also devoted considerable research to understanding benefits cliffs. Cliffs are reductions in public benefits that can result when lower-wage workers get even small bumps in pay. By leaving workers financially worse off, cliffs may discourage them from upgrading their skills. The Atlanta Fed's Advancing Careers for Low-Income Families initiative is forging tools to support community and state efforts to confront benefits cliffs.

    Those tools are intended to help workers climb a career 'ladder' in part by adding skills related to those they already have. There is considerable promise there. Research from [email protected], a nonprofit that helps workers earn to their potential, found that 30 million U.S. workers have skills that would allow them to perform jobs paying at least 50 percent more than their current positions.

    Researchers from the Federal Reserve Banks of Cleveland and Philadelphia analyzed tens of millions of ads for lower-wage jobs in the nation's 33 largest metropolitan areas. For nearly half of those jobs, they identified at least one higher-paying occupation requiring similar skills in the same metro area.

    Along with targeted training and more widely available information, hiring processes that 'recognize the portability of skills across occupations' could boost economic mobility for lower-wage workers and help meet employers' talent needs, the authors concluded. But these disproportionately Black and Hispanic workers often lack paths to better jobs, Byron Auguste, chief executive officer and cofounder of [email protected], said at a Fed Racism and the Economy webinar in November 2020.

    One way to clear more paths is to rethink qualification policies. For instance, workforce development experts advocate new efforts to hire based on workers' actual competencies rather than their educational credentials. This more practical, skills-based approach could make a real difference. Auguste pointed out that requiring a bachelor's degree as a screening mechanism when job duties don't truly demand one excludes 75 percent of Black workers, more than 80 percent of Hispanics, and 80 percent of rural residents.

    If the pandemic is in fact initiating a mass reallocation of labor, that phenomenon presents daunting challenges for the macroeconomy-not least for economic policymakers seeking to promote mobility and resilience for as many people as possible. Policymakers and researchers have no obvious playbook to consult because the current crisis was not sparked by ordinary economic fundamentals but by an extraordinary pandemic.

    'This,' said Bostic, 'could be an experience that changes things fundamentally in ways that we won't understand for a while.'

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