The pandemic has created an economic crisis unlike any recession on record. So perhaps it shouldn’t be surprising that the consequences have also manifested themselves in a way that almost no economist expected.
When unemployment soared in the first weeks of the pandemic, many feared a repeat of the long, slow recovery of the Great Recession: years of unemployment that left many workers permanently scarred. Instead, the labor market recovery was, in many ways, the strongest on record.
At the start of 2021, some economists predicted a surge in inflation. Others were sceptical: similar predictions in recent years – in some cases by the same meteorologists – had not come true. This time, however, they were right.
And when the Federal Reserve began trying to rein in inflation, there were warnings that the job market was sure to collapse, as it had threatened to do every time policymakers began raising interest rates too quickly in the decade. before the pandemic. Instead, the central bank has raised rates to the highest level in decades, and the job market remains stable, or perhaps even gaining ground.
The final chapter on recovery has not been written. A “soft landing” is not a done deal. But it’s clear that the economy, particularly the job market, has proven far more resilient than most people thought likely.
Interviews with dozens of economists — some of whom got the recovery partly right, many of them largely wrong — provided insights into what they’ve learned over the past two years and what they think about the labor market Right now. They didn’t agree on all the details, but three general themes emerged.
1. This time was really different.
Economists have learned to be cautious in concluding that “this time is different.” No matter how different the specifics, the fundamental laws of economic gravity tend to remain constant: bubbles burst; debts come due; Hiring and firing patterns evolve in ways that are largely, if imperfectly, predictable.
But the pandemic recession was truly different. It wasn’t caused by a fundamental imbalance in the economy, like the dot-com bubble in the early 2000s or the subprime mortgage boom a few years later. It was caused by a pandemic that forced many industries to shut down practically overnight.
The response was also different. Never before has the federal government provided so much aid to so many families and businesses. Despite mass unemployment, personal incomes increased in 2020.
The result was a fast but chaotic recovery. When vaccines allowed people to go out again, they had money to spend, but companies weren’t ready to let them spend it. They had lost millions of workers, some of whom had moved to other cities or industries, or started their own businesses, or who were unavailable to work because schools remained closed or the health risks still seemed too great. Companies had to navigate supply chains that remained entangled long after daily life returned to normal, and had to adapt their business models to schedules, spending patterns and habits that had changed during the pandemic.
In retrospect, it seems obvious that normal economic rules may not apply in such an environment. Normally, for example, when job opportunities decrease, unemployment increases: with fewer opportunities available, it is more difficult to find work. But coming out of the pandemic shutdowns, even after the initial hiring rush slowed, there were still more vacancies than workers to fill them. And companies were eager to retain the employees they had worked so hard to hire, so layoffs remained low even as demand began to cool.
Some economists have acknowledged that the pandemic economy will likely follow different rules. Christopher J. Waller, the Fed governor, argued in 2022 that job opportunities could decline without necessarily increasing unemployment, for example. But many other economists were slow to recognize the ways in which standard models did not apply to the pandemic economy.
“It’s the danger of predicting what will happen in extreme times from linear relationships estimated in normal times,” said Laurence M. Ball, an economist at Johns Hopkins. “We should have known.”
2. The job market is returning to normal – and normal is a good thing.
The job market doesn’t seem so strange anymore. In fact, it looks largely identical to before the pandemic began. Job offers are slightly higher than in 2019; labor turnover is slightly lower; the unemployment rate is almost the same.
The good news is that 2019 was a historically strong job market, characterized by gains that crossed racial and socioeconomic lines. The 2024 version is, in some respects, even stronger. The gap in unemployment between black and white Americans is near an all-time low. Employment opportunities have improved for people with disabilities, criminal records and low levels of formal education. Wages are rising across all income groups and, now that inflation has cooled, are outpacing price increases.
“Normal” looks a little different five years later, of course. The pandemic has pushed millions of people into early retirement, and many have not returned to work. The persistence of remote and hybrid work has hurt demand for some businesses, like laundries, and shifted demand for others, like weekday food and beverage outlets, from cities to suburbs.
But while these models will continue to evolve, the period of frenetic rehiring and reallocation is largely over. Workers continue to change jobs, but they no longer leave home during their lunch breaks to pursue a better-paying opportunity down the street. Employers still complain that it’s hard to hire, but they no longer offer signing bonuses and double-digit pay raises to get people to join.
As a result, many economic rules abandoned at the start of the recovery may become relevant again. Without such a glut of job vacancies, for example, a further decline in vacancies could actually portend a rise in unemployment. This doesn’t mean that older models will work perfectly, but they may need to be looked at again.
“You can easily imagine that we had a period where, man, a lot of strange things happened, but now we’re returning to a world that we understand,” said Guy Berger, director of economic research at the Burning Glass Institute, a research on the labor market.
3. The good times don’t (necessarily) have to end.
A few years after the end of the Great Recession, many economists began warning that the United States would soon run out of workers.
Employment had surpassed its pre-recession peak. The unemployment rate was approaching 5%, a level that many economists associated with full employment. Millions of people had dropped out of the workforce during the recession, and it was unclear how many wanted a job or could get one if they tried. The nonpartisan Congressional Budget Office estimated in early 2015 that job growth would soon slow to a trickle, just enough to keep pace with population growth.
These projections turned out to be extremely pessimistic. U.S. employers added more than 11 million jobs from the end of 2014 to the end of 2019, millions more than the Budget Office expected. Companies hired job seekers they had long shunned, pushing the unemployment rate to its lowest level in 50 years and raising wages to attract people from the sidelines. They’ve also found ways to make workers more productive, allowing companies to continue growing without adding as many employees.
It is possible that if there had been no pandemic, the job growth of previous years would have eventually petered out. But there’s little evidence that was an imminent prospect in 2020, and there’s no reason it needs to happen in 2024.
“A strong job market triggers a virtuous cycle, where people have jobs, buy things, companies do well and hire more people,” said Julia Pollak, chief economist at jobs site ZipRecruiter. “It takes something to slow that train down and break that cycle.”
Some kind of disruption is possible. The Fed, nervous about inflation, may wait too long to start cutting interest rates and cause a recession after all. And recent data may have overestimated the strength of the labor market: Economists point to several signs that cracks may be forming beneath the surface.
But pessimists have been citing similar cracks for over a year. So far the foundation has held up.