Commentary, Macroeconomics

COMMENTARY: The Pandemic Economy and the Power of Labor

Devan Bhumralkar, Stanford University

Inflation has become an unfortunate fact of life in the post-pandemic era. But with Americans dipping deeper into their savings for holiday shopping and keeping their houses a little cooler this winter season to save on energy costs, many are wondering when—and how—it ends. The Federal Reserve has been on a rate-raising mission to combat inflation since early 2022, but while everyone is concerned about consumer prices, what this means for the job market remains to be seen. By the time the dust settles in the pandemic economy, workers may emerge with higher wages and bargaining power.

Recessions are usually an employee’s worst nightmare. Massive layoffs and reduced employment opportunities generally go hand in hand with economic downturns. In fact, this has been the reality in recent months for several large companies such as Meta, which laid off approximately 13% of its workforce. Despite this, labor shortages persist across many important sectors such as food service and hospitality. In the face of high inflation, mass layoffs, and labor shortages, it is difficult to see how the current economic phenomenon could actually benefit workers in the long run, but it could do just that. 

At the onset of the pandemic, the economy looked as healthy as it has ever been. The unemployment rate dropped below 4% for the first time since 2000 in 2018 and remained at a level between 3.5% and 4% until March 2020, when lockdowns began. Inflation was within half a percentage point of the Federal Reserve’s target of 2% from mid-2018 until April 2020. The economic shocks of unprecedented lockdowns should come as no surprise, but what’s interesting is what happened next.

The U.S. government and Federal Reserve took dramatic steps to limit the effects of the pandemic through aggressive fiscal and monetary policy. Congress passed massive stimulus packages which injected about 5 trillion dollars into the U.S. economy, and the Fed slashed rates to near zero. Beyond helping millions to afford housing, food, and other necessities, these responses had measurable economic impacts. Unemployment, which had reached heights of 14% during the pandemic, fell back below 6% within less than a year and returned to pre-pandemic levels by 2022. At the same time, though, there is another story this data does not tell.

While many who had lost their jobs during the pandemic’s early days returned to work, others left the labor force for good. About 47 million people quit their jobs in 2021 and a sizable portion of these workers are yet to return. Labor force participation plummeted to about 60%, a depth it had not reached since the 1970s, and has rebounded only meagerly. It seems that for many Americans, going back to work is simply not worth it at this point.

In many ways, the labor shortage phenomenon defies traditional economic logic. One explanation for its decline is the COVID stimulus checks and unemployment benefits that kept families afloat during lockdowns. The scope and magnitude of the stimulus packages may have been generous enough that it disincentivized employment. However, as these benefits were rolled back, there was no sizable jump in labor force participation.

At the same time, inflation has run rampant, reaching a peak of over 9% in June 2022 (12-month percentage change). This has raised the cost of living significantly, especially in terms of the cost of energy, with energy prices soaring 41.6% over the same 12-month period. This huge increase in energy prices is largely due to the energy market shocks caused by the war in Ukraine, but the effect on the U.S. economy is perplexing when looking at labor. Specifically, these huge price increases did not seem to coincide with any changes in unemployment or labor force participation.

Federal Reserve chair Jerome Powell has stated that rate increases will continue until “the job is done,” referring to the Fed’s goal of bringing down inflation. In the coming months, as the economy possibly heads towards a recession, many more people may lose their jobs as layoffs continue for struggling businesses. However, the persisting labor shortages, despite negative economic effects, may create hope for wage levels in the future. The last substantial jump in real wages for ordinary workers was during the Great Recession of 2008, coinciding with a spike in unemployment. In this previous instance, the jump in wages for non-supervisory workers contrasted with stagnant household income nationwide. Much of the change in real wages was closely related to a fall in price levels at the time, though. This time, unemployment remains low and inflation runs high, meaning that the wage increases resulting from shortages in labor would be even more stark.

By no means should high inflation and poor economic performance be considered a good thing. On the contrary, the coming months—or years—may bring very difficult times for employees and businesses alike. However, if one silver lining can be found, it is the empowerment of workers which may result from labor shortages. Globalization and automation have reduced the power of workers for decades as productivity has outpaced wages and purchasing power has lagged. The dynamics between businesses and non-supervisory workers may nonetheless shift as wage increases will be needed to attract a limited supply of employees and incentivize reentry into the workforce to fill open positions. Whether the pandemic may have indirectly given labor the upper hand for once remains to be seen, but the conditions exist to bring the power back to workers.

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