The pandemic has created an economic crisis unlike any recession on record. So perhaps it should come as no surprise that the fallout, too, played out 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 from the Great Depression: years of unemployment that left many workers permanently scarred. Instead, the recovery in the labor market was, by many measures, the strongest on record.
In early 2021, some economists predicted a rise in inflation. Others were skeptical: Similar forecasts in recent years—in some cases by the same meteorologists—have failed to materialize. But this time they were right.
And when the Federal Reserve began trying to reduce inflation, there were warnings that the labor market was bound to buckle, as it had threatened to do every time policymakers started raising interest rates too quickly in the decade before the pandemic. . Instead, the central bank raised interest rates to their highest level in decades and the labor market is holding steady, or perhaps even gaining steam.
The final chapter of recovery has not been written. A “soft landing” is not a done deal. But it’s clear that the economy, particularly the labor market, has proven far more resilient than most people thought possible.
Interviews with dozens of economists — some of whom got the recovery partially right, many of whom got it mostly wrong — provided insight into what they’ve learned over the past two years and what they’re doing about the labor market right now. They did not agree on all the details, but three general themes emerged.
1. This time was really different.
Economists have learned to be wary of concluding that “this time is different.” No matter how different the specifics, the basic laws of economic gravity tend to remain constant: Bubbles burst. outstanding debts? Hiring and firing patterns evolve in ways that are generally, if imperfectly, predictable.
But the pandemic recession was really different. It wasn’t caused by some fundamental imbalance in the economy, like the dot-com bubble of the early 2000s or the subprime mortgage boom a few years later. It was caused by a pandemic that forced many industries to close almost overnight.
The response was also different. Never before has the federal government provided so much assistance to so many households and businesses. Despite mass unemployment, personal incomes rose in 2020.
The result was a recovery that was swift but chaotic. When vaccines allowed people to go outside again, they had money to spend, but businesses weren’t ready to let them spend it. They had dismissed 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 health risks still seemed too great. Companies had to navigate supply chains that remained fractured 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. Typically, for example, when jobs decline, unemployment rises — with fewer opportunities available, it’s harder to find work. But after the pandemic shutdowns, even after the initial hiring rush slowed, there were still more vacancies than workers to fill. And companies were eager to keep the employees they had worked so hard to hire, so layoffs remained low even as demand began to wane.
Some economists acknowledged that the pandemic economy was likely to follow different rules. Christopher J. Waller, chairman of the Fed, argued in 2022 that jobs could fall 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’s going to happen in extreme times from linear relationships estimated in normal times,” said Laurence M. Ball, an economist at Johns Hopkins. “We should have known that.”
2. The job market is returning to normal — and normal is pretty good.
The job market doesn’t seem so strange anymore. In fact, it looks a lot like it was just before the pandemic started. Jobs are slightly higher than 2019. Turnover is slightly lower. the unemployment rate is almost the same.
The good news is that 2019 was a historically strong labor market, marked by gains that cut across racial and socioeconomic lines. The 2024 version is, by some measures, even stronger. The unemployment gap between black and white Americans is nearing an all-time low. Employment opportunities have improved for people with disabilities, criminal records and low levels of formal education. Wages are rising for all income groups and, now that inflation has fallen, are outpacing price increases.
“Normal” looks a little different five years later, of course. The pandemic has forced 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, such as dry cleaners, and shifted demand for others, such as weekday lunches, from cities to suburbs.
But while these patterns will continue to evolve, the period of frantic rehiring and reallocation is largely over. Workers are still switching jobs, but they’re no longer walking out the door on their lunch break to grab a better-paying opportunity down the road. Employers still complain that it’s hard to hire, but they no longer offer signing bonuses and double-digit salary increases to get people in the door.
As a result, many financial rules that went out the window earlier in the recovery may be relevant again. Without such a glut of unpaid jobs, for example, a further decline in jobs may actually portend an increase in unemployment. This doesn’t mean that older models will perform perfectly, but they may still hold up to watching.
“You can easily imagine that we had a period where, man, a lot of strange things happened, but now we’re coming back to a world that we understand,” said Guy Berger, director of economic research at the Burning Glass Institute. organization of labor market research.
3. Good times don’t (necessarily) have to end.
A few years after the end of the Great Depression, many economists began to warn that the United States would soon run out of workers.
Employment had surpassed its pre-recession high. The unemployment rate was approaching 5 percent, a level many economists associate 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 find one if they tried. The nonpartisan Congressional Budget Office estimated in early 2015 that job growth will soon slow gradually, as long as it keeps pace with population growth.
These predictions turned out to be extremely pessimistic. US 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 long-shunned jobseekers, pushing the unemployment rate to a 50-year low, and raised wages to lure people from the fringes. They also found ways to make workers more productive, allowing businesses to continue to grow without adding as many employees.
It is likely that if the pandemic had not occurred, the job growth of previous years would have eventually declined. But there’s little evidence that it was an imminent prospect in 2020, and there’s no reason for it to happen in 2024.
“A strong labor market starts a virtuous cycle where people have jobs, they buy things, companies do well, they hire more people,” said Julia Pollack, chief economist for job site ZipRecruiter. “Something is needed to slow this train down and break this cycle.”
Some sort of disruption is likely. The Fed, nervous about inflation, could wait too long to start cutting interest rates and eventually trigger a recession. And recent figures may have overstated the strength of the labor market — economists point to various signs that cracks could be forming beneath the surface.
But pessimists report similar cracks for well over a year. So far, the institution has held.
