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What’s next for the labor market?
Darrell Spence
Economist

Questions for an uncertain time: Employment


The past six months have provided a master class in uncertainty. COVID-19 touched nearly every aspect of daily life for hundreds of millions of people. Stocks fell drastically as the outbreak erupted — the fastest retreat to a bear market in modern history. They then recovered much of that decline in less than two months.


We asked Capital Group economists and analysts their opinions on COVID-19’s effects, both in the short and long terms. They covered topics as broad as the future of global trade networks and as narrow as the prospects for telemedicine.


Below, you’ll find economist Darrell Spence’s take on the labor market.


You can also see political analyst Matt Miller’s ideas about the presidential election, economist Jared Franz’s opinions and insights on entrepreneurship and economist Talha Khan’s ideas about international interconnectedness.


What’s next for the labor market?


By Darrell Spence

The collapse in economic activity this year has been unprecedented. Many economic indicators were nearly off the charts, including employment growth. However, among these shocking figures hide reasons to be guardedly optimistic. Swift government support and the nature of the downturn suggest we may have blunted the worst effects of the spike in unemployment.


One key to understanding this downturn is that it is materially unlike other recessions, such as the Great


Depression and the global financial crisis. It was not caused by excesses and imbalances that needed to be corrected. Rather, it was the result of leaders proactively shutting down substantial portions of the U.S. economy. As such, a reopening of those areas should, in theory, allow for a quick recovery.


Another key is the nature of the unemployment figures in the U.S. While high — the official May unemployment rate is 13.3%, but I think a more accurate figure is 19.5% — a number of these jobs will be coming back as the economy reopens. The question is how many.


The good news is that 73% of those currently unemployed classify themselves as being “on temporary layoff.” If all these jobs returned in coming months, the unemployment rate would fall to 4.1%, which could support a swift, V-shaped recovery. However, some of these temporary layoffs are likely to become permanent, so 4.1% is probably too optimistic.


In fact, consumer surveys are more consistent with an unemployment rate in the 7%–8% range. That higher rate is still better than the consensus estimate of 10.3% by year’s end, but it would create lingering damage to demand, lending weight to the idea of a slower, U-shaped recovery.


Moreover, while significant job losses led to a sharp drop in wage and salary income, total disposable income has soared due to the one-time payments and additional unemployment benefits from the federal government. As such, job losses have not yet crimped consumers’ overall ability to spend.


This is substantially different from previous recessions. In addition, with the economy shut down, consumers funneled much of that disposable income into savings. This suggests that consumers will have the means to continue spending at pre-coronavirus levels as the economy reopens. Perhaps the new key variable to the economic outlook is how quickly consumers are willing to re-engage in the economy in a world where the coronavirus continues to pose a threat.


Of course, income support will not last forever, so the economy is in a race against time. When expanded unemployment benefits expire at the end of July, they will need to be replaced by actual jobs. Otherwise, that massive fiscal stimulus will have merely delayed, rather than avoided, a decline in income. How fast we are progressing on replacing stimulus income with actual wages and salaries will be reflected in the unemployment rate.


You can also see political analyst Matt Miller’s ideas about the presidential electioneconomist Jared Franz’s opinions and insights on entrepreneurship and economist Talha Khan’s ideas about international interconnectedness.



Darrell Spence is an economist and research director with 27 years of investment experience, all with Capital. He earned a bachelor's degree in economics from Occidental College and is a CFA charterholder.


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