The latest US employment data, released on Thursday, showed that a marked recovery in the labour market continued into June, although only about a third of the jobs lost during the coronavirus shock have so far been regained.
The improvement is good news, but it should not be taken to imply that the labour market will rapidly return to normal, either in a macroeconomic sense, or in the distribution of job opportunities across the population. Women have been hit harder by job losses, a situation that is different from previous recessions. A full return to pre-coronavirus jobs health will be long and difficult.
First, the macro picture. In addition to the regular sources of official economic data, there are new sources of information from the private sector that greatly improve our understanding of the current recession.
For example, Raj Chetty of Harvard University, a leading proponent of big data to improve economic research, has released an impressive website that provides daily information on US consumer spending and much else, using private sources. Given the importance of consumer spending in driving the current cycle, this may be the best way of following US activity in coming months.
Prof Chetty’s data show that the US economy bottomed around April 1, when nominal consumer expenditure was almost one-third below January levels. After a brief period of little change, the arrival of stimulus cheques paid under the Coronavirus Aid, Relief, and Economic Security Act in April triggered a period of extremely sharp recovery until 9 May. In this phase, the growth rate in consumption ran at a remarkable rate of about 0.9 per cent a day. After that, the recovery slowed down, recording a growth rate around 0.2 per cent a day up to the latest data on 17 June.
The slowdown may well continue now that California, Texas, Florida and Arizona, together representing about 30 per cent of the US economy, are suffering from a worrying upsurge in Covid-19 cases.
This has forced renewed lockdowns and a return to risk-averse behaviour, according to Open Table statistics on restaurant dining. It is quite likely that the improvement in the national economy and labour market could pause, or even reverse. Further easing of lockdowns for political reasons will probably be unsuccessful, either because the virus will rebound or because behaviour will remain risk averse.
Prof Chetty describes this as a supply-specific shock, but it seems to contain negative supply and demand characteristics simultaneously, a combination that should not result immediately in higher inflation. This implies that a generalised stimulus to demand, such as a cut in taxes on consumer spending, is not specific enough, and is probably a waste of government money.
Turning to micro effects, the precise nature of the recession is laid bare by the Chetty website and other work based on public and private data sources by Erik Hurst of the University of Chicago’s Booth School of Business, and many other researchers in the US and Europe.
Mr Hurst makes it clear that in US the contraction of 20 per cent in total employment by mid-April was due mostly to small companies in the consumer services sector. Households at the top end of the income scale were prevented by health risks or lockdown policies from spending on person-to-person services, resulting in business closures and unemployment, notably in affluent zip codes.
Low-paid workers have been disproportionately affected, with 37 per cent of workers in the bottom fifth of the wage distribution losing their jobs. Women have been hit harder than men, even after allowing for the industrial composition of job losses. This gender pattern is unexplained.
The contraction in labour input has occurred mainly because workers have been let go, not because average hours per worker have been reduced. About one-third of the lost jobs have come from companies that have entirely ceased doing business. The rest are from those that have survived reducing their payroll numbers.
It now seems increasingly improbable, especially in the US, that this structural damage to the labour market will be reversed quickly. Assuming that the Covid-19 effects persist into 2021, the concentration of employment losses among unskilled workers in specific locations, with many permanently failed businesses, will become increasingly difficult to correct. The serious concerns about a deep-rooted scarring of the labour market, forcibly expressed by many Federal Reserve officials, would then be entirely justified.
The top three priorities to fix the jobs market in the US and elsewhere are virus policy, virus policy and virus policy. Failing that, governments should spend money to protect low-income households, especially the newly unemployed, and encourage them to shift into expanding sectors, of which there are several — including essential retail stores and internet delivery businesses. Focusing on general demand expansion won’t work.
Source: This note is based on material which appeared in an article by Gavyn Davies published in the Financial Times on 5 July 2020.
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