When Will the Jobs Return?


After a double whammy during the past week, the unemployment pains triggered by the coronavirus pandemic seem likely to worsen in the U.S. in the coming months. The number of people filing for unemployment insurance doubled to 6.65 million in the latest weekly report on April 2, taking the two-week total to nearly 10 million. On April 3, the unemployment report for March logged a loss of 701,000 jobs, making it the worst month for unemployment since the last recession. It also took the unemployment rate to 4.4% in March from 3.5% in February, the largest one-month increase since January 1975.

Workers are more pessimistic about losing work in the coming year as they expect overall unemployment to be higher, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations, which was released on April 6. The survey found that workers also expect the growth in their earnings to fall and are less optimistic about finding a new job in the coming year.

The latest unemployment report came as a surprise to many labor economists, because they did not expect much of the pandemic’s impact to show up in the last monthly jobs report as it did, according to Diane Lim, director of outreach and senior advisor at the Penn Wharton Budget Model. “It’s very telling,” she said, pointing out that the survey covers only one week of March 8 through March 14. “That seems like an eternity ago, in terms of how much has happened in the economy with the shutdown since then.” Lim shared her views on the Wharton Business Daily radio show on SiriusXM.

The next unemployment report covering April is due on May 8. It will reveal a more complete picture the pandemic’s impact. The Bureau of Labor Statistics (BLS) has noted that the surveys for its March report predated many coronavirus-related business and school closures in the second half of the month.

The labor department’s reports on jobs and jobless claims have become a proxy for tracking the economic downturn that the pandemic has sparked. “[Unemployment claims data] used to be boring reports for economists, because they were never changing. There were always around 200,000 new or initial unemployment claims each week,” Lim said. “But now it’s a leading indicator, because it comes in on a timely basis, closer to real time.”

Impact on Small Business

According to the March unemployment report, two-thirds of the jobs lost were in the leisure and hospitality sectors, with restaurants and bars accounting for 417,000 job losses, or nearly 60% of the total. Notable employment declines also occurred in health care and social assistance, professional and business services, retail trade, and construction, the report added.

Small businesses with fewer than 50 employees shed 90,000 jobs between February and March, according to the latest ADP National Unemployment Report. A breakdown shows that of that number, 66,000 jobs were lost at “very small businesses” that have fewer than 20 employees. Most of the small-business job losses (77,000) were in the service-providing sector, while goods-producing firms made up the remainder. After accounting for job gains in other sectors such as large companies (businesses with more than 500 employees) and the education and health sectors, private sector firms had a net loss of 27,000 jobs between February and March, according to the ADP report.

“You want the combination of the business loans and the generous unemployment benefits to keep people sitting tight.” –Diane Lim

As small businesses see their fortunes sinking, they are also finding it harder to raise money. Banks and financial-technology firms are starting to toughen their approval standards for new loans to consumers and small businesses, according to a Wall Street Journal report. Large banks like Bank of America and JP Morgan Chase, and fintech lenders like Square Capital and On Deck Capital are among the institutions that have tightened loan approval criteria. “Lenders are concerned that rising unemployment and a potential recession will send loan defaults soaring,” the report noted. The CARES Act passed last month provides $350 billion in loans for small businesses. “[But] the program, which works on a first-come, first-served basis, likely won’t be large enough to satisfy the needs of all of America’s small businesses,” an Axios report noted.

The small business loan package is not enough to help employers keep paying workers until the economy recovers, says Wharton management professor Iwan Barankay. The economy isn’t likely to begin recovering before fall, but the CARES Act provides for small business loans to cover only the next quarter until June, he explained. Moreover, small businesses are finding it challenging to secure those loans, he said. They have to apply for the loans to banks who then get the funds from the Small Business Administration. That process requires banks to access a certain software platform on the SBA website, which crashed for a few hours on Monday, he noted. “They are so backlogged and understaffed that they can’t handle the volume, leading to many loan applications being declined or delayed for weeks. This is pushing more companies into bankruptcy,” he said.

“[The brunt of the impact is borne by] people at the economic frontline of the quarantining and the shutdowns of businesses with a lot of people-facing activity,” Lim said. Most of the workers who filed for unemployment benefits in the past two weeks may have been in the leisure or hospitality sector, because the virus has “basically shut down that entire line of work,” she added.

Lim saw that unemployment is now starting to hit other sectors of the economy, especially the retail industry. She noted that major retailers have announced furloughs and layoffs. “We’re going to see this spread into other areas of the economy that at first we weren’t thinking needed to be shut down,” she said. “We were thinking only really crowded places would need to be shut down. Now we’re starting to hear that any place where you interact with people – like even across the cash register – is too close. We are going to see this spill over into other sectors.”

How Much Longer?

“Whether this will be a temporary blip is, of course, the multi-trillion-dollar question,” said Wharton management professor Matthew Bidwell. “It probably also depends on what ‘temporary’ means. We don’t know when bars, shops, restaurants, gyms, cinemas, schools, etc., will be able to open again. Nor do we know how many people will want to flock back to them once they do. There is also a real concern that people will be reluctant to return to bars, restaurants, etc., even after we can go out.”

According to Bidwell, it will take the economy “a while” before it bounces back to pre-pandemic levels. “There can be a long-lasting disruption after losing skilled workers, as firms try to rebuild the knowledge when demand returns,” he said. “Bringing in new workers is always disruptive, so bearing in mind the need to ramp up again in the future is important.”

Barankay was pessimistic about the ability of employers to resume their businesses in a meaningful manner after the current contraction. “Many companies are out of cash and they fired their employees and closed down their businesses,” he said. “I see no way how they can reopen under the current system.”

Looking for cues from history may be unhelpful. Bidwell noted that while the unemployment insurance claims numbers are “extraordinary,” they cannot be compared to those in previous recessions. “In previous years, [they were caused by] companies laying off workers because of a lack of demand. This time, the jobless claims are caused mainly by companies laying off workers because the pandemic is preventing them from operating,” he explained. The 2008 recession would not offer much by way of useful pointers. Back then, “the shock to the economy, though sharp, was short and much smaller,” he noted.

“As all of the directly affected sectors stop spending money, that will reduce demand across the economy, leading to further layoffs.” –Matthew Bidwell

According to Bidwell, many people are likely to be rehired after the social distancing restrictions ease up. However, he did not expect all laid-off workers to regain their jobs. “[That is] both because business owners do not want to fully staff up until they know what demand will be like, and because some of their businesses may have gone bankrupt or closed down in the meanwhile.”

The other uncertainty is the cascading effect on other sectors, Bidwell pointed out. “As all the directly affected sectors stop spending money, that will reduce demand across the economy, leading to further layoffs,” he warned. “Again, it is unclear how quickly the demand will come back to help those affected by this second wave of layoffs to return to work.”

Hopeful Signs?

Lim was cautiously optimistic. At some point, “you start to run out of people who have lost their jobs because of the quarantine,” she said. “I’m hopeful that there is a natural limit to the job loss, because we hit the most obvious sectors first – the businesses that had to shut down immediately, because they served crowds of people. Most people who do work sitting at a computer can do that anywhere. It’s easier for many in office jobs to continue work as usual.”

Even so, it is likely that many jobs, especially in the leisure and hospitality sector, could come back once the social distancing restrictions are lifted. One reason is that bonds formed at the workplace don’t wear out easily, Lim said. Most of the laid-off workers in the leisure and hospitality sector are not trying to get other jobs because they believe they could go back to their previous employers, she said. While those who have been laid off are filing for unemployment benefits, “they still think of [these companies] as their current employer,” she added. “The positive thing is that while this has been a very sudden and dramatic drop in jobs and employment, things could very quickly improve once we get past the necessity of staying at home.”

Barankay was less optimistic, though. “The major worry I have about the current situation in the U.S. is that the COVID-19 disruption will last so long that those who lose their jobs now will have lost their relationship with the firms and sectors where they worked so far, causing large welfare consequences for a considerable part of the labor force,” said Barankay. “As workers stay idle, their training deteriorates, making them less employable and slowing the recovery for firms.”

“My urgent recommendation to Congress is to look into the German ‘Kurzarbeit’ system to avoid major and prolonged disruption to the U.S. economy.” –Iwan Barankay

It is important to ensure that people who have lost jobs and income can survive in these tough times. Unemployment insurance benefits could ensure that at one end, especially with the recent changes to get more money to workers. At the other end are the small business loans and emergency grants that the CARES Act is helping arrange. The law aims to enable employers to continue paying wages to employees on their payrolls, and meet expenses such as rents, utility bills, insurance and so forth.

“You want the combination of the business loans and the generous unemployment benefits to keep people sitting tight,” said Lim. “You don’t want people to destroy, take down or dismantle their businesses, to literally start moving out of the bakery space that they occupy. You don’t want them to completely close shop for good. You don’t want workers to give up their attachment to the workforce and hopefully their own employers. You want them to be able to maintain a minimal level of consumption – the necessity level of consumption – to be able to continue to pay their rent, to pay for their food and their health care and not get desperate such that they have to go out and find a new job that might not be the best thing for them to do in terms of the longer-term, once we’re past the quarantine period.”

Lessons from Europe

Barankay advised U.S. policy makers to look towards Europe, and Germany in particular, which offers financial support to companies to compensate for lost revenues. The country has a system of grants to firms, which are forgiven under some conditions including maintaining employment. “This way, companies remain in business and can ramp up again after COVID-19 subsides,” he said. “We do not have a comparable system in the U.S., hence recovery will come later and be slower.”

The U.S. could also learn key lessons from Europe about managing unemployment insurance claims, according to Barankay. He noted that European countries are facing job losses in the wake of the pandemic, but they are able to contain the volatility in workers’ earnings much better than in the U.S. system.

“The reason we see such a large increase in unemployment [insurance claims] compared to other OECD countries has to do with how we in the U.S. deal with recessions in the labor market,” said Barankay. “In the U.S., when companies don’t do well, or as it is in the current contraction, they are simply out of cash to pay for wages, they lay off their employees who in turn can file for unemployment.” Unemployment benefits vary by state. For instance, in Pennsylvania, the unemployment dole consists of 50% of an employee’s wages (up to $300 a week, plus a few fringe disbursements) and it lasts for 26 weeks, he noted.

Barankay pointed to the German system of “Kurzarbeit,” which he said is in place with some variation across all major economies in Europe now. “Kurzarbeit” is an agreement between the state, employers and employees in which employers don’t fire employees who in turn agree to a cut in wages to around 80%. The state reimburses a large portion of compensation directly to the worker, he explained. “[That] was a major factor why recovery in the previous recession in Germany was much faster than in all other E.U. countries.”

The advantage of the Kurzarbeit system is that workers can maintain their jobs and the employer-employee relationship is not interrupted along with fringe benefits, Barankay noted. One other advantage of the system is that firms that struggle now can remain in business and after a downturn, they can resume with the same employees. That avoids causing frictions in the labor market, forcing companies to start all over and employees to search for new employment, he added. “My urgent recommendation to Congress is to look into the German Kurzarbeit system to avoid major and prolonged disruption to the U.S. economy.”

The U.K. has announced a program where the government will cover 80% of the salaries of unemployed workers for at least the next three months up to a maximum of £2,500 ($2,900) a month, which is more than the average income, CNN reported. In addition to the labor department’s reports, other measurements of the unemployment situation estimated varying impacts of the recession. The unemployment rate was higher at 8.9% in March, up from 7.4% in February, according to the so-called U-6 metric. Unlike the BLS data, the U-6 rate includes workers who are discouraged and underemployed. Various forecasts predict that the employment situation will get worse before it gets better. The unemployment rate is expected to exceed 10% during the second quarter of this year, the Congressional Budget Office stated in an update to its economic forecast on April 2. Job losses will climb to some 28 million by May, erasing all the jobs gained since 2010, according to a forecast by Oxford Economics that the Wall Street Journal cited.

What’s Next?

How soon will companies start hiring again? That depends largely on the action that Congress takes in the coming weeks and months, Barankay said. “With the current system, the disruption will be so deep that I worry about a major contraction in the U.S. GDP.” By that, he meant a decline in total GDP and not just slower growth, both in 2020 and 2021, he explained.

The latest jobless claims numbers do not really suggest a secular shift where employers learn to make do with fewer employees, according to Bidwell. “Recessions encourage employers to do as much as they can with as few staff as possible – we saw that a lot after the financial crisis,” he said. “But that is more of a cyclical shift than a secular one. I don’t believe that we will see a lot of the formal economy shift to the gig economy. The benefits just are not there [to make that shift] for employers in most sectors.”

Bidwell also did not foresee shifts such as increased productivity as employers make do with fewer hands and employees work out of their homes. “You don’t tend to see increased productivity during recessions because the demand just does not exist.” In fact, productivity tends to go down as firms cut workers slower than demand falls off, he added. “It can pave the way for increased productivity once the recession ends. As for whether working from home improves productivity, a key variable is whether employees are having to home school their children at the same time!”

According to Barankay, the latest employment reports do not signal any shifts in favor of the gig economy, where employers hire temporary workers or independent contractors. He said the “best data” on that segment is contained in a BLS report, which showed that in May 2017, only 3.8% of the work force, or 5.9 million people, held “contingent” jobs. The BLS defines “contingent” workers as those “who do not expect their jobs to last or who report that their jobs are temporary.” As a result, the latest surge in people registering for unemployment claims cannot be attributed to the growth in the gig economy or a reflection of companies shifting their workforce into contingent roles, he added.

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