by The pandemic created an economic crisis unlike any recession on record. So perhaps it should not be surprising that the consequences have also played out in a way that almost no economist expected.
When unemployment soared in the early weeks of the pandemic, many feared a repeat of the long, slow rebound of the Great Recession — years of unemployment that left many workers permanently scarred. Instead, the labor market recovery has been, by many indicators, the strongest ever recorded.
In early 2021, some economists predicted a rise in inflation. Others were skeptical: Similar predictions in recent years (in some cases by the same forecasters) had not come true. This time, however, they were right.
And when the Federal Reserve began trying to reduce inflation, there were warnings that the labor market would surely collapse, as it had threatened to do every time authorities began raising interest rates too quickly in the decade before the pandemic. Instead, the central bank has raised rates to their highest level in decades and the labor market is holding steady, or perhaps even gaining strength.
The final chapter on recovery has not been written. A “soft landing” is not a done deal. But it is clear that the economy, particularly the labor market, has proven much more resilient than most people thought likely.
Interviews with dozens of economists (some of whom got the recovery partly right, others mostly wrong) provided insights into what they’ve learned over the past two years and what they think of the labor market right now. They didn’t agree on all the details, but three general themes emerged.
1. This time it was really different.
Economists have learned to be cautious about concluding that “this time it’s different.“No matter how different the details, the basic laws of economic gravity tend to remain constant: bubbles burst; debts come due; Hiring and firing patterns evolve in ways that are largely, 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 in the early 2000s or the subprime mortgage boom a few years later. It was caused by a pandemic that forced many industries to close virtually overnight.
The response was also different. Never has the federal government provided so much help to so many homes and businesses. Despite mass unemployment, personal income increased in 2020.
The result was a rapid but chaotic recovery. When vaccines allowed people to venture out again, they had money to spend, but companies weren’t willing to let them spend it. Millions of workers had been laid off, some of whom had moved to other cities or industries, or had started their own businesses, or were unavailable to work because schools remained closed or the health risks still seemed too great. Companies had to navigate supply chains that remained stagnant long after daily life had returned to normal, and they had to adjust their business models to schedules, spending patterns and habits that had changed during the pandemic.
In retrospect, it seems obvious that normal economic rules might not apply in such an environment. Normally, for example, when job offers decrease, unemployment increases; With fewer opportunities available, it is more difficult to find work. But after the pandemic shutdowns, even after the initial hiring rush slowed, there were still more vacancies than workers to fill them. And companies were eager to retain the employees they had worked so hard to hire, so layoffs remained low even as demand began to cool.
Some economists acknowledged that the pandemic economy was likely to follow different rules. Christopher J. Waller, governor of the Federal Reserve, argued in 2022 that Job offers 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 pandemic economics.
“It’s the danger of forecasting what will happen in extreme times from linear relationships estimated in normal times,” said Laurence M. Ball, an economist at Johns Hopkins. “We should have known.”
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 largely looks like it did just before the pandemic began. Job offers are slightly higher than in 2019; labor turnover is a little lower; the unemployment rate is almost the same.
The good news is that 2019 was a historically strong labor market, marked by advances that transcend racial and socioeconomic lines. The 2024 version is, by some measures, even stronger. The gap in unemployment between black and white Americans is near a record 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 cooled, are outpacing price increases.
“Normal” looks a little different five years later, of course. The pandemic 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 lunch spots, from cities to the suburbs.
But while those patterns will continue to evolve, the period of frantic rehiring and reassignment is largely over. Workers are still changing jobs, but they are no longer walking out the door during their lunch hour to look for a higher-paying opportunity on the street. Employers still complain that it’s hard to hire, but they no longer offer signing bonuses or double-digit salary increases to attract people.
As a result, many economic rules that disappeared at the beginning of the recovery may become relevant again. Without such a glut of unfilled jobs, for example, a further decline in vacancies may actually portend an increase in unemployment. That doesn’t mean older models will work perfectly, but they may be worth taking another look.
“You can easily imagine that we had a period where a lot of strange things happened, but now we are returning to a world that we understand,” said Guy Berger, director of economic research at the Burning Glass Institute, a labor market research organization.
3. The good times don’t have to end (necessarily).
A few years after the end of the Great Recession, many economists began warning that the United States would soon run out of workers.
Employment had surpassed its pre-recession peak. The unemployment rate was approaching 5 percent, a level that many economists associated with full employment. Millions of people had left the workforce during the recession, and it was unclear how many wanted jobs or could get them if they tried. The nonpartisan Congressional Budget Office estimated in early 2015 that job growth would soon slow to a trickle, enough to keep up with population growth.
These projections turned out to be tremendously pessimistic. American 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 job seekers they had long rejected, driving the unemployment rate to its lowest level in 50 years, and raised wages to attract people who were not on the sidelines. They also found ways to make workers more productive, allowing companies to continue growing without adding as many employees.
It is possible that if the pandemic had not occurred, the job growth of previous years would have eventually dried up. But there is little evidence that it was an imminent prospect in 2020, and there is no reason it has to happen in 2024.
“A strong labor market sets off a virtuous cycle, where people have jobs, they buy things, companies do well, they hire more people,” said Julia Pollak, chief economist at career site ZipRecruiter. “It takes something to slow that train down and interrupt that cycle.”
Some type of interruption is possible. The Federal Reserve, nervous about inflation, could wait too long to start cutting interest rates and trigger a recession after all. And recent data may have overstated the strength of the labor market: Economists point to several signs that cracks could be forming beneath the surface.
But pessimists have been citing similar fissures for more than a year. Until now, the foundation has been maintained.
