The pandemic has created an unprecedented economic crisis. So perhaps it should come as no surprise that the consequences also played out in ways that almost no economist expected.
When unemployment soared in the early weeks of the pandemic, many feared a repeat of the long, slow rebound from the Great Recession: years of unemployment that left many with lifelong scars. On the contrary, the labor market recovery has been, in many respects, the strongest on record.
At the start of 2021, some economists predicted a surge in inflation. Others were skeptical: Similar predictions in recent years – in some cases from the same forecasters – have not come true. But this time they were right.
And when the Federal Reserve began trying to curb inflation, warnings were issued that the labor market was sure to collapse, as it had threatened to do every time policymakers began raising rates. 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 remains stable, if not gaining strength.
The final chapter on recovery has not been written. A “soft landing” is not a sure thing. But it is clear that the economy, and particularly the job market, has proven far more resilient than most people thought likely.
Interviews with dozens of economists — some of whom partially understood the recovery, while many were wrong — provided insight into what they’ve learned over the past two years and what they think about the market work at the moment. They didn’t agree on every detail, but three major themes emerged.
1. This time it was really different.
Economists have learned to be careful not to conclude that “this time it’s different.» However different the specifics, the fundamental laws of economic gravity tend to remain constant: bubbles burst; debts come due; hiring and firing patterns evolve in largely, if imperfectly, predictable ways.
But the pandemic recession was really different. This was not caused by a fundamental imbalance in the economy, like the dot-com bubble of the early 2000s or the subprime mortgage boom a few years later. This was caused by a pandemic that forced many industries to close virtually overnight.
The response was also different. Never before has the federal government provided so much help to so many households and businesses. Despite mass unemployment, personal income increased in 2020.
The result was a rapid but chaotic recovery. When vaccines allowed people to venture outside again, they had money to spend, but businesses weren’t ready to let them spend it. They laid off millions of workers, some of whom moved to other cities or industries, or started their own businesses, or who were unavailable for work because schools remained closed or health risks still seemed too important. Companies had to navigate supply chains that remained stuck long after daily life returned to normal, and they had to adjust their business models to the 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. For example, usually when job offers decrease, unemployment increases: with fewer opportunities available, it is more difficult to find work. But coming out of 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 would likely follow different rules. Christopher J. Waller, governor of the Fed, argued in 2022 that job offers could decrease without necessarily increasing unemployment, for example. But many other economists were slow to recognize how standard models did not apply to the pandemic economy.
“This is the danger of predicting what will happen in extreme times based on 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 look so strange anymore. In fact, the situation largely resembles what it was just before the pandemic began. Job offers are a little higher than in 2019; job turnover is a little lower; the unemployment rate is almost the same.
The good news is that 2019 was a historically strong job market, marked by gains that cut across racial and socioeconomic divides. The 2024 version is, in some ways, even more powerful. The unemployment gap between black and white Americans is near a record high. Employment opportunities have improved for people with disabilities, criminal records and low levels of formal education. Wages are increasing for all income groups and, now that inflation has subsided, they are outpacing price increases.
“Normal” sure looks a little different five years later. The pandemic has pushed 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, like dry cleaners, and shifted demand for others, like weekday dining venues, from cities to suburbs.
But while these trends will continue to evolve, the period of frantic rehiring and reassignment is largely over. Workers still change jobs, but they no longer leave the house on their lunch break to take advantage of a better-paying opportunity on the streets. Employers still complain about how difficult it is to hire, but they no longer offer signing bonuses or double-digit salary increases to lure people.
As a result, many economic rules that were abandoned at the start of the recovery could be relevant again. Without such an excess of unfilled jobs, for example, a further decline in job openings could actually portend an increase in unemployment. That’s not to say that older models will work perfectly, but they might be worth keeping an eye on again.
“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, a labor market research organization.
3. Good times don’t have to end.
A few years after the Great Recession ended, 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 dropped out of the job market during the recession, and it’s unclear how many of them wanted a job or could get one if they tried. The nonpartisan Congressional Budget Office estimated in early 2015 that job growth would soon slow, just enough to keep pace with population growth.
These projections turned out to be extremely pessimistic. U.S. employers created more than 11 million jobs between the end of 2014 and the end of 2019, millions more than the budget office had predicted. Companies hired job seekers they had long avoided, pushing the unemployment rate to a 50-year low, and raised wages to attract people on the margins. 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 petered out. But there is little evidence of an imminent prospect in 2020, and there is no reason for it to happen in 2024.
“A strong labor market sets off a virtuous cycle, where people have jobs, buy things, businesses prosper and hire more,” said Julia Pollak, chief economist at job site ZipRecruiter. “We need something to slow this train down and interrupt this cycle.”
Some kind of interruption is possible. The Fed, nervous about inflation, could wait too long to start cutting interest rates and ultimately cause a recession. And recent data may have overestimated the strength of the labor market: Economists point to various signs that cracks may be forming beneath the surface.
But pessimists have been talking about similar cracks for more than a year. So far, the foundation has held.
