Did Labor Win the Pandemic?

Labor shortages give workers unprecedented power

In this newsletter, we frequently talk about labor market dynamics in the context of the macroeconomy and the challenges facing employers. This post, which celebrates America’s 128th Labor Day, looks at how life (and pay, and work) has improved for workers over the 2.5 years since the pandemic began.  

Labor was already scarce heading into the pandemic

The header really says it all. In February 2020, the unemployment rate was at its lowest level since 1969 (3.5%), there were fewer unemployed people than unfilled jobs (0.8/job opening), the lowest level on record, and job openings were hovering above 7 million for the first time in history.

At this point (2019), I think workers were starting to flex on their employers just the tiniest bit. Some of this can be captured in the data: real median wages increased 8.5% from 2014 to 2019, the fastest inflation-adjusted growth since the Dot.com bubble of the early 2000s.

Workers were also quitting at an unprecedented rate. More than 42 million people quit their job in 2019, which equates to an average of 2.3% of all workers quitting each month (both of which are all-time highs).  

Other signs of workers’ growing power were more qualitative. Millennials (like me) felt empowered to ignore traditions like wearing suits to work, causing many large employers to relax their dress codes. Certain firms had also gone big on amenities, including nap-pods and cereal bars (I know, whether or not these perks are worker-friendly or a way to keep people at work longer is debatable, but you get the point).

In short, labor was scarce, wages were rising, workers were testing boundaries, and then the pandemic happened.

Labor shortages got worse in a hurry

From February to April 2020, the labor force (defined as the pool of Americans either employed or looking for work) shrank by 8.2 million people (-5%).

The size of the labor force just now (August 2022) surpassed pre-pandemic levels, but that means the labor supply is back where it was 2.5 years ago, not where it would have been without the pandemic. As you can see in the graph below, there’s roughly 3 million fewer people in the labor force than there would be if pre-pandemic growth continued (Note: this is a real back of the envelope trend line, so please don’t quote me on it).

So the supply of workers fell off a cliff, but the demand for workers kept growing due to an incredible amount of stimulus that was sent to consumers, businesses, and state and local governments.

As a result of these funds (and the subsequent increase in demand), the number of open, unfilled jobs climbed from just over 7 million in February 2020 to more than 11 million in October 2021. As of July 2022, there were still more than 11 million job openings. Put simply, people (and businesses and governments) had a lot of money to spend, and businesses couldn’t find enough workers to provide the goods/services they could otherwise sell.   

Employers were desperate for workers, and workers suddenly had a ton of options. The quit rate (which was already historically high) surged. The layoff/discharge rate (which had been in decline for the previous decade and was at an all-time low) plummeted.

We’ve described the graph of the quit and layoff/discharge rate as a profit-eating monster, but that’s the employer-centric view. From a worker’s perspective, the graph (once again presented below but with a different label) looks more like a mythical beast of worker empowerment.

Job-changers are big winners

Job-changers have always gotten bigger pay increases than job-stayers. Moving diagonally (from one ladder to another) is simply a faster way to raise your compensation.

The pandemic turbo-charged that dynamic, though, as businesses were desperate to fill their vacant positions. According to ADP data, the median job-changer has gotten a 16.1% pay increase from August 2021 to August 2022, while the median job-stayer has gotten a 7.6% pay increase over that span. With inflation running at an 8.5% yearly rate in July (most recent month available), that means job-changer pay is outpacing inflation, and job-stayer pay isn’t.

Put another way, there’s clearly a big incentive to switch jobs in the post-pandemic economy, and the low labor supply and high labor demand make that a readily available option.

So are the young

Young people usually see faster pay increases than older people, but the pandemic (and the benefits of switching jobs, which is far more feasible for a 20 year old than a 55 year old) really exaggerated this dynamic. Pay for the median person ages 16-24 is up 14.5% year over year as of August 2022, and the 25-34 group (+11%) has also seen their pay outpace inflation.

The same can’t be said for the 35-54 group (7.4%), and the 55-85 (+5.1%) group has really been hit hard by inflation. 

So are white collar workers

Despite what some people (like Malcolm Gladwell and Jamie Dimon) say, working from home, or having the ability to work from home, is a big perk. You can unload the dishwasher between calls, or you can let in a contractor to clean the lint from your dryer vent (to use a personal example from last week), or you can spend an hour of every day on the couch instead of stuck in traffic.

And make no mistake, remote work is here to stay. Kastle (a key card company) reports that just 43% of workers swiped into work during the week ending August 29. In early March 2020, that figure was above 90%. A CBRE survey from this past spring found that about 3 out of 4 companies plan to enact some kind of hybrid work model in 2022. There’s a ton of data to back up the idea that remote work is here for good, but I won’t belabor the point.

The point being: not having to commute to an office and stay there for a set amount of time every day is a huge win for workers.

But only if those workers can work from home. The guy who cleaned out our dryer vent can’t work remotely. Neither can a firefighter, or a construction worker, or a chef, or a nurse.

In June 2021, the WSJ ran an article titled “You’re Finally Going Back to the Office. What Are you Going to Wear,” and one guy responded with a letter to the editor that said:

 For tens of millions of us the debate is settled. We will daily don our uniforms, coveralls and work clothes and, so bedecked, continue to keep the electricity and water on, deliver the mail and packages, truck goods across the county, stock the food stores, staff the hospitals and clinics, answer calls for emergency services, fix things, clean up messes and repair the roads. In short, do all the things we have been doing all along that can’t be accomplished via Zoom in a germ-proof home bunker. So go ahead and wear a suit jacket with a hoodie. Most of us will be too busy to notice.

Which is to say, having to fret about what you wear on Zoom calls or on those few days you actually go into work is a huge privilege and a big win for workers lucky enough to have it.

The flip side of this is that industries that can offer remote work are also (in a way) winners since they’re able to pilfer workers from industries that can’t. But I digress; this is a post about workers, not their employers.

Are these new dynamics going to last forever?

Nope, nothing does. And as one reader pointed out recently, LIFO (last in, first out) should be a big concern to job-switchers with a potential recession on the 2023-horizon.

Still, there’s currently 0.5 unemployed people per job opening. For context, there was an average of 2.7 unemployed people per unfilled job from 2001 to 2015. If the demand for labor fell by 50%, there’d still be enough jobs for every unemployed American (matching problems aside).

Which is to say, labor is really, extraordinarily tight, and while you should always plan for the worst, it’s hard to turn down a new job that comes with a 16% annual pay increase.

Wrapping this up

Labor scarcity has made workers indispensable (or at least harder to dispense of), and a lot of Americans are significantly better off as a result. Yes, this has come at the (literal) price of higher inflation, and yes, some workers (the young, the officed, the job-switchers) have benefited a lot more than others (the old, the in-person, the job-stayers).

Would the economy be better off with an adequate labor supply? No doubt.

Does the median job-switcher (who’s gotten a 16.1% pay increase over the past year) care? Not a chance.

We’ll have our August Q&A post out this week (hopefully Wednesday), and then Week in Review (as always) on Friday. Week in Review posts are only for paid subscribers. If that’s not you and you want it to be, click the link above! If not, no worries—you’ll still get a free preview.