Three lessons from a surprisingly resilient labor market

The pandemic created an economic crisis unlike anything seen before. So it is perhaps not surprising that the aftermath also played out in a way that almost no economists expected.

As unemployment soared in the early weeks of the pandemic, many feared a repeat of the long, slow recovery of the Great Recession: years of unemployment that left many workers permanently scarred. Instead, the labor market recovery has, in many ways, been the strongest on record.

In early 2021, some economists anticipated a rise in inflation. Others were sceptical: Similar predictions made in recent years – in some cases from the same forecasters – had not come true. This time, however, they were right.

And when the Federal Reserve began reining in inflation, there were warnings that the labor market would surely collapse, as it had threatened to do whenever policymakers began raising rates too quickly in the decade before the pandemic. Instead, the central bank has raised interest rates to their highest levels in decades, and the labor market remains stable, or perhaps even gaining strength.

The final chapter of recovery has not yet been written. A 'soft landing' is not a foregone conclusion. But it is clear that the economy, and especially the labor market, has proven to be much more resilient than most people probably thought.

Interviews with dozens of economists—some of whom got the recovery partially right, many of whom got it mostly wrong—provided insight into what they've learned from the past two years, and what they think of the labor market right now. They didn't agree on all the details, but three broad themes emerged.

1. This time it was really different.

Economists have learned to be cautious about concluding that “this time it's different.However different the details may be, the basic laws of economic gravity generally remain constant: bubbles burst; debts expire; patterns of hiring and firing evolve in ways that are broadly, if imperfectly, predictable.

But the pandemic recession was really different. It wasn't 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. It was caused by a pandemic that forced many industries to close virtually overnight.

The reaction was also different. Never before had the federal government provided so much assistance to so many households and businesses. Despite mass unemployment, personal incomes increased in 2020.

The result was a recovery that was rapid but chaotic. When vaccines allowed people to get out and about again, they had money to spend, but companies weren't willing to spend it. They had laid off millions of workers, some of whom had moved to other cities or industries, or started their own businesses, or were unavailable to work because schools remained closed or the health risks still seemed too great. Companies have had to navigate supply chains that remained constricted long after daily life had largely returned to normal, and they had to adapt their business models to schedules, spending patterns and habits that had changed during the pandemic.

In retrospect, it seems clear that normal economic rules may not apply in such an environment. For example, unemployment normally rises when vacancies fall. Because there are fewer opportunities, it is more difficult to find work. But after the pandemic shutdown, even after the initial hiring wave subsided, there were still more job openings than workers to fill them. And companies were eager to keep the employees they worked so hard to keep, keeping layoffs low even as demand began to cool.

Some economists acknowledged that the pandemic economy would likely follow different rules. Christopher J. Waller, a Fed governor, argued that in 2022 vacancies could decrease without necessarily increasing unemployment, for example. But many other economists were slow to recognize the ways in which standard models did not apply to the pandemic economy.

“The danger lies in predicting what will happen in extreme times based on linear relationships estimated in normal times,” said Laurence M. Ball, a Johns Hopkins economist. “We should have known that.”

2. The labor market is returning to normal – and normal is pretty good.

The labor market no longer looks so strange. In fact, it looks much the same as it did just before the pandemic started. The vacancies are slightly higher than in 2019; job turnover is slightly lower; the unemployment rate is almost the same.

The good news is that 2019 was a historically strong labor market, marked by gains that cut across racial and socioeconomic lines. The 2024 version is even stronger by some measures. The unemployment gap 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 are outpacing price increases now that inflation has cooled.

Of course, 'normal' looks a little different five years later. The pandemic has forced millions of people to retire early, 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 these patterns will continue to evolve, the period of frenetic rehiring and redeployment is largely over. Workers still change jobs, but they no longer walk out the door on their lunch break to take advantage of a better-paying opportunity down the street. Employers still complain that hiring is difficult, but they no longer offer signing bonuses and double-digit raises to bring in people.

As a result, many economic rules that previously disappeared from view during the recovery may be relevant again. Without such a surplus of unfilled jobs, a further decline in vacancies could, for example, herald a rise in unemployment. That doesn't mean the old models will perform perfectly, but they can still stand up to watching.

“It's easy to imagine that we went through a period where a lot of strange things happened, but now we're coming back to a world we understand,” said Guy Berger, director of economic research at the Burning Glass Institute. Labor Market Research Organization.

3. The good times don't (necessarily) end.

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 has surpassed its pre-recession peak. The unemployment rate approached 5 percent, a level many economists associate with full employment. Millions of people had left the workforce during the recession, and it was unclear how many people 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 to a trickle, just enough to keep pace with population growth.

Those projections turned out to be extremely pessimistic. American employers created more than 11 million jobs between the end of 2014 and the end of 2019, millions more than what the budget agency expected. Companies hired job seekers they had long avoided, pushing the unemployment rate to a 50-year low, and raising wages to lure people off the sidelines. They also found ways to make workers more productive, allowing companies to continue to grow without adding as many workers.

It is possible that if the pandemic had not occurred, the job growth of previous years would have ultimately stalled. But there is little evidence that this was a looming prospect in 2020, and there is no reason why it should happen in 2024.

“A strong labor market sets off a virtuous cycle where people have jobs, buy things, companies do well and hire more people,” said Julia Pollak, chief economist at job site ZipRecruiter. “It's going to take something to slow that train down and interrupt that cycle.”

Some form of interruption is possible. The Fed, nervous about inflation, could wait too long to cut rates and ultimately trigger a recession. And recent data may have overestimated the strength of the labor market; economists point to several signs that cracks could be developing beneath the surface.

But pessimists have been citing similar cracks for over a year. So far the foundation has held up.