Jobs and the COVID-19 recession: Why this time is different

Workers quit their jobs in record-breaking numbers in November, the Labor Department reported. At first glance, such a large number of quits, followed by mediocre job growth in the December jobs report, may suggest a negative trend for the labor market.

And yet, for the first time in years, this process—playing out against the backdrop of a larger COVID-19-driven “reallocation shock”—actually seems to be directly benefitting workers, in addition to promoting overall efficiency in the economy.

Historically, workers have more often been hurt by reallocation shocks, during which a significant share of workers permanently lose their jobs, forcing them to move to new companies, new places, or new industries to get rehired. These shocks often come in the wake of recessions or significant economic shifts such as job losses from international trade. During those periods, voluntary quits tend to crater, while involuntary layoffs tend to surge.

Nonetheless, these shocks initiate a process of “creative destruction,” wherein the economy sheds certain jobs and creates new ones, sometimes in different industries and different places. While this process is necessary for continued growth and increased productivity, it often has devastating economic impacts for the individual people who lose their jobs. In particular, workers who involuntarily lose their job tend to be unemployed for longer, and when they are rehired, they often have significantly lower wages than in their previous job.

However, from the beginning, the COVID-19 recession has been different. In March 2020, American University economist Gabriel Mathy correctly predicted that the COVID-19 recession would perhaps be the first service sector recession. This has had important implications for the direction of the economy’s reallocation. In past reallocation shocks, job losses were more concentrated among production sector jobs. When workers lost their jobs, they were often forced into lower-paying service sector jobs, which would have significant negative economic impacts on their lives.

In the COVID-19 recession, that process is playing out in reverse. A large portion of the job churn since March 2020 has been concentrated in frontline services such as accommodation, food services, and retail, which rely on in-person customers and can’t be done remotely. These jobs are not only among the most dangerous during a viral outbreak (and have been made more difficult by misinformation-driven abuse), they are also among the lowest-paying.

As companies began hiring people back during the recovery, many workers have not wanted to subject themselves to difficult working conditions and potential safety risks for the low wages that these jobs have historically offered. Meanwhile, many of the workers who were never laid off have become burned out, spurring the record-setting number of quits. But workers aren’t just sitting on the sidelines—they are opting to move into new jobs, ones that either have higher wages, safer working conditions, or other factors that make them more appealing. Even as expanded government unemployment benefits expired in September 2021 (or were never available to begin with for workers who voluntarily quit their jobs), the pace of job switching has continued to accelerate.

These factors have increased worker bargaining power, with positive wage effects. As 2021 ended, the prime-age employment-to-population ratio had recovered to levels last seen in late 2017—a period considered at the time to be a relatively healthy labor market—but with even stronger wage growth.

Wage growth has been particularly strong among nonsupervisory workers, who have the least bargaining power and are most likely to benefit from the surge in job switching. The three-month annualized rolling average of hourly wage growth among production and nonsupervisory workers in November 2017 was 2.2%; in November 2021, it was 6.4%. Unfortunately, these wage gains have been largely negated by high inflation in recent months, but if sustained, they would represent a real and positive gain for workers relative to the last recovery.

Quits began surging after February 2021, with significant turnover being reported both in absolute terms and also as a percentage of total employment. As this happened, production and nonsupervisory workers in industries with the highest quit rates also saw some of the highest wage growth. Central to these dynamics were transitions in the accommodation and food services sector, where both quits and wage increases for production and nonsupervisory workers were nearly twice as large as any other sector.

Amid headlines declaring a “Great Resignation” and even a labor shortage, these developments are good news. For the first time in over two decades, a reallocation shock is not only advancing aggregate economic growth, but is so far benefitting many rank-and-file workers as well. As ZipRecruiter economist Julia Pollak told The Washington Post, the quits reflect workers moving “from lower-paying jobs to higher-paying jobs, from less prestigious jobs to better, more prestigious jobs, from less flexible jobs to more flexible jobs.”

Now, the country faces two challenges: supporting workers who transition across industries or occupations and locking in these newfound gains.

To the first challenge, most workers in low-wage industries such as accommodation, food service, and retail tend to either make intra-industry job changes or move into other relatively low-wage industries. This is a result of employers in high-wage industries looking skeptically at hiring workers from low-wage industries, high cost barriers to education and skill development in the U.S., and a relative lack of resources for adult job seekers compared to other countries.

To begin to address that issue, Congress should pass the Build Back Better Act, which in its House version contains significant investments to support worker career transitions through the Department of Labor and Department of Education, including over $4 billion to support workforce development in support of climate resilience. Other investments in the bill—such as subsidized child care, free pre-K, care for seniors and the disabled, sustained subsidies for Affordable Care Act marketplace plans, and paid leave for workers—would improve workers’ quality of life and reduce “job lock,” or the need for workers to remain in a certain job to maintain benefits.

Several other federal policies could lock in the gains that workers have made in recent months, although they are unlikely to pass due to the composition of the Senate and its filibuster rules. Reviving the long-stalled effort to raise the minimum wage—including eliminating the subminimum tipped wage that many food service and other low-wage service workers earn—would help preserve the wage gains currently happening in low-wage industries. And the Protecting the Right to Organize (PRO) Act would make it easier for workers in low-wage service sector jobs to organize and collectively bargain for better wages and benefits.

The onset of the Omicron variant in December added an additional layer of uncertainty to the trajectory of the economic recovery. However, one thing likely to remain constant is the skepticism many workers have about returning to frontline jobs at low wages. Policymakers should leverage this pro-worker moment to promote a healthier reallocation process that not only supports topline economic growth, but also permanently improves the well-being of workers. That would entail a truly welcome reallocation.