The U.S. economy has fully recovered from the coronavirus pandemic, in one important way. But it’s back with nearly 8 million fewer workers.
Gross domestic product, adjusted for inflation, has most likely exceeded pre-pandemic levels, according to forecasting firm IHS Markit. Official GDP numbers arrive quarterly, and the prior peak for real GDP was $19.3 trillion in the fourth quarter of 2019. GDP plunged to $17.3 trillion last year but rebounded to $19.1 trillion in the first quarter of 2021. IHS, which tracks GDP monthly, believes it hit a new high in May. Official figures will likely confirm that when the government releases them in late July.
While GDP has recovered, however, employment hasn’t come close. There are 7.6 million fewer workers than before the pandemic. Adding in job growth that normally might have occurred during the last 15 months brings the total to roughly 10 million missing workers. The U.S. economy is literally producing more with fewer workers.
That could be good or bad. It’s possible that businesses have learned to thrive with fewer workers, through automation or other innovations. Companies normally use recessions to reorganize work flows and create new efficiencies, sometimes in order to survive. If the missing 8 million or 10 million workers aren’t really needed, that might mean unemployment will stay elevated for a long time.
There could be a more upbeat explanation, however. With Americans stuck at home for most of the last 15 months, consumption shifted from in-person services such as restaurants, gyms and salons to goods such as home-improvement materials and exercise equipment. Productivity is higher in the output of goods than in services, which could be why we can have higher overall output with fewer workers.
The record number of job openings—especially in the restaurant industry and other service sectors—supports the idea that the economy will absorb those remaining 8 million workers. Productivity might drop as consumption shifts back toward a normal balance between goods and services, which means GDP growth would cool. But there’s an X Factor that might signal a permanent boost in the productivity of workers and a sustained bump in longer-run output.
A recent study by economists Jose Maria Barrero, Nicholas Bloom and Steven Davis predicts that remote work will persist long after the pandemic for many workers, rising from 5% of all workdays before the pandemic to 20% after. By studying the output of remote workers during the pandemic, the researchers predict a 5% overall improvement in worker productivity, due to saved commuting time, more efficient work schedules and better employee well-being.
“That’s huge,” says Joel Prakken, chief US economist at IHS Markit. “That would be three years of productivity growth in one year. If that’s what happens, by the time we hire back the workers who still aren’t working, the level of GDP will be higher than last time we enjoyed full employment.”
That sort of long-lasting boom isn’t a mainstream forecast. IHS expects GDP growth of 7.4% this year and 4.8% next year, but then a return to middling growth of around 2%. The White House forecast, normally a bit rosier than private economists’, is even more modest under President Biden.
The unpredictable nature of the coronavirus shutdowns, coupled with a much faster recovery than expected, has left economists and business owners puzzled over underlying changes in the economy. And the labor market may be the most puzzling. After an unprecedented surge in joblessness last year, many displaced workers seem to be resisting a return to low-paying or unrewarding jobs. That will probably change as jobless aid runs out, the coronavirus recedes and kids get back to normal schooling, freeing parents to work more. Employers will also pay more to hire workers they absolutely need. For now, each side seems to be eyeing the other, with the pace of negotiations likely to pick up soon.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.