Table of Contents
Big economic moments deserve a proper name.
Some have labeled this one “the great reallocation.”
Another way to put it: COVID shook up our
economy like a snow globe. Workers and businesses
are not gliding gently back to their old positions:
Work environments, job responsibilities, child care,
life priorities—all have been set swirling by the
pandemic experience.
Even in the before-times, the process for employees
and employers to find the right fit was an ordeal
for both sides. Researching, applying, and negotiating
take effort and time, oftentimes unfruitful. Unlike
most markets, in which just one side of a transaction is making a choice (consumers care which
restaurant they eat at; restaurants do
not generally care which consumers eat
there), the labor market is complicated
by “two-sided differentiation,” said University
of Minnesota labor economist
and former Institute visiting scholar Aaron
Sojourner: Employers and workers
both size up each other, and either can
scuttle the deal if the match isn’t right.
The employment process is naturally
full of frictions, which Sojourner defines
as anything “that gets between you and
the best job out there for you.” The term
“frictional unemployment” refers to the
inevitable share of people who are navigating
this matchmaking process.
The extreme signals from the data tell
us the labor market is in a high-friction
moment. Last year saw a record 47 million people quit their jobs, the highest
since the Bureau of Labor Statistics started
collecting the data in 2000. Meanwhile,
the number of people who have
taken themselves out of the labor force
remains elevated, particularly for people
over age 55.
At the same time, there have been an
extraordinary number of job openings,
nearly 11 million at the end of 2021—more than the number of people looking
for work. The Beveridge Curve shifted
outward into unknown territory and
took on an unfamiliar vertical shape (see figure): Unemployment stopped falling
while openings continued to rise. This
imbalance is driving up wages, particularly for lower-wage jobs. That there are so
many job openings and so many job seekers
implies there are matches to be made.
That they aren’t happening, or aren’t happening
quickly, suggests that frictions, old
and new, are getting in the way.
What do these unusual trends say
about how the labor market itself has
changed? What do they say about us,
as workers? What is the endgame of
the great reallocation? Understanding
is critical for the Federal Reserve as it
sets policy to support the conditions for
reaching maximum employment. Yet with labor demand and labor supply
adapting to the COVID economic shakeup,
one with no recent precedent, it can
be tricky to answer that eternal, nagging
question: Are we there yet?
You can’t fire me—I quit!
Quitting has been having a moment.
Quits tend to naturally rise with tight
job markets. But “they’re not just high,”
said economist Steven Davis of the University
of Chicago Booth School of Business.
“They’re higher than any period in
the history of the data.”
The reasons for this churn are likely
both structural—where will the swirling
snowflakes fall?—and informational—how long will it take them to land? Structurally,
the pandemic introduced major
health concerns, changed consumer spending patterns, and altered firms’ use
of technology, all of which have impacted
which businesses are more and
less productive—AMC Theatres versus
Netflix, say, or a restaurant with a large
dining room versus a takeout counter.
As a result, “there’s another firm out
there now that is more productive and
can make better offers” to prospective
employees, Sojourner said.
But how people learn about these new
opportunities depends upon “information
frictions”—the fact that information
about job openings, employer quality, and
even wages is not easily or equally available.
Research by Institute visiting scholar
and University of California, Berkeley
economist Benjamin Schoefer shows that
people don’t seem to have a good sense
about how their compensation compares
to workers in similar jobs at other
employers—whether you are paid well or
poorly compared to your peers, you likely
think you’re close to the middle.
“If you get stuck in a low-wage job,
you might think all jobs are low-wage
jobs and therefore you never switch,”
Schoefer said. But if these workers are pushed to search for new jobs—as many
who were laid off or left their jobs during
the COVID recession did—they learn,
which may lead them to seek out and
obtain higher wages in the future.
People appear to gain
valuable new information
about employment
options when colleagues
quit to look for a new job.
As a result, quitting seems
to beget more quitting.
In addition, Schoefer’s research suggests,
people appear to gain valuable new
information about employment options
when colleagues quit to look for a new
job. As a result, in the near term at least,
quitting seems to beget more quitting—a
kind of multiplier effect. “One of the top
things in the news—and in everyday
conversation—is people talking about,
‘Oh, wow, employers are really bidding
up wages and a lot of people are quitting
their jobs,’” said Nick Bunker, director of
economic research for the Indeed Hiring
Lab. “People might sort of say, ‘Wait a
minute—let me think about this.’”
Power to the people?
In the quits-rate and other aspects of
the tight, post-pandemic labor market, it
is tempting to see a shift in power from
employers to employees. “I do think
what we’re seeing right now is a tilting of
the bargaining table more toward workers,”
said Bunker. “There’s more power
for job-seekers because of the kind of
outside options they have. If you’re an
employed person…you can go to your
current employer and say, ‘Hey, look,
there’s all this demand out there and all
these people are quitting their jobs. It’d
be a shame if I left!’”
Household savings surged during the
pandemic, thanks to government stimulus
and lower household spending.
The feeling of extra money in the bank
could provide a temporary wealth effect,
empowering and emboldening workers.
The increased bargaining power of
workers may be short-lived, however,
especially where automation (essentially,
substituting capital for people) is an
option. Ironically, the pandemic itself—and the higher wages that resulted—will
tip the scales in favor of automation,
predicts economist Andra Ghent of the
University of Utah’s David Eccles School
of Business.
“This technology was available prior
to the pandemic, but for firms it wasn’t
cost-effective to invest in it. And now it is,”
Ghent said. “Long term, this is not good
news” for many lower-wage workers.
Rethinking our relationship to work
Wages are not the only piece of our work
lives that the pandemic put in relief.
Most obviously, the pandemic caused
a newfound awareness of health risks
on the job. “It turns out to be hard to
fill a number of jobs that require daily
or intensive contact with others,” said
economist Arie Kapteyn of the Center
for Economic and Social Research at the
University of Southern California, which
runs the ongoing Understanding Coronavirus in America survey. Health risk
is mediated not only by interaction with
others but also by employer decisions:
Have they put a mask mandate or a vaccine
mandate in place? These concerns
add to the criteria that job seekers and
prospective employers must match on,
increasing job search frictions.
But health concerns are not the only
driver of new expectations, Kapteyn
noted. “Another story is that people are
reevaluating their lives: Is this really
what you want to do?”
Health concerns are not the only driver of
new expectations, Kapteyn noted. “Another
story is that people are reevaluating their
lives: Is this really what you want to do?”
Many already-tough jobs were made
more unpleasant by the pandemic,
said RAND economist Kathryn Anne
Edwards. Hospitality workers have had to
enforce mask mandates. Retail workers
do more cleaning. Restaurant staff spend
time bagging take-out orders (for lower
tips) and contend with surly customers.
Nurses, bus drivers, substitute teachers
… the altered nature of many jobs may
lead workers to hold out for alternatives.
In addition, a “status quo” effect may
be at work among the historically large
number of people who have been out
of work for an extended time, explained
behavioral economist George Loewenstein
of Carnegie Mellon. “Continuing to
work in an occupation is very different
from re-entering it,” he said. “Being out of it might give you a new perspective on
alternatives that life has to offer—possibly
with one alternative being idle or
unemployed.”
Loewenstein worries about a darker
effect of pandemic unemployment,
with long-term consequences for the job
market: “I suspect that there is a massive
mental health crisis that we’re not fully
aware of.” Even before the pandemic,
Loewenstein said, going back to work
after an extended absence “was a very
daunting prospect for a lot of people—a
lot of insecurity about whether they had
the right skills. The pandemic has led to
this re-entry issue on a mass scale.”
For some, living through the pandemic
has shifted the place of work and earnings
in our priorities. By introducing more
family time and life without a commute,
the pandemic could have altered the value
people place on leisure, said Ghent,
who studies work-from-home trends. We
are more willing to step onto a different
path, “willing to say, long-term, maybe
this isn’t going to increase my wages as
much, but I won’t put myself on the same
trajectory to have the big increase in productivity
later on [in my career].”
Commuting and cubicles? No, thank you.
People did more than change their
minds during the pandemic. They
changed ZIP codes.
Some workers moved to an entirely
different metro area—leaving California’s Bay Area, for example, in hopes of
a remote-working life in Boise. A more
substantial shift was the movement away
from city centers into the suburbs. While
renters are more mobile than homeowners,
physical moves are not quickly
undone, leaving a sticky situation where
jobs and workers are not in the same
places as office work returns.
While renters are more
mobile than homeowners,
physical moves are not
quickly undone, leaving a
sticky situation where jobs and
workers are not in the same
places as office work returns.
“What might have looked like an
attractive job when I only had a 20-minute
commute, now doesn’t look so attractive
if it’s a 75-minute commute,” noted Davis
of the University of Chicago. He says the
“spatial mismatch” works both ways,
with employees in the suburbs who don’t
want to go into the city and city-dwellers
finding that service jobs have followed
white-collar workers into the suburbs.
For jobs with a remote-work potential,
the dance between employers and
workers is far from over. The pandemic
was a historic inflection point—similar,
said the University of Utah’s Ghent, to
the telephone or email reaching critical
mass. “These technologies have this
characteristic of a network externality,
where the benefit of them depends upon
how many other people are using them,”
Ghent said. “Zoom was not invented in
2020. But it wasn’t appropriate for an
accountant to say to a client, ‘Hey, you
want to just meet over Zoom?’”
Ghent believes the productivity gains
from crossing this threshold—including
eliminating hours of nonproductive
commuting time—will be a “win-win”
for workers and employers overall. The University of Minnesota’s Aaron Sojourner
points out that it could also reduce job
search frictions, allowing both workers
and companies to search nationally, not
just locally, which should increase the
quality of employee-employer matches.
But for this to happen, employees
and employers must strike a truce on the
right amount of work-from-home. Davis’
ongoing Survey of Working Arrangements and Attitudes finds employee and
employer expectations are converging,
but workers still expect a nearly full day
more at home each week, on average,
than employers. Nearly 40 percent of
recent, college-educated job-quitters,
surveyed in the fall, said they did so to
obtain greater time working from home.
One economic diagnosis for the mismatch
in expectations: Some diffuse and
long-term benefits to office-time for the
organization—innovation, collaboration,
mentoring—do not factor into workers’
day-to-day calculations of costs and
benefits. Loewenstein, the behavioral
economist, suggests workers might also be
ignoring long-term benefits to themselves,
which he labels an “internality” problem.
“These kinds of changes occur slowly
within organizations,” Davis said. “It
requires a profound shift in how you manage the organization, how you cultivate
cultural values, how you transmit
knowledge from more-experienced to
less-experienced workers.” We are still in
the thick of experimenting, bargaining,
and self-sorting our way to a new equilibrium
around remote work.
A hard(er) bargain
With workers dreading a commute and
eager to preserve newfound work-life
balance, negotiating a pay and benefits
package just got more complicated. Wage
bargaining is already prone to frictions
caused by asymmetric information; by
the fact that negotiation typically happens
only annually; and by the practical reality
that wages are hard to adjust downward.
Now the pandemic has introduced
a new element into the compensation
picture. Employees and job seekers want
flexibility; but at what cost? Davis’ ongoing
Survey of Working Arrangements and Attitudes finds employees now working
from home part of the week would
require a raise of more than 8 percent
to compensate them for returning to the
office full time.
Post-COVID inflation adds another
wrinkle—but also a possible solution to
the stickiness of wage decreases. “Smart
employers can probably get away for the
next couple of years with offering lower
wage increases than they might otherwise
offer,” said Davis. “It’ll be a lot easier to get
away with a wage hike below the inflation
rate, if you at the same time allow workers
to work from home part of the week.”
Remote work is not an option for all
jobs, of course. In particular, many lower-wage jobs in retail, hospitality, and
manufacturing must be done on site.
These are jobs at which workers traditionally
have little negotiating power over wages; they have also experienced
anemic wage growth over the past 20
years. Now, however, wages in a number
of low-wage sectors are the fastest-growing
in the economy. These jobs cannot be compensated with greater flexibility,
and in many cases the job responsibilities
carry both new risks and burdens.
By not accepting the old, low rates of
pay, workers are exerting influence to
increase wages.
The child care challenge
Flexible hours and hybrid work help
keep parents in the labor force. But trying
to juggle work and children during
the pandemic has proven they are no
substitute for reliable child care.
Child care has long been a friction
for parents of young children, especially
mothers, affecting both whether and how
much they work, RAND’s Edwards said.
With limited access to paid family leave,
subsidized child care, or part-time work
schedules, “We haven’t made it easy for mothers of young children to work in
the formal labor market,” said Elizabeth
Cascio, an economics professor at Dartmouth
College.
When the pandemic sent not just young children but all children home, “in terms of the time parents had to devote to these child care needs, it was almost like having another newborn,” observed Gema Zamarro.
When the pandemic sent not just
young children but all children home,
“in terms of the time parents had to
devote to these child care needs, it was
almost like having another newborn,”
observed Gema Zamarro, professor of
economics and education reform at the
University of Arkansas. Mothers were
far more likely than fathers to provide
this care, even when both parents were
employed, according to Zamarro’s analysis
of survey data: In the spring of 2020,
one in three working moms reported
being the sole provider of child care for
their children, compared to one in 10
working dads. And this imbalance had
grown even larger by fall 2020.
But the days didn’t get any longer.
“Being the only one providing child care
in the spring of 2020 is associated with a
20 percentage-point increase in respondents
saying, ‘I had to reduce working
hours,’” Zamarro reported, and sole providers were also more likely to transition
out of employment entirely. Research by
Edwards shows that the more kids there
are in a household, the larger the decline
in mothers’ labor force participation.
Unfortunately, child care frictions
stoked by the pandemic remain elevated.
The child care sector is roughly 10 percent
smaller than it was before, Cascio
reports—and as many parents can attest,
availability was a challenge even in 2019.
Lower supply, compounded with post COVID approaches to cleaning and
crowding, will tend to make child care
even more expensive than the $15,000-$20,000 that quality centers typically
cost before the pandemic. Schools have
reopened, but children are still subject to
unpredictable quarantines and closures.
And while most working parents feel a
child care crunch, the burden doesn’t fall
evenly. Ultimately, parents with greater
resources are better able to solve their
child care needs, stay in the labor force,
be more productive, earn more money,
and invest more in their children, U.S.
Census Bureau economist Misty Heggeness
explained, making affordable,
accessible child care an equality issue.
(See “The Great Balancing Act.” )
With some 10 million open jobs, it’s
also a matter of economic growth. Speaking
to CBS’s “Face the Nation” about the
challenge of finding child care, Minneapolis
Fed President Neel Kashkari said, “It
does have an effect on women’s participation
in the labor force and how high our
labor force participation is as a whole.”
Like the tug-of-war over remote work,
workers’ willingness to quit, and our
shifting relationship to our jobs, “These
[child care] challenges have been exacerbated
in the pandemic,” Kashkari said.
“Long term, this is an important economic
growth issue and competitiveness
issue for the country.”