What the US recovery is missing

Laura Tyson and Lenny Mendonca October 22, 2021 06:00

The expiration of enhanced unemployment benefits in the United States has come and gone with no noticeable impact on the number of Americans seeking work. This should come as no surprise. Arguments made by uninformed and self-interested low-wage employers who blamed the pandemic-era safety net for their inability to fill open positions never held water. Research from the US Federal Reserve Bank of San Francisco has shown that early suspension of benefits in some states had no noticeable impact on their unemployment rates.

The challenge of employing more than eight million jobless Americans will not be solved by cutting benefits. Rather, we need a more substantial change in our social contract, particularly to support jobs in the care economy. Before the pandemic, the US economy was close to full employment (as traditionally defined), with an unemployment rate of 3.5% in February 2020. The economy had added more than two million jobs over the previous year, in what had been the longest economic expansion in US history. But COVID-19 – and the lockdowns used to combat it – changed that almost overnight. Within the space of a month, 20.5 million US jobs were lost, and the unemployment rate peaked at almost 15%.

Rapid action by the US Federal Reserve and an unprecedented fiscal response through the American Rescue Plan and the Coronavirus Aid, Relief, and Economic Security (CARES) Act stemmed the tide. Many jobs switched to remote work, and the economy was stabilized until vaccines arrived, allowing for a reopening. By September 2021, employment had increased by 17.4 million jobs from its previous trough, and the unemployment rate had dropped to 4.8%. At the end of the month, there were more job openings (ten million) than people seeking work (8.4 million). The Fed is expected to start tapering its support for the economy in the next couple of quarters.

But COVID-19, and the early response to it, laid bare deep inequities that have only gotten worse. The recovery has not benefited women, people of color, or low-wage workers in the hospitality, travel, and care industries (of all groups, black women have benefited the least from the recovery). By May 2021, workers with college degrees had fully recovered their pandemic job losses, whereas the cohort without college degrees, accounting for more than half the unemployed, remains 4.5 million jobs short of pre-pandemic levels.

Although the overall labor-market tightening has started to affect wages, benefits, and working conditions, market factors alone will not close the remaining gaps, especially in jobs with low starting wages or variable work hours. Without even larger changes in wages and more predicable scheduling, many restaurants and retailers will still struggle to fill positions.

Automation can and will address some of these shortages. Use of self-checkout at large retailers is soaring, and McDonald’s is testing kiosks for customers to place food orders. These technologies not only facilitate transactions with fewer employees, but also prompt customers to order more through product recommendations.

But much in-person service work is difficult to automate. Bureau of Labor Statistics data indicate that US job growth can be expected to include more than three million jobs in personal care, food service, and hospitality. At the same time, population aging will impede labor-market growth, and pressures on women to care for children and elders will further constrain the available workforce. Making matters worse, in one recent survey, 42% of women and 35% of men say they are suffering from burnout and may resign in the coming months.

Some states have taken steps to address the workforce and care challenge. California, for example, has extended paid family leave, expanded its earned income tax credit (EITC), and is now paying for universal preschool, free community college, and generous Medicaid and Affordable Care Act programs (Medi-Cal and Covered California).

But federal action is needed to sustain and scale up these policy innovations. To that end, congressional Democrats’ budget proposal includes several key proposals that would help working Americans. The $1.8 trillion American Families Plan, for example, would provide universal preschool, set limits on childcare costs while increasing provider pay, support tuition-free community college, and extend child tax credits and paid family leave.

The Democrats’ plans are projected to increase employment by 20 million and boost long-term growth, with the benefits accruing mostly to lower- and middle-income families. It is therefore essential that Congress pass the budget proposals with all these enhancements for working families kept intact.

Additional work will be needed to address the structural challenges in the care economy. By 2050, the number of people aged 65 and older with Alzheimer’s or dementia may grow to 12.7 million. Yet, right now, 83% of the help provided to older adults in the US comes from family members, friends, or other unpaid caregivers. Because most paid care jobs are at least partly funded by the federal government through Medicaid and Medicare, a national-level intervention is needed. Promising innovations include expanding the EITC to those caring for children or elders at home, and investing in worker-owned retraining co-ops like Futuro Health.

Moreover, the US is a significant outlier among OECD countries in its lack of public support for childcare (providing just $500 per year for a child’s care, compared to an OECD average of more than $14,000, and up to nearly $30,000 in Norway). Expanding paid family leave to the level of other advanced countries is likely to enable more mothers to enter the workforce. That, in turn, would help reduce labor costs for many small businesses without triggering an increase in business closures, as has happened in California.

As the US pulls out of the pandemic-induced downturn, we cannot ignore deep challenges in our labor markets. Automation, federal resources, and policy innovation are necessary to ensure that the recovery reaches everyone.

Copyright: Project Syndicate
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Laura Tyson and Lenny Mendonca

Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley. Lenny Mendonca, Chairman of New America, is Senior Partner Emeritus at McKinsey