Structural Problems in the U.S. Labor Market – What are the Challenges for the New President?

On January 20, Joe Biden was inaugurated as the new U.S. President. He, along with his Vice President Kamala Harris and the entire administration, face great challenges. Many people died or became seriously ill during the Corona pandemic; the spring saw a dramatic economic collapse and record high unemployment. In the wake of the pandemic, inequality, which was already high in the United States before the Corona pandemic, could increase further. Joe Biden has announced several measures to revive the labor market and reduce inequality.

The United States, like many other countries, has been hit hard by the Corona pandemic. Many people have died or are suffering long-term consequences. In addition, a large number of people fear for their professional future or worry about relatives and acquaintances. From March 2020, unemployment dramatically increased and there was a slump in economic output – gross domestic product (GDP) collapsed in the first half of 2020 by around 10 percent compared with the level in the final quarter of 2019. After the pandemic had been somewhat contained for the time being in May and the various lockdown measures had been partially lifted, there was a strong recovery in early summer, which continued at a slower pace in the fall. The fiscal aid package adopted in March had a supporting effect. Key elements of the program were a generous increase in unemployment benefits until the end of July, one-off payments to low- and middle-income households, and an aid program for businesses. But this was far from the end of the corona pandemic and the associated health and economic challenges. The United States continues to be severely affected by the pandemic, and drastic containment measures are in place in many states.

Pandemic leads to high unemployment

In the labor market, the pandemic is likely to leave longer-term marks and could further exacerbate pre-existing inequalities. In the spring of 2020, the unemployment rate shot up after large-scale furloughs and layoffs occurred. The official unemployment rate climbed from 3.5 percent in February to 14.3 percent in April 2020.(1) The broader so-called U-6 unemployment rate, which specifically includes people who work fewer hours than desired or who are not actively looking for work, rose as high as 22.9 percent in April from 7.0 percent in February.  The unemployment rate has fallen again significantly since April to 6.7 percent in December, but is likely to remain elevated for some time. The U-6 unemployment rate was also still at 11.7 percent in December.

The second Corona aid package agreed by the political parties at the end of December provides for one-off payments to households and an increase in unemployment benefits until the end of March, similar to the spring 2020 package. On the one hand, this should help the people affected to make ends meet financially. On the other hand, it will also support economic activity, which – hopefully – will underpin the recovery of the labor market in the spring.

Structural problems in the labor market exacerbated by the pandemic

The situation on the labor market had already been ambivalent since the financial and economic crisis, despite a fairly favorable trend prior to the pandemic. The unemployment rate was low, but in the years before the outbreak of the pandemic, low-paying new jobs were created too often – for example, in the catering industry or in the so-called gig economy with many insecure and temporary jobs. In recent decades, many formerly well-paid jobs for the middle class – especially in industry – have been lost to automation or relocation abroad.(2)  As a result, income inequality in the United States is high and average real wages have grown only at a muted pace in recent decades. Research shows that those with the highest incomes have received an increasingly large share of total income over the past several decades, while that share has declined for those with lower incomes.(3) This does not mean that people as a whole have not benefited from globalization and technological change. Much has improved, a large number of goods and services are available at often affordable prices. The benefits of international trade in particular are often underestimated. Yet for too many people – at least in the U.S. – wages and job security have deteriorated or improved surprisingly little. It is conceivable that the consequences of the Corona pandemic will further increase inequality. So far, the Corona pandemic has left many low-income people unemployed, such as those who worked in the hospitality and entertainment industries or as cleaners in office buildings.(4)  Minorities are disproportionately affected. Inequalities may also tend to widen between the sexes. Mothers, for example, have been more likely than average to withdraw from the labor market to care for children during the pandemic and school closures.(5) This is likely to worsen the wage and career prospects of these women in the future. Employees who can do their work at home have come through the crisis comparatively unscathed so far. In the medium term, however, it is conceivable that the trend toward location-independent work by so-called “white-collar workers” – i.e. office employees – could encourage the relocation of jobs for the middle class abroad and thus increase polarization on the labor market. It cannot be ruled out, therefore, that working from home will bring disadvantages in this respect in the longer term.

Plans of the new president

The new President Biden intends to introduce additional aid and stimulus measures. The plans known so far include further one-time payments and a renewed extension of unemployment benefits until the end of the summer. In addition, an increase in the minimum wage is proposed. These aids are to be followed later by long-term measures aimed in particular at investments in education, “green” energy sources and infrastructure. Last but not least, these planned measures are linked to the hope that new jobs will be created in promising areas. During the current low interest rate environment, higher public debt should be manageable to a certain extent in order to finance this additional spending. It is to be hoped that the U.S. economy and labor market will recover from the crisis during the pandemic – also thanks to such measures. Otherwise, inequality, which was already high before the crisis, threatens to increase further, which could further fuel social polarization.

  1. For a discussion of various classification problems in determining the unemployment rate during the Corona pandemic, see, for example, Furman, J., and W. Powell III (2020), “Unemployment continues to fall, but U.S. labor market problems run deep,” Peterson Institute for International Economic, August 7, 2020.
  2. See, for instance: Autor, D., D. Dorn and G. Hanson (2016): “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade”, Annual Review of Economics, 2016, 8, 205–240; Fort, T., J. Pierce and P. Schott (2018): “New Perspectives on the Decline of US Manufacturing Employment”, Journal of Economic Perspectives, 32 (2): 47-72.
  3. See, for instance: Zucman, G. und E. Saez (2020): “The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts”, Journal of Economic Perspectives, 2020, 34(4): 3-26.
  4. See, for instance: Falk, G., J. Carter, I. Nicchitta. E. Nyhof und P. Romero (2021): “Unemployment Rates During the COVID-19 Pandemic: In Brief”, Congressional Research Service, 12. Januar 2021.
  5. See, for instance: Alon, T., M. Doepke, J. Olmstead-Rumsey und M. Tertilt (2020), “The Impact of COVID-19 on Gender Equality”, Covid Economics: Vetted and Real-Time Papers 4: 62-85; Alon, T., M. Doepke, J. Olmstead-Rumsey und M. Tertilt (2020b), “This Time It’s Different: The Role of Women’s Employment in a Pandemic Recession”, CEPR Discussion Paper 15149.

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