The labor market will likely require years to fully recover its pandemic-era losses, even as a COVID-19 vaccine becomes widely distributed and a longer-lasting economic reopening takes place, according to at least one economist.
Faced with a record surge in COVID-19 cases and renewed lockdown measures, the U.S. economy shed 140,000 jobs in December and the unemployment rate held stubbornly at 6.7%, or nearly double its pre-virus level, according to the U.S. Department of Labor’s latest monthly report. The job losses brought the total deficit in employment to 9.8 million from February.
But the pandemic’s latest blow to the labor market, driving the first drop in payrolls since April, was likely not its last.
“We expect the double-dip pattern to continue into the new year as the pandemic remains rampant,” Jim O’Sullivan, U.S. macro strategist for TD Securities, wrote in a note Friday. “We expect recovery to resume within a few months, with the help of vaccines and fiscal stimulus, although we also expect the labor market to show significant net weakening for several years.”
More specifically, the labor market may need four to five years to return to a state similar to what it was before the pandemic, when the jobless rate was at 3.5%, labor force participation was firm and payrolls were growing consistently, O’Sullivan added in a phone interview with Yahoo Finance.
“I think it’s going to be a while before you make up that 10 million,” O’Sullivan said. “And then on top of that, of course, there’s normal growth over time in the labor force, even though labor force growth has slowed for demographic reasons.”
In other words, the labor market will need to recuperate both the lost jobs during the pandemic as well as make up additional ground to find jobs for those who joined and will join the working-age population and labor force during the recovery.
As of December, the overall size of the labor force was still constrained because of the virus. At nearly 160.6 million, the civilian labor force — characterized as those working or looking for jobs — was still smaller by nearly 4 million compared to February, and the labor force participation rate was just 61.5%, or nearly two percentage points short of pre-pandemic levels. When considering the shrunken participation rate, the December unemployment rate of 6.7% understates the extent of the joblessness across the economy, O’Sullivan said.
“Even with some strong payroll numbers in three, four, five months’ time for a few months at least, it’s still going to be a long way from where we were effectively in February,” O’Sullivan said. “The key point there is that the participation rate is down pretty significantly since February because people aren’t looking for jobs because of COVID.”
“Presumably they’ll come back into the labor force over time, but adjusting for the drop in participation rate as well as the lingering classification issues that the BLS keeps highlighting, the unemployment rate is arguably around 10% on a like-for-like basis now, relative to the 3.5% in February,” he added.
Other economists echoed similar viewpoints about the risks of a drawn-out recovery ahead.
“The situation won’t improve meaningfully until COVID containment measures are lifted, which could be a number of months away,” James Knightley, ING chief international economist, said in a note Friday. “While the vaccination program is starting to gain traction there is a window of extreme vulnerability as the number of cases and hospitalizations rise. Should the new, more transmissible variant of COVID gain a foothold here then this would increase the threat of more near-term containment measures, which would undoubtedly come at a severe economic cost. This in turn risks further job losses.”
Meanwhile, Austan Goolsbee, University of Chicago professor of economics, told Yahoo Finance Live on Friday that December’s evident backsliding in the labor market suggested “there’s a high danger that this puts us on a path to a double-dip recession.”
Still, other economists have struck a more upbeat tone about the timing of a full recovery in the labor market, even after December’s disappointing jobs report. MKM Chief Economist Mark Darda told Yahoo Finance Live on Friday he believed “V-shaped recovery should ensue” this year amid the vaccine rollout, and that “by the end of this year going into 2022, we’re going to essentially be fully recovered and the discussion at that point is probably going to be overshooting and the potential for some inflation.”
The Federal Reserve, for its part, forecasted in December that the labor market would return to a 3.7% employment rate to close in on its pre-pandemic level by the end of 2023.
“I would say if anything they’re being optimistic,” O’Sullivan said.
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
Read more from Emily:
Credit Suisse boosts 2021 S&P 500 price target to 4,200 with more stimulus expected
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