Did COVID permanently change the labor market?

I doubt that anyone alive during the Covid pandemic will forget it.  One reason is many of us are reminded of it every day.  Certainly, many remember being ill, or still morn friends or family who passed due to the disease.  We still see people wearing masks, and this time of year we’re already hearing reminders to get the latest Covid vaccine later in the year.

But some of us remember Covid in other ways because it has had so many lasting impacts on numerous aspects of our lives.  For example, remote work and virtual meetings have become lasting fixtures in the workplace. It is now expected in many settings, such as gyms, to wipe surfaces and equipment after use.  Knuckle bumps are still competing with handshakes for greetings.

 In today’s column I want to focus on the labor market, how Covid changed it, and whether we can determine if he changes are permanent. 

 I already mentioned two changes in the labor market – remote work and virtual meetings.  I’ve addressed these topics in other columns, so suffice it to say experts see both as permanent, with the only question being how common they will become.

 More broadly, Covid had three other impacts on our work lives.  Covid caused a restructuring of where people work, how much workers are paid, and the virus accelerated the development of machines and technology that could replace humans in the workplace.  All three of these elements emerged from something that was unique in our modern economy – a massive labor shortage.

 We can see the linkages by reviewing what happened.   The business shutdowns early in the pandemic furloughed millions of workers.  Employment dropped everywhere, but especially in firms largely dependent on labor.  For example, employment in restaurants dropped an amazing 40%.  But workers survived due a variety of federal assistance, like augmented unemployment assistance, stimulus checks, expanded SNAP (food stamps), and other programs.

Then came the surprise, at least to many.  As the economy re-opened, the “Great Resignation” emerged. At its peak, over 4 million workers were leaving their jobs each month.  With federal help still supporting them, many workers decided to leave their jobs and search for other work.  This was particularly the case for lower-paying jobs, such as in the leisure and hospitality sectors.  Many of the workers found higher-paying jobs in the technology and related sectors, which had rapidly expanded during the pandemic. The result was a labor shortage in industries like restaurants, hotels, construction, and health care. 

 How did these industries react to the shortages?  They reacted the way economists would expect.  They made their jobs more attractive to workers, especially by increasing the pay.  For example, in North Carolina between 2019 and 2024, average hourly wage rates  rose three times faster in leisure/hospitality and construction and two times faster in education/health care and general service jobs compared to the increase for the average job. Importantly, these increases have also outpaced price increases (inflation) over the same time period.         

The tactic worked.  Economic sectors like restaurants, which suffered the worst job shortage, now have more employees than prior to the pandemic, and the same has occurred for other sectors.  Labor force participation of prime working age adults – defined as ages 25-54 – is also back to its pre-pandemic level.  And while we hear of labor shortages in certain areas, this is not unusual for a growing and changing economy.

Someone could conclude that the pandemic actually had some good results for the labor market, particularly for those at low pay scales.  It gave workers some time to re-evaluate their current job, possibly upgrade their skills, and move to higher paying employment.  At the same time, economic sectors facing a labor shortage were prompted to increase their pay, thereby benefiting workers who stayed in those jobs.

 Now let me address the question posed in the column’s title.  Will these changes in the labor market prompted by the pandemic be permanent?   I see two future forces that will determine the answer, with one taking the labor market in one direction, while the other will take the labor market in the opposite direction.

The two forces guiding the future labor market will be the aging workforce and labor-replacing technology. With a declining birth rate and longer lifespans, our population is becoming older.  For example, the North Carolina population aged 65 and older is forecasted to increase almost three times faster than the population under age 17 between now and 2050.  There’s also an expected big difference between growth in the 65 and older population and the prime working age population between  25 and 54.  So unless a surge in migration to North Carolina from other states or nations occurs, workers may be relatively harder to find in the future.  This would motivate businesses to improve wages and working conditions to attract workers, thereby solidifying the labor market changes prompted by Covid.

 Yet at the same time, businesses facing relatively more expensive labor will be motivated to find ways to reduce their use of labor.  The major way to do this is to use more labor-saving technology.  Interestingly, we are now on the cusp of new labor-saving technology in the form of artificial technology (AI).  It is certainly plausible that AI’s success could eventually create labor surpluses, which would lower worker pay and make the impacts from Covid temporary.

Hence, as is often the case when trying to predict the future, there is not a clear answer to today’s question of whether Covid permanently changed the labor market.  In the anticipated battle between workers and technology, which will win?  You decide.

Walden is a Reynolds Distinguished Professor Emeritus at North Carolina State University.