An economic theory called 'reallocation friction' may explain why employers are having a hard time finding workers — and why a full recovery could be years away
By now you’ve probably heard about the big mystery in the US economy: Restaurants can’t find enough people to hire, even though millions of Americans remain out of work. Republicans blame the government for extending unemployment benefits and eroding the country’s “work ethic.” Democrats point to school and daycare closures that are forcing parents to stay home with their kids, as well as the continuing dangers the virus poses to people in frontline work.
Economists are having a tough time teasing out which of the three factors are fueling the labor shortage, and to what degree. “This is unlike anything we’ve ever seen before, and we’re still right in the middle of it,” Jed Kolko, the chief economist at Indeed, told me. But all three factors are expected to recede by the fall, as federal unemployment supplements expire, the threat of COVID-19 abates, and schools and daycare centers reopen. Things will return to normal, the thinking goes, and economists will once again be able to make sense of the economy.
But what if the job numbers don’t return so quickly to the status quo? What if, hidden beneath all these transitory factors, a bigger, more lasting realignment in the labor market is taking shape? A few economists are beginning to raise that possibility — that the pandemic’s effects will continue to batter the leisure and hospitality sector, which employs one in 10 American workers, well beyond the fall. Nicholas Bloom, a leading work-from-home expert I profiled in April, compared COVID’s effects on white-collar work to the asteroid that ended the age of dinosaurs. Now, it appears, its shockwaves may reshape blue-collar employment as well.
“It’s worth considering what a similar paradigm shift would be for some of these industries that rely on in-person service workers,” Daniel Zhao, a senior economist at the job site Glassdoor, told me. “Anytime you have an enormous shock to both the economy and to society, there’s going to be a learning period as we figure out how to manage the new normal.”
The economic costs of an exodus
It makes sense that the economic upheaval is showing up first in leisure and hospitality. After all, these jobs — ranging from restaurant cooks and dishwashers to hotel clerks and fitness instructors — offer by far the lowest pay among all sectors of the economy, and they also come with lousy working conditions and few benefits. The pandemic made things even worse, placing these workers at risk of infection if they kept their jobs and financial ruin if they didn’t. Over the past few weeks, I spoke with bartenders, cooks, and servers who have left the industry for good. Some were laid off and found new jobs they like better. Others came to see their old work as inherently unstable and potentially dangerous. Many said they’re going to take some time to figure out what they want to do next.
In a normal economy, it’s not a problem when workers change careers; other jobseekers can come in to take their place. But an exodus, like the one we may be seeing now in hotels and restaurants, is different. It can take time for workers to find a job in an unfamiliar industry in which they have few connections. Their new positions could require them to move to another city or state. And inexperienced workers require training to build up the necessary skills. Until all that happens, jobs go unfilled — keeping unemployment elevated, even though the demand for those jobs is there. Economists call it reallocation friction.
Joel David, a senior economist at the Chicago Fed, has been thinking about reallocation friction since the early months of the pandemic. In the spring of 2020, COVID-19 was decimating some industries, while leaving others unscathed. David was curious what that unequal effect might mean for an economic recovery. So he examined how various industries fared differently during past recessions, and how workers switching careers prolonged any economic rebound.
What he found was startling. Using industry-level stock-market returns, David estimated that COVID’s lopsided hit to some sectors of the economy might keep the unemployment rate elevated for three years, by a peak of 2 percentage points. “It’s hard to tease out exactly from the data at the moment because there are so many different things going on, but I think that might be part of what we’re seeing right now,” David told me. In other words, it may take until 2023 for the economy to fully recover from the current labor shortages.
In a follow-up study in March, David drew on actual job numbers to compare COVID’s impact on employment in different sectors with previous recessions. He found that during the first six months of the pandemic, the reallocation rate — a measure of how much some sectors lost or gained in their relative share of total employment — was the highest since any US recession going back to 1945. The reallocation out of leisure and hospitality has been especially stark: At the start of the pandemic, one in two jobs in the sector evaporated in a single month.
As the pandemic began to ease, David found, the losing sectors regained some employment. But as of December, the reallocation rate remained higher than the postwar average. Even now, employment in leisure and hospitality remains 17% below prepandemic levels. The takeaway? As the economy reopens further, employers will ramp up hiring. But the recovery is going to be uneven, with some sectors struggling to staff up. “Compared to other postwar recessions, we should expect to see more of these reallocation issues come up,” David said.
David expects those issues to manifest mostly in leisure and hospitality jobs. But he noted that other parts of the economy also experienced big hits during the pandemic, including public schools, whose budgets were slashed in the downturn, and daycare centers, which were closed for much of the crisis. As schools and daycare centers begin to reopen this fall, they could find that some of their previous workers have moved on to other work. That would frustrate their efforts to staff up — and make it harder for parents who rely on them to go back to their own jobs. If reallocation issues spread beyond restaurants, the entire economy could take a hit. A shortage of waiters makes it harder to dine out. A shortage of daycare aides makes it harder for everyone to make a living.
Why hospitality workers are leaving
To make matters worse, David’s analysis might actually understate how much readjustment will be necessary in the years ahead. His study assumes that people are switching careers for an economic reason: They lost their jobs. That makes sense in a normal recession. But the current situation is anything but normal. After living through the uncertainty of a pandemic, even people who managed to keep their jobs during the downturn are looking for ways to change occupations. Think healthcare workers burned out after a year of nonstop trauma, or parents with long commutes eager to move into jobs that will allow them to work from home. It will take time for these workers to figure out what they want to do next, and to acquire the necessary skills to make the transition.
For some of the restaurant workers I spoke with, switching careers was accidental. Cydney Palmatier, 24, was just days into her new job as a server at a small restaurant in Connecticut before the pandemic forced her employer to close in March 2020. After moving back into her family’s home in New York, she found a job loading trucks at a distribution center for a major retailer. “For the first time in my life, I feel respected as an employee,” she said. “I have two paid breaks I don’t have to fight for or schedule into my tables. I have PTO.”
For others, leaving was more deliberate. Britt Martin, 29, felt miserable after years of being disrespected by customers and employers, harassed by other bartenders, and living an unhealthy lifestyle surrounded by alcohol. “I was not a happy person then,” she told me. But it took being unemployed for several months to consider trying something new. “This was a giant pause for people who were lucky enough to get unemployment and be able to take a breath without worrying about too much,” she said. “I really had to be introspective and analyze where my life was headed, and bartending wasn’t going to do it for me.” She’s now back in school to finish her undergraduate degree so that she can go on to get a master’s in social work.
Many workers were jolted into a career change after the pandemic made them rethink the prospects of the entire industry. Jon Yagin, who managed to hold on to his job as a chef at the employee restaurant of Dropbox until January, was traumatized by the constant fear of being laid off. Now, instead of using his two decades of experience in the business and his degree in culinary arts to land a job at another San Francisco restaurant, he’s decided to explore drop-shipping and digital marketing. “I’ve already seen it upfront, where — bam — your job just gets taken away from you,” Yagin, 40, told me. “That was such a shocking experience. Do I want to put myself in that situation again?” He also watched as many of his friends who were working as cooks faced extraordinary risks to their health during the pandemic. (Cooks, who often work in hot, poorly ventilated kitchens, encountered the biggest jump in mortality during the pandemic across occupations in California.)
It’s possible, of course, that the labor shortage won’t turn out to be as deep or long-lasting as David predicts. Back when the economy was starting to rebound from the Great Recession, employers complained about a dearth of qualified workers, even though unemployment was still high. But the economy kept adding jobs, and the unemployment rate eventually dropped to under 4%, reaching a five-decade low. Heidi Shierholz, chief economist at the Economic Policy Institute, thinks the same pattern may play out today in leisure and hospitality jobs. “I don’t feel like that workforce has massively shrunk,” she told me. “Or at least I’m not seeing signs of that yet.”
But the longer reallocation friction continues, and the wider it spreads, the more employers will be forced to make significant changes to the way they do business. With a smaller group of career veterans to draw from, businesses are already reaching into nontraditional applicant pools — creating new opportunities for those who traditionally struggle to find employment. Kitchens for Good, a nonprofit that trains formerly incarcerated and homeless people to become cooks, is getting so many calls and emails now from employers that the organization ran out of unemployed apprentices to place.
Companies struggling to staff up are also raising wages and offering better benefits to lure back old workers and entice new ones. Just this year, the hourly pay for leisure and hospitality workers in nonsupervisory roles has jumped 7%. A few restaurants are starting to offer health insurance and retirement benefits for the first time, and Chipotle is promising to pay for workers’ college tuition.
“Some businesses are already signaling that they believe that these shortages aren’t just a temporary phenomenon,” Zhao, the Glassdoor economist, said. “They want to get ahead of them for the long term.” As better pay and benefits become the new normal, millions of workers in one of the economy’s biggest sectors could face a brighter future, long after the pandemic finally recedes.
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