Mar 6, 2020

Job Growth Skyrockets, But the Coronavirus Looms

No one seems to be talking about the long-run economic effects of COVID-19

The Labor Department’s monthly jobs report released today shows that the US economy added 273,000 net new jobs in February, while the previous estimates for December and January were revised upward by a total of 85,000. Monthly employment growth has averaged 243,000 new jobs over the past three months, far exceeding most economists’ expectations, especially given that monthly job growth averaged 178,000 in 2019. 

That’s old news, though, as many economists, epidemiologists, and other experts warn that the coronavirus COVID-19 may develop into a pandemic (if it hasn’t already), substantially restricting people’s ability to work and reducing their net expenditures on goods and services over the coming year. US stock market indices exhibited some of their fastest drops into correction territory (a decline of ten percent or more) following the COVID-19’s spread outside of China. 

The stock market losses seem to be premised on concerns over COVID-19’s short-run effects, primarily the likely impact on production and consumption as it interferes with global supply chains and tourism and entertainment spending. A larger concern, and one not yet mentioned in the media, is the potential for COVID-19 to substantially affect long-run economic productivity, especially if its mortality rate remains at levels already experienced in China. 

A larger concern is the potential for COVID-19 to substantially affect long-run economic productivity.

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Preliminary evidence indicates that older people tend to experience more severe cases of COVID-19 and are more likely to die from the disease. Standard labor economic theory suggests that older, more-experienced workers tend to be the most productive due to their accumulated “human capital.” While this may be true in general, it obviously isn’t valid for every situation, especially since the skills needed for effective production in the modern economy evolve over time. I remember, for example, my father’s difficulty in learning to type on a computer keyboard. Moreover, the idea that an older worker’s contribution to productivity is larger than a younger worker’s input may seem counterintuitive, given that younger workers generally are thought to have more hustle and enthusiasm than older workers. 

But a more nuanced and practical way to look at this is that older workers tend to be in management and decision-making positions that leverage their accumulated knowledge and wisdom. In essence, their guidance improves overall productivity by helping less-experienced, but more vigorous workers avoid making mistakes, such as being highly productive in terms of piecework but producing the wrong things or producing too much (just as my father helped redirect what he called my “eager beaver syndrome” to home projects that didn’t involve hand-digging a swimming pool in the backyard). 

So in addition to its short-term economic effects on ability to work and demand for goods and services, COVID-19 may lead to long-run productivity losses by harming older workers, essentially removing their productive capacity from the economy before they might have otherwise retired.

The size of this effect can’t be precisely determined. It’s almost certain to be less than the long-run impact of the Spanish flu of 1918-1919 because its rates of mortality were highest for the 18-40 year-old age range. A death early in life will result in a greater decrease in long-run aggregate productivity than the same person’s death later in life (because the economy will lose out on that person’s mid-life productivity in addition to their later-life productivity). Most research on the Spanish flu focuses on the short-term economic effect, with many businesses suffering double-digit declines in revenue. But long-term effects were documented as well, such as individuals whose mothers were exposed to the disease while they were in utero showing greater-than-typical physical disabilities and medical problems later in life, as well as reduced educational attainment, all of which reduced their total productivity.

Research on other pandemics offers more quantitative estimates on the economic consequences. The World Bank estimated that the SARS pandemic reduced global GDP by $33 billion, a relatively small amount, while a modern pandemic equivalent to the Spanish flu would cut world economic output by 4.8 percent. The study suggested that the majority of economic losses would come from efforts to avoid infection (i.e. reduce consumption), which are short-term effects. Research on the indirect and long-term impact, such as reductions in children’s human capital development due to school closures, appears scant.

Lastly, if COVID-19 becomes endemic by joining the common cold and flu as a new seasonal disease, the economic effect will compound, especially if the new mutations of COVID-19 exhibit similar levels of mortality. For comparison, a 2007 CDC report estimated that the seasonal flu, which seems to have a much lower mortality rate than COVID-19, leads to total annual economic losses of $111 billion (adjusted for inflation) in the US alone. Another 2003 study found that the common cold costs the US economy $57 billion each year (adjusted for inflation).

There’s much we’re still learning about the disease and its potential global economic impact. And it’s worth explicitly stating that it’s important to avoid fearmongering and sensationalism, especially since the disease could prove to be less severe than feared. So, take this (very preliminary and cursory) economic analysis as purely cautionary. Hopefully the medical profession will find effective means to combat COVID-19, and we’ll be able to dismiss these early conjectures in the future.

Quick Statistics from the February 2020 BLS Jobs Report

Headline Employment Statistics

  • Total nonfarm payroll employment increased by 273,000 jobs.
  • The labor force participation rate held steady at 63.4 percent.
  • The headline unemployment rate (U-3) fell by 0.1 percentage points to 3.5 percent.

Other Unemployment Rates

  • The mid- to long-term unemployment rate (15 weeks or longer, U-1) held steady at 1.2 percent.
  • The discouraged worker unemployment rate (U-4) held steady at 3.8 percent.
  • The comprehensive jobless rate (U-5b) fell by 0.1 percentage points to 6.3 percent.

Deeper Unemployment Statistics

  • The number of unemployed workers fell by 105,000 to 5.8 million.
  • The number of people who say they want a job but were not actively seeking work increased by 58,000 to 5.0 million.
  • Short-term unemployed workers (under 15 weeks) increased by 2,000 to 3.8 million, accounting for 66 percent of those who are unemployed.
  • Long-term unemployed workers (27 weeks or longer) fell by 64,000 to 1.1 million, accounting for 19 percent of those who are unemployed.

Full-Time vs. Part-Time Employment Statistics

  • The unemployment rate for those specifically seeking full-time work held steady at 3.5 percent.
  • The unemployment rate for those specifically seeking part-time work fell by 0.4 percentage points to 3.7 percent.
  • The number of people who wanted to work full time, but who could only find part-time work for economic reasons, rose by 136,000 to 4.3 million. The part-time workers who wanted full-time employment constituted 16.3 percent of all part-time workers.

Wages

  • Average hourly earnings (for all private, nonfarm employees) rose by 3.0 percent over the previous 12 months.
  • Average weekly earnings (for all private, nonfarm employees) rose by 3.0 percent over the previous 12 months.

Photo by CDC on Unsplash

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