The rise of Delta darkens our second-half forecast

The broader impact of the pandemic on employment can be seen when looking at data across different states. The states with the largest positive change in unemployment rates from July 2020 to August 2021 are the states with the highest vaccination rates. States with higher vaccination rates are also seeing lower case numbers and less impact from the Delta variant. The outlook for the economy hinges on the anticipated increase in vaccination rates due to approval of lower-dose vaccines for children ages 6 to 12 as well as increasing vaccine mandates from firms and governments.

The ability to vaccinate school-age children is an important aspect of getting the economy back to normal. Fiscal policy and reopening plans were calibrated with the assumption that fall 2021 would see a return to schools and the office. A safe and sustained return to the classroom will be a tailwind to both the labor market and economic growth in the final quarter of the year. It may also help ease some of the labor market shortages firms are experiencing.

Prior to the pandemic, and in the past two recessions, workers over the age of 55 increased their labor force participation while other workers dropped out of the labor force. Longer life expectancy, moderate portfolio returns, and reduced housing prices are some of the key reasons the labor force saw an increase among the over 55 cohort. However, during the pandemic, those over the age of 55 left the labor force in greater numbers than younger workers. Indeed, this is exacerbating another labor market shortage: a shortage of workers without bachelor’s degrees. Older cohorts of workers have lower rates of college education and as they retire, the labor force has a greater percentage increase in workers with bachelor’s degrees each year. This has a demographic knock-on effect for many industries, such as leisure and hospitality, healthcare, construction, and transportation, to name a few.

Rising wages may be a sign of a structural shift in certain labor markets.

In previous pandemics, it was often the case that higher real wages were paid to workers in the years after the pandemic.³ Economists have mostly interpreted this data to be the result of a smaller labor force, and yet the same amount of property, plant, and equipment as prior to the pandemic. In other words, the physical productive capacity was not harmed due to the pandemic, but the size of the labor force was. This resulted in a labor shortage that raised real wages. As we continue to exit the current pandemic, wages are rising, especially for those jobs where people must work in person. These developments corroborate data indicating that people are changing their views on work-life balance, and are impacted by pandemic-related health concerns and childcare issues, which are impediments to in-person work while the pandemic is ongoing. When we combine these cyclical factors caused by the pandemic with longer-term structural factors such as the reduction in workers without college degrees, it seems likely that firms will be grappling with labor shortages in lower-paid sectors for several years to come. This will impact not only planning for workforce needs, but also the ways in which companies deploy labor-saving technology.

While the Delta variant is likely to cause a speed bump in third-quarter growth, we still anticipate that 2021 GDP will grow by 5.5%, with strong growth of 4.4% likely in 2022. Against this backdrop of healthy growth, firms will still have to grapple with lingering labor market issues exacerbated by the pandemic and longer-term structural issues impacting the composition of the labor force. The new ways of working and deploying technology are likely to last well beyond the pandemic and will have an enduring impact on the future contours of the economy.