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Will the pandemic further polarize the US labor market?

Will the pandemic further polarize the US labor market?

In recent decades, the U.S. labor market has undergone a fundamental shift — a polarization of the job market and the hollowing out of middle-skill occupations. Furthermore, since 1990, every U.S. recession has been followed by a so-called jobless recovery. Given the unique nature of the pandemic shock, the following question is worth considering: Will the 2020 recession further polarize the job market and leave us with another jobless recovery? 

Since the early 1980s, middle-skill, routine occupations have declined while high-skill, non-routine occupations have seen substantial growth. Interestingly, low-skill, non-routine service-oriented occupations have also experienced job growth. Economists Daron Acemoglu and David Autor popularized the categorizing of occupations along two dimensions. Along one dimension, cognitive versus manual skill requirements are considered, and, along a second dimension, the routine versus non-routine nature of tasks are examined.

Thus, various occupations can be classified under four categories: cognitive and non-routine (software developers, financial modelers, doctors and surgeons, artists, etc.), cognitive and routine (sales staff, secretaries and administrative assistants, etc.), manual and routine (assembly line and other production workers, transportation and moving, etc.), and manual and non-routine (janitors, gardeners, home health aides, etc.).

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Due to skill-biased technological changes (labor tasks that can be clearly defined and codified can be automated and undertaken by programmable robots and computers) and globalization (outsourcing of back office operations and offshoring of labor-intensive production activities to China and other low cost destinations), occupations that involved cognitive, routine tasks or manual, routine tasks have declined sharply over the past four decades. Meanwhile, professions characterized by cognitive and non-routine activities have flourished and seen high wage growth. There has also been an increase in manual and non-routine oriented occupations. Wage growth in such occupations has, however, been subdued as many former production workers have been forced to join others in competing for low-skill service jobs.

Moreover, economists Nir Jaimovich and Henry Siu have found that jobless recoveries (which refers to a situation where the rebound in aggregate employment significantly trails the recovery in aggregate output) experienced by the U.S. since mid-1980s is related to the sharp spike in job losses in routine occupations during economic downturns. In other words, the transformative changes wrought by job polarization have not occurred in a gradual manner. Instead, the loss of employment in routine occupations has been highly concentrated around economic downturns.

The COVID-19 pandemic, along with the lockdown and social distancing measures implemented to control the virus, pushed the economy into a self-induced coma. This resulted in an unprecedented economic slowdown in the second quarter of this year. In recent months, with the gradual reopening of the economy, signs of a fitful recovery have emerged. There is now a growing consensus that the economic recovery is K-shaped. Some sectors and certain occupations have mostly, if not fully, recovered, while others continue to struggle and face enormous odds in their fight to survive.

In one sense, existing job polarization trends have been magnified by the pandemic. Those who could work remotely and remain productive (software and game developers, finance and professional business services) were largely protected whereas those in contact-intensive service sector jobs (traditional retail, restaurants, leisure and hospitality services) bore the brunt of job losses. Sadly, low-skill (manual and non-routine) service-oriented occupations, which, despite meager wage increases, had experienced solid job growth in the decades prior to the pandemic, now face a negative structural shock. As more professionals work from home and as office occupancy rates continue to lag, various support service occupations (janitors and office maintenance staff, food truck vendors and business district restaurant workers, etc.) are encountering severe headwinds. There is a potential risk that some of the temporary layoffs may become permanent and thus result in another jobless recovery (albeit one driven by a permanent loss of certain types of service jobs). 

Meanwhile, the pandemic may have sped up the pace of development and adoption of certain new technologies, such as autonomous delivery vehicles and robotic process automation, that are likely to further boost demand for the high-skilled while reducing it for the middle- or low-skilled. Given that high-skill (cognitive and non-routine) occupations already dominate the list of professions that can be undertaken remotely, the latest round of skill-biased technological changes has the potential to cause further polarization of the labor market.

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A few bright spots do exist. In particular, the recent construction boom (as many in dense urban centers flee to suburbs in search of more space) and early signs of a revival in manufacturing (driven by a desire to create more resilient supply chains and reduce risks associated with the ongoing trade conflict with China) is certainly welcome news. These developments may contribute to growth and partial recovery of long-depressed middle-skill occupations.

Though the magnitude and duration of COVID-19’s impact on the U.S. labor market depend to some extent on the pace of development of vaccines and therapeutics, early indications are that the pandemic will further polarize the job market. The uneven labor market effects arising from the K-shaped recovery are likely to widen the gap between high-skill/high pay and low-skill/low pay occupations and create further headwinds for non-cognitive oriented occupations. Moreover, the remote work revolution and skill-biased technological changes will have varying impact on workers based on their education levels. From a policy standpoint, a flexible and worker-centric policy response is necessary.                                                         

Vivekanand Jayakumar is an associate professor of economics at the University of Tampa.