How Severe Was the Contraction in U.S. Employment?

If the economic impact of COVID-19 first manifested in financial markets, it came home to many Americans through the sharpest and greatest rise in unemployment since the Great Depression. Maximiliano Dvorkin and Amanda Michaud review this labor market upheaval with a focus on uneven effects across sectors, noting that the leisure and hospitality sector saw some of the worst losses.

By Maximiliano Dvorkin and Amanda Michaud

The Federal Reserve carefully monitors the evolution of labor markets as it strives to fulfill its mandate of maximum employment. Early in the COVID-19 pandemic, from February to April 2020, the number of employed people in the U.S. fell by 25 million, a 16% decline. In the Great Recession of 2007-09, employment fell by 8.5 million, close to 6%, but it took 18 months for it to decrease that much.

Some of the unprecedented effects of the pandemic stem from the nature of the shock: Social distancing measures and other restrictions on daily activities in 2020 had a direct impact on many sectors and businesses, particularly those that require close physical contact with customers.

Severity of Employment Losses

The figure below compares the contraction in employment by sector during the Great Recession with the contraction during the first two months of the pandemic. During these two months, employment in the leisure and hospitality sector contracted by around 50%, with a contraction of over 20% in the other services sector, which includes repair and maintenance and personal services, such as beauty shops. During the Great Recession, the largest drop in employment (in construction and durable goods manufacturing) was around 20%.

The next figure helps us understand these differences by showing a potential relationship between the contraction in employment and the ability of workers to work from home. Those sectors with more options to work from home, such as financial activities, had a milder drop in employment. The opposite was true in sectors with fewer options to work from home, such as leisure and hospitality.

Effects Not Felt Equally by Workers

The pandemic has also affected individuals’ availability to participate in the labor market. The labor force participation rate of prime-age workers (ages 25 to 54) declined from 82.9% to 79.8% from February to April 2020. That amounts to 3.8 million Americans who left the labor market, a figure six times larger than during the Great Recession.These figures on participation rates by age and race are authors’ calculations using the Bureau of Labor Statistics’ Current Population Survey (seasonally adjusted and noninstitutional population).

Older individuals, married women and some minority groups also reported much higher exit rates from the labor force:The exit rate of the labor force is defined as the share of people in one of the demographic groups that were part of the labor force in one month and not in the labor force in the following month.

• For workers over age 60, the rate nearly doubled from the typical 6% per month to 11% in April.
• For prime-age married women, the rate doubled from 3% to 6%.
• For prime-age Black males, the rate more than doubled from 4% to 9%.
• For prime-age Hispanic women, exit rates more than doubled from 5% to 12%.

Mitigating the Impact

This decline in available workers was historically large, but government programs mitigated the impact on households and the economy. In March, unemployment insurance benefits were increased and offered to workers not covered by state benefits.

While time spent working for pay fell during the early months of the pandemic, additional work was done at home through child care, cooking and related activities, which has important economic value. Recent research co-authored by St. Louis Fed Research Officer Oksana Leukhina estimated that the value of such home production rose by $30.8 billion during April, which is 10.5% of the fall in the value of paid work during that month.See Oksana Leukhina and Zhixiu Yu’s 2020 St. Louis Fed working paper, “Home Production and Leisure During the COVID-19 Recession.”

Employment recovered at an extraordinary pace after April 2020, with large gains in the sectors that were deeply affected early on. A speedy recovery has the potential to mitigate scarring effects associated with temporary declines in employment and to aid in reclaiming the historic employment gains among minority groups. Yet, the strength of the continued recovery ultimately rests on the ability of the U.S. to check the pandemic.

Notes and References

1. These figures on participation rates by age and race are authors’ calculations using the Bureau of Labor Statistics’ Current Population Survey (seasonally adjusted and noninstitutional population).
2. The exit rate of the labor force is defined as the share of people in one of the demographic groups that were part of the labor force in one month and not in the labor force in the following month.
3. See Oksana Leukhina and Zhixiu Yu’s 2020 St. Louis Fed working paper “Home Production and Leisure During the COVID-19 Recession.”

Related Resources

• Economic Synopses: The Decline of Employment During COVID-19: The Role of Contact-Intensive Industries
• Regional Economist: Which Jobs Have Been Hit Hardest by COVID-19?
• On the Economy: The Recent COVID-19 Spike and the U.S. Employment Slowdown
• On the Economy: The Impact of COVID-19 on Labor Markets across the U.S.