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The Impact of Covid-19 on America’s Labor Market

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interview

The Impact of Covid-19 on America’s Labor Market

City Talk April 6, 2020
Covid-19
Economy, finance, and budgets
Cities

Photo Courtesy of Timothy BartikThis week, Timothy J. Bartik discussed the impact of the Covid-19 pandemic on the labor market, Rust Belt regions, and Michigan’s economy with Charles F. McElwee, assistant editor of City Journal. Bartik is a senior economist at the Upjohn Institute for Employment Research, a nonprofit and nonpartisan research organization in Kalamazoo, Michigan. His research focuses on state and local economic development and labor markets. Bartik’s most recent book is Making Sense of Incentives: Taming Business Incentives to Promote Prosperity. He received his B.A. from Yale and his Ph.D. in economics from the University of Wisconsin–Madison.

How could Covid-19 change the labor market in America’s cities and towns?

Recessions cause long-run labor market damage, and on a local level, more severe recessions cause greater long-run damage. As shown in research by my Upjohn Institute colleague, Brad Hershbein, and Bryan Stuart of George Washington University, when an area experiences 5 percent greater job loss than the U.S. as a whole, its residents will find it harder to get a job even a decade later: the ratio of local employment to local population (the local “employment rate”) will be lower by 2 percentage points. This is consistent with prior research that local job losses lead to long-term reductions in local employment rates. Locally severe recessions damage the job skills of the non-employed and also cause social problems. Such recessions also damage the fiscal capacity of state and local governments to provide public services.

Of course, what happens depends in part on public-policy choices. Local recessions can be mitigated if the federal government adopts wise macroeconomic policies that provide needed aid. As I have argued elsewhere, we probably need countercyclical fiscal assistance to state and local governments of at least $500 billion over the next two years. We also need policies that encourage employment expansion in the hardest-hit areas, along with job training to adapt to the new labor market.

What states or cities could be hit hardest by the economic shutdown?

This current recession seems likely to have greater effects on areas with ties to travel-related industries and energy-related industries. In addition, the negative effects of this crisis on consumer and business confidence will reduce consumer purchases of durable goods. It will also discourage business investment, which will particularly hurt manufacturing-related sectors. Finally, it seems likely that states and regions that end up having higher infection rates will probably suffer more economically. This appears to have been the case during the 1918 Spanish Flu epidemic. State and local governments should realize that minimizing the current pandemic is not only good for public health but also crucial for the economy.

How is Covid-19 affecting Michigan’s economy?

The virus is having an impact in the Detroit area, perhaps due to high poverty and prevalence of preexisting health problems. I also expect that, as in almost every U.S. recession, manufacturing will be suffer, which will have significant negative effects on Michigan’s economy.

What effect could the crisis have on economic development in Rust Belt regions, particularly those dependent on manufacturing, logistics, and distribution?

In the “short run”—which could be several years, if the recession is prolonged—manufacturing-related industries will struggle. I would also anticipate some realignment of U.S. economic activity to prepare for future pandemics, including investment in health-system capacity, better medical instruments and tests, and health-related research. Regions with research universities and industries that can respond to such investments will perform better. Pandemic planning might involve more manufacturing-related industries than some realize. If you can bend metal and mold plastic for auto parts, for example, you can potentially do the same for medical instruments.

What is an overlooked sector that could be transformed by this crisis?

I think that the U.S. will want added manufacturing capacity in reserve for a future crisis. Local economies that can respond to manufacturing demand in a timely way will be able to grow.

Photo: Erin-McGoff/iStock

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