Ahmed Rahman Explains the Pandemic Labor Market

In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Ahmed Rahman about the disruptions the pandemic and other factors have caused in the U.S. labor market over the past two years.

Rahman is an associate professor of economics in Lehigh's College of Business. He also is a research fellow at the Institute of Labor Economics. His research areas include economic growth, economic history, immigration, and the economics of education.

He spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.

Below is an edited excerpt from that conversation. Read the complete podcast transcript. 

Jack Croft: Over the past year or more, the U.S. labor market has experienced something it rarely, if ever, has seen before: a combination of high job openings and low hiring. We'll get into some of the details throughout the discussion today, but broadly speaking, what's going on here?

Ahmed Rahman: That's the question for our age. Economists have labeled this phenomenon various things: the Great Resignation, the Great Realignment. And of course, my favorite is the Take This Job and Shove It Economy. The ultimate question is, why is this happening? I hate to bring up the dreaded C word so early in our conversation, but it's COVID. Of course, COVID has forced us to reevaluate almost everything: what we do, how we do it, where we do it, why we do it. It's influencing all our relationships, family, our communities, and maybe especially in the workplaces.

And to be honest, some of us wondered at the start of this pandemic in 2020 if these jobs that seem to be evaporating away would ever come back. They might get automated away or outsourced. And in fact, the technology hasn't caught up. They're not there yet, right? These jobs in retail, in education, hospitality, manufacturing, they rely on people. They still are people dependent. So what we're seeing now is, in fact, the opposite is happening, that the jobs have certainly come back. It's just that the people have not. And you need both.

I think what's interesting is it reflects something that perhaps sociologists and psychologists could have informed the economist a while ago about, and that's that this cataclysm, it's forced a reevaluation at the individual level and through the labor market. Though the labor market really did appear very strong in 2019, I think it turns out that many of us were miserable doing those jobs. And now people are voting with their feet in a major way.

Croft: What are some of the key strategies that employers have been using to try to compete for the best candidates for the jobs that they have to fill?

Rahman: This is going to be a big issue in 2022. It is actually a burgeoning area in labor economics called personnel economics. And part of that is the ideas of attracting and retaining personnel. I mean, I myself study retention issues in the military, and there's a lot of random things that happen that allow us to measure the importance of various factors in retention. Examples include opportunities for promotion and advancement, accumulation of firm-specific knowledge and human capital, various perks on the job. All these things appear to matter to varying degrees. And what's true for the military is, for the most part, true for the overall economy, the civilian workforce.

In our current climate, there are these two big ones. Wages are obviously one of them, so we're seeing these wage increases to attract workers. This is especially true for lower skilled service jobs. The other is what we might call work amenities. And one of the new amenities that's a key interest now is this ability to work remotely, the ability to shape your own hours, and so on, this degree of flexibility. And I think what's interesting, what's relatively new here, and what labor economists are looking very deeply into, is that there are important interactions when it comes to these two factors.

These upward wage pressures [are] less pronounced in those areas where workers are, in fact, granted more flexibility. They're called saving differentials. An example would be where Google actually said, "You can work remotely, but we are going to discount your earnings. You're going to take 10% off your wages if you have that flexibility." So I think we're seeing what we might call wage compression that's happening. Wages are likely to continue to rise, but they're going to be rising for the lowest wage earners.

As an example, workers in gas stations, non-managerial workers - this is the lowest paid sector - they saw their earnings rise something like 16% since the pandemic began, and that's a lot higher than the average. That's just a glimpse of the potential wage compression that we're seeing here. More generally, the bottom 25% of earners, I think, have seen the highest wage growth up to like 5% over the last year, where other income earners, the increase has been far less.

Employers cannot entice these workers back with something that they are increasingly demanding—it’s this flexibility, this opportunity to work remotely. The nature of these jobs simply do not allow for that. When we need these workers, they are deemed essential. And I think we've learned kind of anew just how essential they are. And so they're going into the market and they will need to be paid accordingly.

Croft: Now, if there are far more jobs then available workers and employers are paying higher wages than before the pandemic, one of the conundrums that we've been dealing with is a flat labor force participation rate over the past year and a half. What accounts for that, and how much of a factor does the lingering coronavirus pandemic, with omicron as the latest, play in keeping workers on the sidelines?

Rahman: The labor force participation rate, I think now hovers at 61.9%. This is a full percent-and-a-half below pre-pandemic and it's the lowest it's been since the 1970s. So for those of us who are interested in the longer-run growth prospects for America, this is, in fact, quite alarming. [There are] some reasons we might think that it's going to be flat for the foreseeable future, and there are other reasons why we think it might rise. One of the big reasons why it might remain flat is we've seen 3.6 million more Americans who left the workforce and saying that they did not want to come back compared to in November 2019. And older Americans, those 55 and older, accounted for like 90% of that increase. I think that's the part where these individuals really are not coming back because those that are leaving skews older.

But there are other considerations. Again, I'm going to come back to the working from home aspect as one of those considerations. If you think about it, like 5 to 10% of jobs out there, I think, can be done remotely. You can do them anywhere. And then 5 or 10% of jobs, you can never do them remotely. You always have to show up. The vast majority, 80, 90%, are part of that big group in the middle where it's a mix. And that's part of this Great Realignment. There's lots of bargaining going on between firms and workers just trying to figure it out.

Croft: To wrap things up then, the beginning of the new year is usually a time for optimism. So what do you see are the prospects for getting at least close to the full employment levels we saw pre-pandemic by the end of 2022?

Rahman: I do see some good things on the horizon. We just have to keep in mind it's not a bad thing to take time to figure out what you want to do with your life, right? I mean, labor economists will naturally lament that people are retiring early or that the labor force participation rate is so low. But it's not to say that this sort of new resource allocation that's happening right now is not going to lead to a better one. People are finding themselves. I think we should encourage that through various policies. I think unemployment will, in fact, continue to fall, could get to 3 ½ percent relatively soon.

And I think there's various policies that we can implement to allow that transition to happen. Things like immigration policy, I think is an important part here that we might want to revisit, policies about internal migration, people wanting to work in a high-wage place but live in a low-cost place. That's also happening. So I think there are lots of positive things that potentially are occurring. And let's recall what John Maynard Keynes had predicted for us back in the 1930s, that we would work eight to 10 hours a week because we'd be so productive. I think he was right about the productivity, stunningly wrong about the hours working. But I think part of the shock is that we might be moving a little bit closer to that vision. It obviously takes some time.

So what I would say is, despite the urgency that's generated by always worrying about next quarter's earnings or the next election, what this labor market requires is for us to try some patience. Just a little patience, as the great philosopher from Guns and Roses urged.