Why the pandemic’s record quit rates are a boon for workers

Workers quit their jobs in record numbers in November, the Labor Department reported last week. At first glance, such a large number of quits, followed by lackluster employment growth in the December jobs report, may suggest a negative trend for the labor market.

And yet, for the first time in years, this process – which is taking place in the context of a broader “reallocation shock” caused by COVID-19 – actually seems to be directly benefiting workers, in addition to promoting the overall efficiency of the economy.

Historically, workers have been more often affected by reassignment shocks, during which a significant share of workers permanently lose their jobs, forcing them to move to new companies, new locations or new industries to be rehired. These shocks often occur as a result of recessions or major economic changes such as job losses due to international trade. During these periods, voluntary departures tend to plummet, while involuntary dismissals tend to increase.

Nevertheless, these shocks trigger a process of “creative destruction,” in which the economy removes some jobs and creates new ones, sometimes in different industries and different locations. Although this process is necessary for continued growth and increased productivity, it often has devastating economic effects for people who lose their jobs. In particular, workers who involuntarily lose their jobs tend to be unemployed longer and, when rehired, often receive significantly lower wages than in their previous job.

However, from the start, the COVID-19 recession has been different. In March 2020, American University economist Gabriel Mathy correctly predicted that the COVID-19 recession may be the first service-sector recession. This had important implications for the direction of the reallocation of the economy. In past reallocation shocks, job losses were more concentrated in production sector jobs. When workers lost their jobs, they were often forced to accept lower-paying jobs in the service sector, which would have significant negative economic repercussions on their lives.

In the COVID-19 recession, this process is happening in reverse. Much of the job turnover since March 2020 has been in frontline services such as accommodation, catering and retail, which rely on in-person customers and cannot be done remotely. These jobs are not only among the most dangerous during a viral outbreak (and have been made more difficult by misinformation-driven abuse), they are also among the lowest paying.

As companies began to hire people during the recovery, many workers were unwilling to put themselves through harsh working conditions and potential safety hazards for the low wages these jobs historically offered. Meanwhile, many workers who were never laid off became burnt out, spurring record quits. Even though government unemployment benefits expired in September 2021 (or were never available to workers who voluntarily left their jobs), the pace of job change has continued to accelerate.

These factors increased workers’ bargaining power, with positive wage effects. By the end of 2021, the prime-age employment-to-population ratio had recovered to levels last seen at the end of 2017 – a period considered at the time to be a relatively healthy labor market – but with even stronger wage growth.

Wage growth has been particularly strong among non-managerial workers, who have the least bargaining power and are most likely to benefit from the surge in job changes. The three-month annualized moving average of hourly wage growth for production workers and non-supervisors in November 2017 was 2.2%; in November 2021, it was 6.4%. Unfortunately, these wage gains have been largely canceled out by the high inflation of recent months, but if they continue, they would represent a real and positive gain for workers compared to the last recovery.

Quits began to increase after February 2021, with significant turnover reported both in absolute terms and also as a percentage of total employment. When this happened, production workers and non-supervisors in industries with the highest quit rates also experienced some of the strongest wage growth. At the heart of this dynamic were transitions in the accommodation and food services industry, where quits and wage increases for production workers and non-supervisors were nearly twice as high as in any other sector.

Figure 1

Amid headlines declaring a “big quit” and even a labor shortage, these developments are welcome news. For the first time in more than two decades, a reallocation shock is not only advancing overall economic growth, but also benefiting many rank-and-file workers so far. As ZipRecruiter economist Julia Pollak told the Washington Post, quits reflect workers moving “from lower-paying jobs to higher-paying jobs, from less prestigious jobs to better and more prestigious jobs, ‘less flexible jobs to more flexible jobs’.

Today, the country faces two challenges: supporting workers who move from one industry or profession to another, and securing these new gains.

For the first challenge, most workers in low-wage industries like accommodation, food service, and retail tend to either make intra-industry job shifts or move into other industries at relatively low wages. This is because employers in high-wage industries view hiring workers in low-wage industries with skepticism, high barriers to the high cost of education and skills development in the United States, and a relative lack of resources for adult job seekers compared to other countries.

To begin to address this problem, Congress should pass the Build Back Better Act, which, in its house version, contains significant investments to support workers’ career transitions through the Department of Labor and the Department of Education, including over $4 billion to support workforce development in support of climate resilience. Other investments in the bill, such as subsidized child care, free preschool, care for the elderly and disabled, supported subsidies for Affordable Care Act market plans, and paid leave for workers, would improve the quality of life for workers and reduce lockouts,” or the need for workers to stay in a certain job to keep their benefits.

Several other federal policies could lock in the gains workers have made in recent months, though they are unlikely to pass due to the makeup of the Senate and its filibuster rules. Reviving the long-running effort to raise the minimum wage — including eliminating the below-tip wage earned by many restaurant workers and other low-wage service workers — would help preserve the wage gains that are currently produce in low-wage industries. And the Protection of the Right to Organize (PRO) Act would allow low-wage service sector workers to organize and collectively bargain for better wages and benefits.

The appearance of the Omicron variant in December added an additional layer of uncertainty to the trajectory of economic recovery. However, one thing likely to remain constant is the skepticism of many workers about returning to low-wage frontline jobs. Policymakers should take advantage of this pro-worker moment to promote a healthier reallocation process that not only supports economic growth, but also permanently improves worker well-being. This would entail a really welcome reassignment.

About Joel Simmons

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