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Economic Impact on Main Street, Not Wall Street
Many experts believe the coronavirus lockdown was unnecessary. There also seems to have been a great deal of suppression of information calling for an end of the lockdown. For example, Youtube came under fire when it removed a video by two doctors who spoke out against the lockdown. Now, President Trump has vowed that we will not be locking down again.
The destructive impact of the lockdown on the US macro-economy is staggering, but the saddest part is the damage this will do to American workers and families. Based on evidence from the Global Financial Crisis (GFC), it appears that once the lockdown is over, Americans will see wages permanently decreased. Although after a recovery period, corporate profits and the stock market will continue to rise.
Belt Tightening For Thee, But Not For Me
During the GFC, the phrase “belt tightening” was thrown around quite liberally. Many companies, in addition to laying-off employees, told those who remained their pay and benefits would be cut and they would be doing the same amount of work with less people. Workers were told this was necessary to keep the company afloat, and this was not entirely untrue. But after the crisis had passed, companies realized having less people doing more work for less money increased corporate profits. In fact, by 2011-2012 average corporate profits were already higher than they had been before the GFC.
The average American family saw their income decrease by 8% and the average household wealth dropped by 18% during the GFC. Between 2007 and 2013, Business Insider reported that household net worth dropped by 40%. It took nearly ten years to add back jobs lost during the GFC and to grow the job market by an additional 10 million jobs. Keep in mind that about 4 million seventeen-year-olds turn eighteen each year and would presumably be entering the work force. While 68.9% of US high school graduates go on to university, some are entering the work force in addition to studying.
Others will drop out of university and enter the work force. And those who make it through graduating university will enter the workforce. Consequently, we can use the number of 17-year-olds turning 18 as an approximate proxy for the number of new Americans entering the workforce each year. At the other end of the employment spectrum, roughly 5 million Americans reach retirement age each year, but at least 20% of those continue to work. Even before coronavirus lockdown, the American Association of Retired Persons (AARP) expects that percentage to reach 32% by 2022.
Percentage of Seniors in the Workplace Will Increase
The percentage of people 65 and older working full time has steadily increased. In previous generations, prior to the GFC, it was more common for companies to provide pensions. Workers had job security enough to remain at a company long enough to retire. Another issue is the dramatic increase in the cost of college tuition. Even those who planned and saved found that their investment accounts crashed during the GFC or that they were forced to use the money to survive. In addition, many Americans delay their retirement to pay for their children’s education.
Americans not being able to afford retirement means the labor market must create new jobs each year in order to accommodate both seniors who remain in the workforce and young people who are entering. The AARP made their prediction of an increase to 32% of seniors working in 2015. The coronavirus lockdown will drive that percentage up. The GFC prevented many people from retiring, as it decimated their savings.
The Coronavirus lock down has caused an increase in unemployment and a decrease in the number of companies. Additionally, 30% of Americans have dipped into their retirement account in order to survive the coronavirus lockdown. This, again, will drive older Americans to continue to work or to look for work, reducing opportunities for new entrants in the job market. As stated previously, this increases the supply of labor while it decreases the demand for labor, which drives down the price of labor, or wages.
Self-Employment on the Rise
The number of self-employed Americans and freelancers has increased steadily since GFC, This is largely due to the fact that people cannot find full time work, or that the wage for that work has dropped substantially enough that they are willing to try their hand at entrepreneurship. Those who become self-employed “full-time” are no longer counted in unemployment statistics, whether their self-employment is earning a living or not.
Meanwhile, many people are double counted if they are self-employed part-time on top of their day job. The fact that they have a day job counts them as employed, but because they cannot earn enough money to live, they work as Uber drivers or take other part-time self-employment. This trend has also increased steadily since the GFC, and is yet another indication that employment and wages have not actually recovered. In 2019, it was estimated that the average wage had the same buying power as it did in 1978.
In some industries, such as automotive, pre and post GFC employees are in separate tiers with differing pay and benefits. The number of temporary employees has increased steadily because it is cheaper for companies to hire temps who receive no benefits and who can be hired and fired depending on short-term changes in workload. The average American also gets less paid vacation days today than before the GFC. A 2016 survey by Business Insider determined that the average American had less paid holidays than a medieval peasant.
The Laws of Supply and Demand
The GFC is estimated to have cost 9 million Americans their jobs. During the covid-19 lockdown, real unemployment exceeded 20%, with some estimates as high as 20 million people out of work. More than 700,000 immigrants become naturalized US citizens each year. Some are already working in the US and others are non-working dependents. Consequently, some percentage of new immigrants are added to the labor supply.
Additionally, the Federation for American Immigration Reform (FAIR) estimates that there are over 7 million illegal aliens working in the US. As a direct result of the lockdown, over 100,000 small businesses have closed permanently. Many others, such as hotels, resorts, airlines, and restaurants are reopening under considerable constraints, meaning they will need fewer workers.
The laws of supply and demand say that as supply increases, price decreases. We now have an oversupply of people who need to work and fewer companies who need workers. This means wages and employment will decrease. As companies reopen, sales will be slow and a smaller number of workers will be expected to do more work. Because fewer people have money to spend, it will take time to get back to previous levels of sales and employment. And given experience from the GFC, there is no indication that wages will suddenly jump when that happens.