Despite strict lockdowns, supply chains disruptions, sharp economic contraction, and high unemployment rate, the COVID-19 recession is not expected to as worse as an economic depression. Zachary Karabell argues that this is due to the large fiscal stimulus by government and a commitment to unlimited liquidity by the central bank. It largely applies to the US economy, but some variant of it is true for all economy.
Specifically, two factors are at play here. First, average unemployment benefit is higher than average wage per week, meaning that consumption demand across most households is in fact relatively strong. Second, the job losses are mostly in sectors required face-to-face contact, meaning that unemployment is not economy-wise.
There are two reasons, one positive and one decidedly not. The positive reason is that for all the clunky ineptitude of the social safety nets created in April by Congress in the form of direct payments, small business relief and expanded unemployment benefits, those considerable amounts of money ended up buoying the depressed fortunes of tens of millions of people. In fact, given the extra $600 a week emergency supplement provided by the federal government, many people at the lower end of the wage spectrum pre-COVid have been taking home more money weekly than when they were employed. The average amount earned by the 40 million people who have received unemployment at some point since March was less than $750 a week; the average amount received under the various emergency programs? $970 a week. That helps explain why overall economic activity hasn’t declined in lock-step with unemployment or with the contraction of so many industries. Those juiced benefits are due to expire in July, however, raising the prospect that unless those are extended further the trajectory will worsen.
The other reason isn’t so benign. In terms of unemployment statistics and how we discuss work, a job is a job is a job. But in terms of wages and a living wage, all jobs are not created equal. Not even close. For many millions of jobs, the pay is barely above what constitutes the poverty line and isn’t enough to cover food and shelter for one person let alone a family. Hence the strong push in recent years to raise the minimum wage to at least $15 an hour, which many cities such as Seattle have done but which the federal government has not.In the current crisis, the preponderance of job losses have been human service industries, ones that depend of face-to-face contact and cannot be shifted via Zoom into the digital realm. Those industries – restaurants, hospitality, travel, tourism, retail stores, events – are also amongst the lowest paid. Overall, average earnings in the U.S. are $28 an hour. But earnings for leisure and hospitality are $16 an hour and for retail $20 an hour. Those tens of millions of workers were never accounting for the same level of consumer spending or home sales or travel dollars or economic activity as the tens of millions who work in construction or manufacturing or technology or higher-end service industries such as finance and consulting or public servants like teachers and police. The result is that you can have 15-20% unemployment with 40 million people out of work at one point or another in the past months and not have a one-to-one hit to economic activity.
