- The US economy has had a strange comeback, where overall output is back to its pre-recession level but employment is still low.
- That means we're selling as much stuff as we were in 2019 but with almost 6 million fewer workers.
- Workers could stay sidelined and we'll keep making more with less, or they'll come back to a more productive economy that could boom for years.
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But there's a strange divide in the recovery, and how it works itself out could define the rest of the decade. There's a split between the recovery of GDP and employment. The first is recovering much faster than the latter.
Both total economic output, as measured by real gross domestic product, and the number of Americans with jobs plummeted last spring, and both have spent the last year sharply recovering.
Real GDP recently surpassed its pre-pandemic peak, but as of July there are still about 5.7 million fewer employees on payrolls in the US than there were in February 2020.
That means the US economy is making and selling as much stuff as it was in 2019, but with nearly 6 million fewer workers. This suggests a big increase in productivity.
If those gains hold up, there are two very different paths forward from here: Workers might stay on the sidelines and output will keep modestly growing, with a permanently smaller labor force, or those workers could return to fuel a more productive economy than most developed countries like the US have seen in decades.
Doing more with less
One possibility is that we could maintain the productivity gains seen during the pandemic with a permanently smaller workforce.
Economics blogger Kevin Drum made some back-of-the-envelope calculations, estimating that by the end of 2022, output would be roughly where it would have been without the pandemic, but with only about 3.5 million more employed Americans than we have now. (Drum used the CBO's estimates for what potential GDP could look like, while extrapolating out from the productivity growth over the last several months.)
Economist Robert Gordon, who specializes in studying long-run trends in productivity and economic growth, shared similar thoughts with UCLA Anderson economist Leo Feler in a February podcast. This was a big deal in the economics community, as Gordon is a famous pessimist when it comes to productivity.
Gordon noted that a lot of the productivity growth over the last year came from high-income, high-productivity workers who can do their jobs from home without all the expenses and trappings of commutes and office buildings.
If those trends continue, Gordon predicted you could see a dampening of productivity growth across the broader economy as sectors like commercial real estate and public transportation struggle in an environment where office buildings in downtown business districts remain empty.
Doing more with more
There's another possible future, however. If productivity growth sustains and the US returns to pre-pandemic employment trends, that could turbocharge overall economic growth for years to come.
Bloomberg columnist Conor Sen made his own back-of-the-envelope calculations along those lines. The US could actually see 7% annual GDP growth over the next couple years, he wrote, much higher than most estimates.
Sen assumed a return to pre-pandemic employment trends by the end of 2022 - adding back all of the 5.7 million lost jobs, plus the jobs that would have been added to the economy without the disruptions of the last year - as well as ongoing productivity growth as businesses invest in automation and other technologies.
This also seems to be the goal of President Joe Biden and the Democrats' proposed economic policies. Both the $1 trillion bipartisan infrastructure bill and the likely party-line $3.5 trillion reconciliation bill are full of proposals to boost productivity through investments in better physical infrastructure and to make it easier for Americans to return to the workforce through initiatives like improved access to child care. If there is such a thing as "Bidenomics," it's the doing-more-with-more approach of this scenario.
This all depends on whether or not workers come back
These are the extreme ends of a spectrum, and the economy could well end up somewhere in the middle, with modest-to-fast gains in both employment and growth. But a lot will depend on just how many workers come back.
Even though the US has been adding jobs at a stunning pace through the summer, labor force participation remains quite a bit lower than it did before the pandemic. Many older Americans have likely permanently retired, and many workers may be waiting on the sidelines because of ongoing concerns about the pandemic and uncertainty around schools reopening.
If job openings are enticing enough to bring in those sidelined workers, we could see an economic boom. If they aren't, or if the productivity gains we've seen over the last year represent a permanent dislocation of a lot of pre-pandemic jobs, we could have a more productive but smaller workforce.
It all comes down to just how much growth workers - and employers - want out of the economy.