Jobless recoveries have been typically attributed to structural changes in the economy that increase frictional unemployment because workers must be redeployed to expanding sectors. Reallocation this time around is unprecedentedly high, which makes sense as workers need to move to pandemic-proof sectors. Simultaneously, the pandemic has accelerated pre-existing trends such as the move away from brick-and-mortar retail, deglobalization, the increasing reliance on AI and robots, etc.
Reason #2 – Income Distribution has Become Even Less Consumption Friendly
A more important cause of jobless recovery in my view is the loss of workers’ market power – one of the hallmarks of the Great Moderation (Three Conditions for a Lasting Inflation Acceleration, 16 July 2020). As a result, workers’ share of domestic income has been steadily falling. Because the propensity to save is greater out of profits than out of wages, this makes for mediocre inflation and growth. The pandemic has further worsened income distribution. This is because the employment recovery in low-skill services involving face-to-face interaction, for instance retail or restaurants, has lagged the rest of the economy.
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