Pandemic Economy Is Writing a New Labor Market Playbook

(Bloomberg Opinion) -- The economic rebounds following both the 2001 and 2008 recessions came to be known as jobless recoveries. Demand was slow to recover so employers held back on hiring — which for companies, at least, turned out to be the right decision.

The recovery from the pandemic recession has been very different and is carrying new lessons. Employers have struggled to fill jobs to meet sharp increases in demand, with operations suffering in many cases. In a call with investors last week to discuss quarterly results, railroad company CSX Corp. said its experience over the past two years has changed its thinking on staffing strategy in a slowdown.

Given the trajectory in the labor market since the latter part of 2020 — an unemployment rate that has fallen to 3.6%, 11 million job openings in the economy compared with seven million prior to the pandemic, and supply-chain bottlenecks that stem in part from labor shortages — there are bound to be a lot of other companies doing some rethinking of their own. And the decisions they make will be important for the labor market in the next economic downturn.

"We're going to manage this employee pipeline differently than we have in the past," said CSX Chief Executive Officer Jim Foote, responding to an analyst question about how much volume was left on the table because of staffing shortages. He vowed, "We're going to make sure that this doesn't happen to us again."

After the 2001 and 2008 recessions, companies learned how to fire millions of employees and maintain operations at lower levels of demand. So as the pandemic took hold in the U.S. in March 2020 and economic activity plunged, that was the playbook many went to again. But this time demand bounced back quickly, in part due to fiscal relief from the federal government. Companies that for years had complained about labor shortages and warned about inadequate talent pipelines in their industries suddenly found those concerns magnified to the point where they were having a material impact on their operations.

When the next downturn arrives, companies' pandemic experience doesn't mean they will or should avoid layoffs in order to cope, but their approach will be more strategic. When cutting staff, they will likely view lower-paid jobs that require less experience — warehouse workers, retail cashiers and fast food employees — as more dispensable because it’s easier to rehire and train those workers than engineers or airline pilots. 

With a goal of retaining critical staff for an eventual recovery, companies might shift more employees to part-time or offer furloughs with benefits rather than conduct sweeping layoffs.

To the extent companies are now worrying about the prospect of a recession, the high rate at which workers have been quitting their jobs will allow attrition to occur more quickly than in the past — hiring freezes combined with a high quits rate should be enough to reduce staffing levels pretty fast.

For investors and economic analysts, this shift will lead to some different trends in the data. First, we should expect fewer layoffs and a slower rise in unemployment in the next cycle. And that would probably mean a shallower downturn than we would otherwise expect. It's tough to get a severe recession if millions of people aren't losing their jobs.

If companies choose to keep more people on the payroll than they have in past downturns, that might be reflected in tighter profit margins than we've seen in past recessions. But the payoff will come during the ensuing recovery, when companies will be in a better position to take advantage of rising demand.

CSX may be one of the first companies to talk openly about how the pandemic has changed its thinking on staffing, but it won't be the last. Just as companies have learned that having access to semiconductors and ocean freight isn't a given, they will have new appreciation for employees in critical positions. That’s good news for those workers, and it means we can expect companies to manage their supply chains better in the next downturn.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He's been a contributor to the Atlantic and Business Insider and resides in Atlanta.

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