The sharp decline in Covid cases during the first half of 2021 raised expectations that the pandemic would gradually die down and the jobs market would return to normal by year's end. But the Delta variant has scrambled that labor market outlook for this year and beyond, with an increasing number of infections, hospitalizations and deaths.
There are three sets of implications this Covid surge has for hiring in the US. We'll start to see the Delta variant's ripple effects as soon as this week's jobs report, in slower employment and labor force growth, as well as a more sluggish rate of offices reopening.
Consumer demand will soften
While we are unlikely to return to the restrictive shutdowns we saw last year, the fear of getting infected is likely to impact willingness to engage in in-person activities, including a wide range of consumption categories and work. It is now clear that Covid-19 will stay with us for the foreseeable future, and spending on in-person services in December 2021 will be weaker than had been expected before the Delta variant emerged. As a result, the demand for workers providing these services will be weaker and employment recovery by December 2021 will be far from complete.
While economic data for July was still solid, August indicators show softening. Real-time statistics show a significant drop in air travel sales, as well as movie theatres' box office returns since July. And Google mobility measures show a drop in travel and leisure-related activities. Early readings from August suggest that consumer confidence has declined, while some businesses are seeing slowing sales.
The increase in infection risk is likely to significantly impact two groups in particular: senior citizens and families with children younger than 12 (and thus not eligible for the vaccine). These groups spend disproportionally more on consumption categories, such as vacations, restaurants, childcare and services catering to kids. These industries are likely to recover more slowly than expected. In addition, given the ongoing global spread of the pandemic, international tourism will not be back to normal anytime soon.
As a result, this week's jobs report and September's will likely show slower than originally expected employment growth, especially in in-person services. In the previous Covid-19 surge from November to January, employment in leisure and hospitality not only slowed down, but declined during that period. The number of jobs available in December 2021 in these industries is likely to be lower than originally expected.
Labor supply will remain tight
We hoped that Covid's continuing decline would reduce or eliminate barriers to returning to work, such as fear of infection or the threat of continued remote learning. But Delta's persistence will keep people out of the job market. Some older workers who have been waiting for infection risk to disappear before they return to work may now retire.
In this week's jobs report and the ones that follow, we are likely to see the recovery in labor force participation lose steam. At the same time, we expect more unemployed workers to find work as the high unemployment benefits gradually expire.
Remote work will make it harder to recover
Delta's rise will slow the return to the office. The delay will lengthen and increase the economic damage to city centers, where many office buildings are located and where workers spend money on food, retail and other consumption categories. Also, the longer workers and employers settle into a remote work environment, the harder it will be to fully return to the office. The share of remote workers in the post-pandemic new normal may be even higher than expected.
At some point, despite the presence of Covid-19, the labor market and the US economy more broadly will return to normal. But unfortunately, with the rise of Delta, this is unlikely to happen in 2021. This week's jobs report, and the ones that follow in 2021, will show smaller growth in the labor force and in employment than originally expected.
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