A Long Time Still Until the New Normal

October 20, 2021

Alec Levenson
Economist / Senior Research Scientist at Center for Effective Organizations, University of Southern California

This blog was originally published in HRZone and is an update of my article in Sloan Management Review in April 2020.

Even before the Delta variant of Covid-19 swept across the globe, there already were clear signs that the economic disruptions that set in a year and a half ago were still going strong. Adding in Delta further increases uncertainty, pushing back any new equilibrium well into 2022 at the earliest, and likely well beyond. The problems:

The virus isn’t going away. The virus continues to disrupt in-person work. The emergence of Delta and other variants so quickly proves that the virus will be circulating and disrupting economic activity likely for years to come. It’s quite likely that the future holds even worse variants than Delta, including ones that could evade the protection provided by the current very effective vaccines, threatening the protections and freedoms currently enjoyed by the vaccinated.

Continued changes in consumer behavior. Many consumers of in-person services such as travel, dine-in restaurant meals, attending big indoor events (concerts, theater, movies, etc.), etc. have not changed their aversion to going back to the way things were. As a result, demand for such services will remain depressed indefinitely, keeping down sales and hiring relative to their pre-Covid-19 levels well into 2023 and beyond. When an industry experiences such prolonged periods of reduced demand, the available workforce and investment dollars slowly move away to other opportunities. However, it takes a long time for everything to sort out in terms of the new jobs that will be created and the skills people will need to work in them, including mismatches between what the workers needed to succeed in the old vs. new jobs.

Even though overall consumption of some services, such as dining out, rebounded quickly in 2021 in countries like the US and UK, the nature of that spending today is very different than before the pandemic, requiring different delivery models. And the spending in other key categories such as travel has not and will not be recovering until well into 2022 or beyond. In the meantime, reduced commuting to offices continues to depress sales in urban retail centers, prolonging retail space vacancies, and lowering the value of commercial real estate. It may take years for the long run patterns to become clear, and for all the current uncertainty about consumptions patterns to be resolved.

Emerging changes in employee behavior. Employee behavior has changed in fundamental ways that most people are not acknowledging. For over a generation we’ve had an evolving “tale of two cities” economy in the US and the other advanced (i.e. richest) economies in Europe and East Asia, with knowledge workers earning more and more while blue collar and office support occupations have been earning less. Those same workers at the bottom of the economic ladder have had to work in the exact same jobs that have been hit hardest by the pandemic. Even before Covid-19, we were at a virtual breaking point, where most of these workers weren’t earning enough to make ends meet, and had to work multiple jobs or work very long hours to meet their income goals, in work that was very difficult and/or not very interesting to do (cashier, food preparation/meal service, meat processing, etc.). Many of these workers are now re-evaluating their priorities given the continuing threats to their health from working in those jobs.

Many people who worked those jobs were teenagers, young adults and older people who wanted the extra cash from working but didn’t actually need the money. Others were people working those jobs to supplement work they did that did not require the same kind of in person contact, such as artists, musicians, and others who used service work to supplement their other income. Others still used part-time work to supplement their full-time jobs in other sectors. Until and unless we end up with herd immunity globally, many of these workers are never going back to those jobs – and it doesn’t take more than about 10-20% of them giving up on working in those sectors to have profound effects on the entire sector in terms of reduced labor supply.

So Covid-19 may have been the straw that broke the camel’s back in terms of creating a real reckoning with the economic value of many service sector and lower-wage jobs in our society, from both the consumer and employee perspective.

Vaccines are key to economic recovery but can’t immunize the economy from changing consumer and worker preferences. The variation in vaccine efficacy globally, and emerging evidence on waning protection over time and in the face of new variants ensures that Covid-19 will be disrupting economies for a long time still. The prospects of global herd immunity from severe illness and death are still at least two years away. And that continued threat, along with the need to maintain caution around virus transmission through social distancing, masking, etc., will continue to make a significant segment of both consumers and workers pause or reconsider going back to the way things were pre-pandemic.

The important thing to note is that even if most people want to return to pre-pandemic ways of shopping, eating, traveling and working, having “only” 10% of consumers and/or workers fundamentally changing their behavior indefinitely is a huge disruption. Ten percent less consumer spending for an industry is equivalent to a massive pullback in demand. Ten percent fewer people employed in an economy equals a massive recession. The negative economic impacts of Covid-19 are going to be around for a lot longer still.

For a deeper dive into the issues addressed here, come join the virtual Optimizing the Operating Model Beyond Covid-19 workshop in November 2021, featuring guest speakers Beth Gunderson, Stefan Garcon, Heather Stockton and Max Blumberg.