The Effects of OPEC+ Oil Prices

  Last spring, the COVID-19 pandemic hit the oil industry particularly hard, but it has since recovered. Much of the changes which took place within the industry were changes in the amount of output, as well as shifts in the prices of oil. As we (hopefully) are moving out of the pandemic, more price and quantity changes may arise as demand in some countries is decreasing due to higher infection rates, increasing in others, all the while OPEC+ is trying to target a certain price for its oil. In order to analyze this situation, we can use the IS-LM-PC model.

To start this investigation, we should first understand exactly what the IS-LM-PC model is. For this, we will use our textbook as our main source. To begin, the model is first an extension of our previously defined IS-LM model. What is added here is that in addition to the IS-LM graph, another graph is derived below it, showing output, rather than compared to the real interest rate, compared to the change in the inflation rate. This allows us to see whether the economy is above, at, or below potential output, which would have at (1) a 0% change in the inflation, (2) the natural rate of unemployment, and (3) the natural amount of output, when given a PC curve and an amount of output.

(Blanchard 178)

This is important to be able to derive as the three are quite interconnected: when output rises, the inflation rate tends to increase, whereupon unemployment tends to decrease. As such, given the change in one variable, we can arrive at a semi-accurate prediction of how we should expect the rest of the economy to change in effect, all else equal. The IS-LM-PC model also however connects back to our previous WS-PS model. Should the real wage decrease due to higher markups, this means that for a given output, inflation has increased, causing the PC curve to shift up. This means, that in essence, the IS-LM-PC model is bringing together what we have learned about the IS-LM and WS-PS models, in order to allow us to better understand how the concepts of output, real wage, markups, prices, real interest rate, and unemployment, all are interconnected and help us to explain what we should expect when one variable changes. As such, with the comprehensiveness of the model, we should use it in any situation where a change in one of its variables takes place.

Now, with an understanding of the IS-LM-PC model, we can discuss what the consequences might be if OPEC+ (OPEC member-countries plus a few other oil producers, such as Russia) takes measures to influence the price of oil. At the start of the pandemic, as demand for oil significantly dropped, OPEC+ drastically cut oil production -- by 8 million bpd, in fact -- in order to maintain price stability. However, with recent increases in global demand, OPEC+ has decided to ease these output cuts; between May and July, they plan to increase the current supply by 2.2 million bpd, leaving total output cuts at 5.8 million bpd (“OPEC+ to meet Tuesday,” 2021). This gradual increase in output may have to be done with caution, though, as COVID-19 outbreaks continue to spread across the globe.

The third-largest importer of crude oil is India, but recently, India has experienced an incredibly sharp rise in COVID-19 cases and deaths, leading many to believe that there may be a large decrease in global oil demand (“OPEC+ to Meet Tuesday,” 2021). However, others are less skeptical, and instead believe that global demand will stay on track with past predictions: U.S. demand for oil, as well as other nations that are easing restrictions and opening their economies, will outpace the loss in Indian demand for oil. This optimism has led OPEC+ to stick with their initial plan of gradually increasing oil production in the upcoming months, though they will do so at a rate that’s slower than demand. Altogether, with “‘only a modest production increase outside of OPEC+, and OPEC+ pursuing a cautious approach, we expect the oil market to be undersupplied by 1.5 million barrels per day this year’” (“Oil Rises as OPEC+,” 2021). As this quote suggests, OPEC+’s oil production will cautiously lag behind demand, implying that there will be an increase in the price of oil.

This price increase is equivalent to firms increasing their markups, which, in turn, lowers real wages and increases unemployment. At a given level of output, the increase in firm prices leads to higher inflation. This is equivalent to a shift upwards of the PC curve. To combat the increasing inflation, the central bank will raise the policy rate. On the IS-LM graph, this is equivalent to a shift upwards of the LM curve. With a higher real interest rate, output decreases -- in graphical terms, we are moving left along the IS curve. At the same time, inflation becomes stabilized until the output gap has closed and output is equal to potential output. This is shown by moving down along the new PC curve until we cross the line that signifies zero change in the inflation rate, and, as a result, attain a new lower level of potential output.  Ultimately, the IS-LM-PC model suggests to us that an increase in oil prices results in a decrease in output.

This is the relationship that economist Keith Sill wrote about in his 2007 article, “The Macroeconomics of Oil Shocks.” It’s important to note, however, that Sill is referring to large increases in oil price that result from major disruptions in oil supply (e.g., the Iran-Iraq War in the early 1980s). In this current situation, wherein OPEC+ is attempting to recover from the effects of the pandemic, the increase in oil price is unlikely to lead to a permanent decrease in output. As opposed to a price increase due to a dramatic drop in oil supply, this price increase is the result of an increase in oil supply cautiously lagging behind demand. Additionally, this price increase is occurring at a time when the economy is trying to recover from a recession, not while it’s about to move into one. So, while the IS-LM-PC model provides us a framework with which to analyze the effect that oil prices have on output, it’s necessary to bear in mind the context of our analysis.

Works Cited

CNBC. (2021, April 27). Oil rises as OPEC+ seen sticking to policy despite India COVID surge. CNBC. https://www.cnbc.com/2021/04/27/oil-markets-covid-in-india.html. 

CNBC. (2021, April 27). OPEC+ to meet Tuesday amid concern about rising virus cases. CNBC.https://www.cnbc.com/2021/04/27/oil-opec-to-meet-tuesday-amid-concern-about-rising-virus-cases-.html. 

Sill, K. (2007). The Macroeconomics of Oil Shocks. Business Review, Issue Q1, 21-31.

Stagflation and the current economy -Thomas piwonka, Kristin Moniz

     The current times we live in are some of the most tumultuous in recent decades, barring the great recession, and this has come with a great deal of uneasiness when it comes to the future of our economy.  There is an arising worry that because of the unsettled nature of the world, we may see stagflation in the future.  In “Why Stagflation is a Growing Threat to the Global Economy” by Nouriel Roubini, Roubini outlines several key points regarding the future of our economy and our current practices. His main point is that Stagflation would come from the increased inflation caused by the “surplus” stimulus bills passed to ease the economic damage caused by the Covid19 pandemic.  While this on its own would not lead to a stagflationary event, when combined with events that may occur in the future, we may see large unemployment and high inflation which was seen in the ’70s.  The arguments against this are 1, that people will save much of the money, as they always do, and invest into infrastructure which will increase supply as demand increases, and 2 that banks can soak up the excess liquidity caused by the larger portion of liquid, or spendable money in people's pockets as a result of overcompensation for the covid crash.  A central bank would do this by raising interest rates and forcing the liquidity of money to raise, however, with this second option, banks may not be able to soak up the liquidity, as the economy may demand a low interest rate to maintain stability.  This seems to be backed up by Fed statements claiming that there are no plans currently or for some time to raise the interest rates. The third counterargument would be that the monetization of fiscal deficits will not be inflationary, rather it will only prevent inflation.  What Roubini brings up regarding these is that we are recovering from a supply shock, much like the oil shocks of the 1970s.  Our shock is a negative aggregate supply shock, as we have seen with the loss of many usually supplied goods because of covid.  Problems that would deepen this potential stagflation (ie, supply shocks) would be deglobalization, rising protectionism, post-pandemic supply bottlenecks, deepening Sino-US cold war, and the balkanization of global supply chains and reshoring of foreign direct investment from low-cost China to higher-cost locations. (Roubini, 2021)  More domestic sources of stress could be rising inequality, with more power given to producers in recent years, giving them more pricing power.  While these looming problems may affect the macroeconomy eventually, currently the slack in markets for goods will prevent a sustained inflationary surge, however, loose monetary and fiscal policies will start to trigger persistent inflationary or stagflationary pressures, owing to the emergence of any number of persistent negative supply shocks.  

I feel that it is important to quickly summate stagflation, as it is the centerpiece of this post. Stagflation is the name for when an economy experiences high inflation, and high unemployment at the same time. This would seem counter to what we have been learning about with the Phillips curve, and I will touch on that more later. On a typical Phillips curve, we would expect unemployment and inflation to have a negative relationship, with one going down and the other going up. A prime example to look at when thinking about stagflation would be the oil shocks to the US in the 1970s.  This was a culmination of many different factors, but mainly it was caused by the embargo of the United States by OAPEC, because of their decision to resupply the Israeli military during the Yom Kippur war.  OAPEC limited oil shipments to the US, and other countries.  This increase in the cost of oil had several impacts on the US economy; first, it raised the cost of transportation for almost every good in the US, causing prices to rise, as gas naturally became more expensive,  and secondly, it caused production to become more expensive, slowing economic growth.  This raised inflation, and unemployment, leading to Stagflation.  One US response was to devalue the dollar and declare wage and price freezing.  During this time period, the US implemented many expansionary policies, and this helped lead to the rapid inflation of the time.  Because the US was so liberal with allowing money to become more liquid, they were in the perfect position to go into a recession given a supply shock.  The only way for the US to get out of this trap was to increase interest rates to double-digit levels, which caused a recession.  (Neilson 2020)  What this shows is that our current expansionary/reactionary policies toward the covid19 pandemic may have adverse ramifications regarding stagflation in multiple ways, and the only way to get out of it may be to cause a recession caused by increased interest rates.  This would be extremely worrying currently because we are already experiencing large amounts of unemployment, and even though we are seeing growth, it is not backed up with equal or continued hiring of workers.  There is also much liquid policymaking in the US as a means of support for those affected by the Covid19 pandemic.  

The mention of stagflation brings into question the validity of the Phillips curve, which we have recently become familiar with.  The core tenant of the Phillips curve is that you trade off unemployment for inflation, meaning that the higher your unemployment, the lower your inflation, and vice versa.  This theory dominated US policymaking during the 1960s and led to inflation increasing from 1.2% in 1962, to 5.8% in 1970. (Dorn, 134) Unfortunately during the 1970s, we experienced shocks to the oil supply, which caused high unemployment and high inflation, which would seem to contradict the Phillips curve. Another theory which disputes the Phillips curve would be that of Milton Friedman, who theorized that there were three stages to the Phillips curve, with the first being the one we are most familiar with.  This would be the curve in the short run and shows a simple negative relationship between unemployment and inflation. (Dorn 2021)

                [FIGURE 1]

This however only applies during the short run.  While a rise in inflation will bring down unemployment, during the short run, during the long run we would see employers and workers fully anticipate higher inflation, and they will revise their plans, causing unemployment to return to its natural level.  For example in figure 2 we can see that when inflation rises to i1, it temporarily lowers unemployment, however, it is adjusted to the natural rate of unemployment of Nu once workers and employers recorrect. (Dorn 2021)

                                                             [FIGURE 2]

This would indicate that the Phillips curve is vertical, and there is no tradeoff between unemployment and inflation.  The third stage which Friedman outlines would be the hypothesis that high and variable inflation lays the ground for higher future unemployment by distorting relative prices, producing a positively sloped long-run Phillips curve. This can be shown in figure3. (dorn 2021)

.     [FIGURE 3]

What seems to be concerning several economists today is that it appears that those in charge of monetary policy seem to still find the Phillips curve compelling, and influential to further policymaking.  Examples of this endorsement come from several different interviews with influential people, like Janet Yellen, and Fed Chairman Powell. (Dorn pg142)  Our response to the Covid19 pandemic has been quick and powerful, with many stimulus packages and granting easy ways for money to move around in the economy, and while this has certainly saved us now, it may cause alarm in the future, and lay the groundwork for stagflation in the future.  Essentially with our current predicament, we may see the beginning of a stagflationary period in the future.  The ease of access to liquid money, and the excess of stimulus money paired with uncertainty caused by the pandemic may lead to the perfect backdrop to a stagflationary event.  If these factors combine with a large shock to the economy, such as a further deepening of the trade war with China, or increased isolationism from countries globally, we may find ourselves seeing a repeat of the 1970s.  This also brings into question the continued use of the Phillips curve in monetary policy-making. Should this be something we still use to help guide policy or is its continued use a trap? Is the US heading towards a stagflationary event, or should we just coast on out of this danger zone without experiencing these negative effects?

Resources

Catalan Vidal, J. (2017). The Stagflation Crisis and the European Automotive Industry, 1973-85. Business History, 59(1–2), 4–34. https://doi-org.ezproxy.plu.edu/http://www.tandfonline.com/loi/fbsh20

Dorn, James A. "The Phillips Curve: A Poor Guide for Monetary Policy." The Cato Journal, vol. 40, no. 1, 2020, p. 133+. Gale Academic OneFile, . Accessed 21 Apr. 2021.

Nielsen, Barry. “Stagflation in the 1970s.” Investopedia, Investopedia, 31 Mar. 2021, www.investopedia.com/articles/economics/08/1970-stagflation.asp. 

Roubini, Nouriel. “Why Stagflation Is a Growing Threat to the Global Economy.” The Guardian, Guardian News and Media, 15 Apr. 2021, www.theguardian.com/business/2021/apr/15/why-stagflation-is-a-growing-threat-to-the-global-economy. 

Pandemic Pandemonium: Inflation and the Philips-curve

 t is clear that the pandemic has created unprecedented conditions which experts have tried to quickly find solutions and corrections to. In the economic sphere, the shock in demand and mandated closure/limiting of businesses lead to huge unemployment rates. As a solution, the government adopted giant expansionary fiscal policy, resulting in huge debates about inflation amongst economists and one of the biggest policies was President Biden’s $1.9 trillion Covid-19 relief bill (Stewart). Here we go over the phillips-curve's (PC’s) relationship between inflation and unemployment, it’s historical inaccuracies and potential improvements, the debate about inflation, and where all of this leaves us at the moment according to economic theory.

In short, mandated limiting of in-person business shocked demand and led to a spike in unemployment which only exacerbated plummeting demand, and to remedy this the government enacted extreme expansionary policy measures in order to slow down this shock in demand and prevent further spikes in unemployment (see graph under blog). According to the PC, unemployment is inversely related to inflation; however, this has not held up well historically. Two salient examples of this are the stagflation which occurred in the 70s and recent low unemployment. In the first case unemployment and inflation were both high, and in the second case unemployment and inflation were both low (compare graphs under blog). This directly violates the PC in unemployment and inflation were directly related rather than inversely related. One question arises: How is the intuition that low-unemployment leads to higher inflation through higher demand and thus an increase in prices, and so to lower unemployment leads to lower demand causing prices to decrease, wrong? Bearing this in mind, we now turn to the inflation debate surrounding recent policy decisions.

Now, unemployment claims have dropped to 576,000, the lowest since the beginning of the pandemic began, a total of 16.9 million people are continuing to collect unemployment benefits, down from 18.2 million in the previous week as of April 15th 2021, and many indicators point towards business slowly picking up (KTLA, 2021). In light of this, and the rapid introduction of liquidity into the economy, some are alarmed that inflation may soon run rampant. Again, this liquidity was introduced through recent government spending, like the stimulus checks and is seen in the M1 money supply graph.

“Some economists and experts have warned that [the expansionary fiscal policy] is too much, and that once the economy recovers — perhaps rather quickly, thanks to the vaccine — the country won’t have enough capacity to meet demand and the economy will overheat, resulting in an increase in prices (Stuart, Emily 2021).”

However, there are many other economists, including Paul Krugman, that believe that if inflation were to come the FED has enough “easy” tools to help combat it (Stewart, 2021). This line of argument rests on interest rates, set by the FED, being near zero. Should demand spike after the recovery, not only will increased interest rates curb demand by disincentivizing debtors but also give the FED room to cut interest rates in the event of another recession. Concerning the PC relation, that is now that unemployment rate is going down the PC would predict inflation to go up,

“‘the consensus is still the Phillips curve isn’t dead, but the world has changed, so maybe the way it works has changed,’ said Raphael Schoenle, deputy director of the Center for Inflation Research at the Federal Reserve Bank of Cleveland. In a 2018 interview, [Jay] Powell said he believes the curve may not be dead, but it is at least ‘resting,’ (Stuary, Emily 2021).

In other words, the PC is not a great model for forecasting inflation as it stands, but with a few modifications it could be a useful tool. The journal we looked into took several variations of the PC and tried to determine which variation held best in its forecasting power, using historical data. The journal’s results are that the PC is more accurate with Time-Varying Coefficients and when it corrects for the business cycle and other activity measures, rather than just unemployment (Abdelsalam, Mamdouh, 2017). In other words, improvements upon the PC negate simple relationships between unemployment and inflation—answering the question at the end of the second paragraph with inflation having other factors outside of employment. Leaving us with no choice but to wait and see how the current economic environment will develop.

M1 Money Stock:

(Board of Governors of the Federal Reserve System (US), M1 Money Stock [M1SL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M1SL, April 21, 2021.)

Unemployment 

(U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, April 21, 2021.)

Inflation

(Federal Reserve Bank of Atlanta, Sticky Price Consumer Price Index less Food and Energy [CORESTICKM159SFRBATL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CORESTICKM159SFRBATL, April 21, 2021.)

Citations:

Abdelsalam, Mamdouh Abdelmoula M, “Improving Phillips Curve's Inflation Forecasts under Misspecification,” Romanian Journal of Economic Forecasting, v. 20, Iss. 3, (2017).

 

Board of Governors of the Federal Reserve System (US), M1 Money Stock [M1SL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M1SL, April 21, 2021.

Press, Associated. “Unemployment Claims Plunge to 576,000, Lowest in U.S. since Pandemic Began.” KTLA, KTLA, 15 Apr. 2021, ktla.com/news/nationworld/unemployment-claims-plunge-to-576000-lowest-in-u-s-since-pandemic-began/.

Federal Reserve Bank of Atlanta, Sticky Price Consumer Price Index less Food and Energy [CORESTICKM159SFRBATL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CORESTICKM159SFRBATL, April 21, 2021.

Stewart, Emily. “How Much to Worry - and Not Worry - about Inflation.” Vox, Vox, 24 Mar. 2021, www.vox.com/policy-and-politics/22346376/inflation-rate-explained-federal-reserve. 

U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, April 21, 2021.

A Shot in the Dark: UK Policy Based on the Output Gap

Jessica Ullom-Minnich & Skyler Ramirez-Ortiz

In early March, the UK announced its budgetary plan for the coming years. The plan, which was expected to be largely contractionary, reversed its plans in light of the impact that both Brexit uncertainty and continued pandemic lockdowns have had on the economy. The Office of Budget Responsibility (OBR) has revised its expectations of future growth. It now anticipates growth of “4% in 2021, down from 5.5% in the previous forecast, but then... 7.3% in 2022, the fastest rise in eight decades.” In response to these estimates, the new budget includes expansionary policies like an extended Coronavirus job retention plan and increased grants and low-interest loans. On the whole, the plan is expected to increase spending by about ￡35 billion and cut taxes by an additional ￡24 billion. This is effectively an increase of 3% of GDP, not counting multiplier effects. The OBR has added that they hope these measures will close the negative output gap in the UK economy. In a few years time, as output grows substantially, the government is expected to raise taxes to the highest levels since the 1960s.

The IS-LM-PC model provides valuable insights into the logic behind this policy. To set up this analysis, assume an economy in medium-run equilibrium before Brexit/Covid-19 lockdowns. We know that both Brexit and Covid-19 have likely shifted the IS curve inward. Brexit decreased business confidence and thus investment, while lockdowns caused many to lose their jobs and reduce their consumption. In the short run, this creates a new equilibrium with higher interest rates and lower output, provided monetary policy does not change. However, a medium-run perspective requires knowledge of the position of the Philip curve. For example, if new tariffs raised the prices of important raw materials, businesses would have to use larger markups to afford their inputs. This would shift the Phillips curve upward. If the shift was significant enough, the UK economy could already be in medium-run equilibrium- even with the reduced output. This would mean that expansionary policy could only result in a temporary increase in GDP that would bring with it a large increase in the inflation rate. However if, on the other hand, the Phillips curve has remained where it originally was, then the action from the OBR may be able to force the IS curve out again and quickly reestablish equilibrium with a minimal change in inflation. Even as UK policymakers look toward the future, the consideration of medium-run equilibrium still applies. The article suggests that in several years when economic growth is high again, taxes will be raised substantially. If policymakers manage to get the economy back to equilibrium before this dramatically increased growth, higher taxes could prevent the IS curve from shifting out and moving the economy out of equilibrium once more. However, if the economy has not yet fully recovered and the output gap is still negative, the increased taxes would be counterproductive. The government’s ability to be effective in any of this relies on its ability to effectively predict where the Phillips curve is. More precisely, they need to determine exactly how large the output gap, the difference between current output and potential output, is.

The data table above was taken from the UK Treasury’s website. It lists several independent estimates for what the output gap currently is (as of Feb 2021) and also what it will be as far into the future as 2025. Particularly of note is the diversity of the measurements. According to the table, the current UK output gap could be anything from -5.2% to 7.5%. Taken in comparison with the OBR’s estimate at the bottom of the page (-1.1%) it is apparent that the eventual impact of policy based on the predicted output gap is anything but certain. The fundamental problem is that “despite their policy relevance, output gaps are notoriously difficult to measure (especially in the vicinity of a large shock...), and there is no consensus in the profession on the best method for estimating them.” Traditionally, the primary methods for estimating potential output have relied on “decomposing observable output ... subject to various assumptions.” Naturally, problems occur when there are either issues with these assumptions or the observable data itself. In fact “endpoint problems” in which current data is being constantly revised, are very common in most models. One new method attempting to compensate for this issue is the method used by Marko Melolinna and Mate Toth in their paper that uses financial variables -in addition to traditional ones like real GDP- as signals for the business cycle to better predict real-time output gaps. This is based on the logic that the financial system can either “act as an amplifier of shocks or can be the source of shocks that trigger business cycle fluctuations in the first place.” On the whole, this new model presents a view of the UK’s economy that tends to have a more optimistic view of the UK output gap in the post-2008 financial crisis world. This is because in the model a “larger part of the crisis-related downturn is attributed to cyclical rather than structural factors.” The results of this study, while promising, still have progress to make. Some of their results (pictured below) show their model’s real-time estimates of the output gap compared with the full sample predictions. Even though these estimates generally trend together, they are often different enough that a policy based on the real times estimates could significantly miss the mark and mistakenly under-account or over-account for the output gap. What this means in the context of the UK’s new budget plan is that the OBR’s estimates of the output gap are very likely to be flawed in some respect. If policymakers were to wait long enough to be more confident in the output gap estimates, it would already be too late to take action off of them. There is simply too much diversity among estimates of the current output gap and an empirical discrepancy between real-time estimates and ex post facto estimates of the output gap. Even if the fiscal policy is headed in the right direction, miscalculation means there is a high likelihood of seeing the UK’s inflation rate change in the near future as they get closer and closer to closing the output gap.

Bibliography

"A Game of Two Halves." The Economist, Mar 06, 2021, 21-22, https://ezproxy.plu.edu/login?url=https://www-proquest-com.ezproxy.plu.edu/magazines/game-two-halves/docview/2497407324/se-2?accountid=2130.

Blanchard, Olivier. Macroeconomics. 7th ed. Boston, MA: Pearson, 2017.

Macroeconomic Co-ordination and Strategy Team, The. "Forecasts for the UK Economy: A Comparison of Independent Forecasts." February 2021. Accessed April 11, 2021. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/962029/Forecomp_February_2021.pdf

Melolinna, Marko, and Mate Toth. “Output Gaps, Inflation and Financial Cycles in the UK.” Empirical Economics 56, no. 3 (March 2019): 1039–70. https://search-ebscohost-com.ezproxy.plu.edu/login.aspx?direct=true&db=ecn&AN=1757826&site=ehost-live&scope=site.

 

The She-Cession: The Disproportionate Effects of the Pandemic on Women in the Workforce

Hanna Venera & Holden Smith

In the wake of the COVID-19 pandemic, the world has witnessed a wide variety of adverse effects, most notably in the economic sectors. One aspect of the pandemic that has received little attention is the disproportionate effects felt by women as compared to men with regard to employment and the workforce. Not only are women losing jobs “at a steeper rate than men,” but women are also having a harder time returning to work (Chaney, 2020). In fact, Furmans (2021) explains that “women’s participation in the labor force has slipped to 57%, the lowest it has been since 1988.” Why might this be? Economists argue that women are simply falling out of the US labor force due to the uneven burden this pandemic has exacerbated by gender. Comparing pre and post-pandemic, Chaney and Weber (2020) report that in February 2020, both men and women had similar unemployment rates near 3.5%; however, in May 2020, the rates were significantly different, with men at 13.5% and women at 16.2%. As we discussed in class, these numbers are accounting only for those actively seeking employment, which shows that more women are seeking employment and participating in the workforce than historically. However, the high rate is still problematic, as it can have a lasting impact on both these women’s professional careers and bargaining power in this economy. Women of color have been even more disproportionately impacted by this pandemic, as compared to white women, with 20.2% unemployment for Hispanic women, 16.4% for black women, and 15% for white women (Chaney & Weber, 2020). As anyone who faces unemployment during a recession is at risk of not returning to the workforce, we might see adverse effects in the communities that are being impacted most heavily, in this case women, most notably women of color. Further, in their econometric analysis, Dang and Ngyen (2021) found that “Women are 24 percent more likely to permanently lose their job compared to men… and expect their labor income to fall by 50 percent more than men do” (p. 2). Women before this pandemic were already facing tremendous obstacles, including the pay gap; this pandemic has only expanded these inequalities. This pandemic and the actions of the world's government have targeted the sectors in which women are the most prevalent, turning this period into a she-cession.

Figure 1: Unemployment Data by Gender, 2000-2021

Source: St. Louis Fed, https://fred.stlouisfed.org/series/LNS14000002

This disproportionate shock by gender skewed in favor of men is actually the opposite of past recessions. In previous recessions men showed higher rates of unemployment because of their high proportion of workers in sectors that usually felt the brunt of layoffs and wage decreases, such as manufacturing and construction; this time has been different (Chaney & Weber, 2020). Stephani Albanesis, an economics professor at the University of Pittsburgh jokes that “every recession is a ‘mancession’ except this one” (Chaney & Weber, 2020). When breaking down the cause of this unique instance in history, we must examine the context of the COVID-19 pandemic and what it has impacted the most strongly. As a result of social distancing and quarantine restrictions, the service industry (including the food industry, healthcare and nursing, or childcare) has felt the brunt of these economic shocks, many of which employ a large percentage of women -- about 77% according to Chaney & Weber (2020). This means that the unemployment rates within the service sector are higher than other economic sectors, which translates to workers within that sector as more replaceable, many of which are women. As explained by Dang and Ngugen (2021), “The COVID-19 pandemic differs from a typical economic recession since it can more strongly affect sectors with high female employment shares” (p. 1). Interestingly enough, this high proportion of women in the service sector created an opportunity for “women [to hold] a higher proportion of US jobs than men for the first time in nearly a decade;” however, since the pandemic and the disproportionate job losses, this proportion has flipped, such that men compose the majority of the workforce once again (Fuhrmans, 2021). This returns to how the unemployment rate is defined. As the rate is determined only by those actively searching for jobs, this higher number has both implications of progress for women composing a larger portion of the workforce, but also losing jobs involuntarily at a higher rate.

Figure 2: Sex and Race by Economic Sector, 2020

Source: US Bureau of Labor Statistics, https://www.bls.gov/cps/cpsaat18.htm

Looking to the future, we must consider the potential long-term implications of women leaving the workforce. Chaney (2020) argues that the decline in the female workforce could lead to a rise in household income inequality. In this day and age, it is difficult to support a family with only one income, increasing the number of households with two breadwinners. With an increasing number of women losing jobs as a result of the pandemic’s effect on the service sector, families are losing a second source of income (and sometimes their only source in the case of single parent households). Chaney (2020) explains that in past recessions, “married women... took jobs to offset lost wages when their husband or male partner was laid off… [but now] are less likely to seek work because their employment prospects are... limited.” In essence, the women who have left the workforce may be taking a more permanent leave than they initially realized. Economists have also discussed this disparity in context with a term called “hysteresis,” such that “the longer women remain out to the labor market, the harder it could be to return” (Chaney, 2020). This idea stems from the notion that being removed from the workforce results in a lack of practice and employment of certain skills required, causing women to be perceived as less hireable, or if they are hired, could be seen as less valuable, causing a drop in benefits or pay. This connects to the relationship between wages and the unemployment rate, as this concept is an example of bargaining power in the workplace; when the unemployment rate is low, workers have a higher bargaining power, which raises the efficiency wage required to retain workers. In the wake of the pandemic, unemployment rates are conversely low, resulting in low bargaining power and lower wages overall, since replacing a worker is relatively inexpensive for the employer. This means that even if women are able to find jobs, they are difficult to retain, and would not have the same financial support as prior. Finally, school and child care closures have also played a large role in women returning to work (Chaney, 2020). As Titan Alon, an economics professor at the University of California San Diego explains, “if you have to take care of your children eight hours of the day when they would have been in school… how could you literally work a full-time job as well” (Chaney, 2020). Overall, this pandemic has caused a recession unlike any other historically, in that women have felt an overwhelming brunt of the economic impacts, as the service sector has been disproportionately targeted. As economists continue to study the impacts of the pandemic, this disparity should be considered, especially in context of long-term impacts on the economy and women’s place within it.

Works Cited

Chaney, S. (2020, June). Women's Job Losses From Pandemic Aren't Good for Economic Recovery; Squeeze on jobs and continued child-care responsibilities are expected to pose setbacks to female employment as businesses start to reopen. Wall Street Journal.

Chaney, S., & Weber, L. (2020, May). Coronavirus Employment Shock Hits Women Harder Than Men; Women are more likely to work in vulnerable sectors like retailing and personal care. Wall Street Journal.

Dang, H. H. & Nguyen, C. V. (2021). Gender inequality during the COVID-19 pandemic: Income, expenditure, savings, and job loss. World Development, 140(105296). https://doi.org/10.1016/j.worlddev.2020.105296

Fuhrmans, V. (2021, March). International Women's Day Caps a Year Like No Other for Working Women; How women are coping with Covid-19 and the long-term impact the pandemic could have on their careers longer term. Wall Street Journal.