Lawrence F. Katz: An Economic Emergency

This interview is part of a cross-disciplinary series examining the real and possible effects of the COVID-19 crisis.

Lawrence F. Katz is the Elisabeth Allison Professor of Economics at Harvard University and a research associate of the National Bureau of Economic Research. His work focuses on labor economics and the economics of social problems. As a Radcliffe Institute fellow in 2005–2006, he researched, with Claudia Goldin, The Race between Education and Technology (Belknap Press, 2008), a history of US economic inequality and the roles of technological change and the pace of educational advance in wage structure.

Over the course of your career, you’ve studied the US economy from various angles, including labor economics and the economics of social problems. How is this crisis different from past ones? 

The rapidity of the decline in US economic activity and employment associated with the COVID-19 pandemic and public health crisis over the past two months is unprecedented in my professional career and beyond anything we have experienced in our lifetimes. And the size of the decline in employment from February to April of 25 million (or 16 percent) and of consumer spending of over 20 percent since mid-March are astonishing and have not been seen since the Great Depression of the 1930s. This crisis differs from the economic crises and recessions of my lifetime in the public health imperative of explicitly shutting down operations in large parts of the economy where social distancing and remote work are not feasible. 

A large part of the decline in individuals at work and much of the decline in consumer spending are an essential feature of the public health response of social distancing to mitigate the epidemic. But the particular way that US policy and labor market institutions have shut down the economy has generated more unemployment than necessary, with the use of layoffs as opposed to alternative approaches of keeping workers connected to employers through furloughs and work-sharing policies, as have been used more successfully in some European economies. And the increases in unemployment and in economic distress have exacerbated preexisting US inequalities, with the burdens falling more on low-wage workers, minorities, and more vulnerable households and individuals, which has illuminated the problems with our fragmented and incomplete safety-net system. The increases in generosity of the unemployment insurance system—with pandemic unemployment insurance providing an extra $600 a week from the CARES Act unemployment insurance extensions—have become an important lifeline, allowing many families of unemployed workers to pay the rent, buy groceries, and provide some extra spending to support the economy. But too many unemployed workers have had a difficult time accessing unemployment insurance through our state-based system, with many states having antiquated computer systems and insufficient staffing. SNAP (food stamps) benefits have been the other lifeline to help keep those out of work afloat. But our social safety has too many holes, as seen in increasing reports of hunger and food insecurity. Furthermore—with schools closed and attempts at online learning—glaring inequalities in Internet access and having quiet environments in which children can work have been magnified.

The latest numbers show that upwards of 36.5 million Americans have filed for unemployment since a national emergency was declared. A recent poll shows that 77 percent of laid-off or furloughed workers expect to regain their jobs once stay-at-home orders are lifted. Is this realistic, and if not, what should lawmakers be doing to help the greatest number of people?

The official US unemployment rate increased from 3.5 percent in February to 14.7 percent in April, the highest level since the Great Depression. And the labor force participation rate fell by 3.2 percentage points in addition as some of those losing work exited the work force. One potential silver lining is that over 18 million of the unemployed surveyed consisted of individuals who consider themselves to be on temporary layoff or furlough and expect to be recalled to their previous job—78 percent of unemployed workers in the latest report are considered on temporary layoff. The good news is that economic recoveries are typically faster when a larger share of the unemployed are on temporary layoffs. On the other hand, my past work with Bruce Meyer has shown that unemployed individuals who initially view themselves as being on temporary layoff but who don’t get recalled to their previous job (i.e., end up being permanently displaced if their previous employer goes out of business or permanently closes their unit) end up experiencing the longest jobless spells and largest earnings losses. 

A major worry is that many (especially small and medium-sized) businesses are at risk of not surviving an extended pandemic downturn. Thus, a substantial share of those currently on temporary layoff are likely to become permanent job losers. We need to plan for this and will need to further extend unemployment insurance benefits to support this group, figure out ways to use their unemployment benefits to potentially subsidize a new job once a recovery starts, and provide support and guidance for retraining and education opportunities for displaced workers. We do have some encouraging evaluations using randomized control trials of effective sectoral employment training programs (with 20 to 40 percent earnings increase impacts) and of extended support from displaced workers from our Trade Adjustment Assistance program, and such programs will become key once the public-health situation permits an economic recovery.

With so many low-wage workers filling essential roles, do you see near-term momentum for movements that support these workers, whether in organized labor, among higher-minimum-wage advocates, or elsewhere?

The heroic and essential role played by so many low-wage workers in delivery jobs, grocery stores, food production, and care work—often without adequate personal protection equipment and without adequate voice and representation in the workplace—is increasingly highlighting the glaring inequalities in the US labor market and society. I do hope that the salience of the efforts and hardship of such workers will foster some momentum for increased hazard pay for such jobs in the short run and for increased worker rights to have a voice and union representation. The current situation shows that there are large public-health externalities—spillovers—to unsafe working conditions and that we all benefit if essential workers have access to sick pay, paid leave, and an ability to point out and correct unsafe conditions without being sanctioned. A longer-run strategy of raising pay in current low-wage jobs in the care sector and other essential sectors will need to combine a social recognition of the value of such jobs (and willingness to pay somewhat higher prices), some form of worker representation and sectoral wage bargaining yielding increased productivity and lower turnover from higher compensation, and improved training and education (from early childhood education to adult retraining opportunities) to increase the potential productivity of the least advantaged US workers in a manner similar to economies such as Denmark, which has much higher pay in these sectors. 

Interview was edited for clarity and length.