A service-based recession

The COVID-19 pandemic has caused one of the worst economic downturns in modern history. The World Bank projects a global 6.2 percent decline in income per person in 2020, as well as the first recorded contraction of the Global South economies taken as a whole.Footnote ³ As COVID-19 cases continue to rise around the world, and surge in the most populous countries of the Global South, it seems likely that economic conditions will worsen before they get better. Current estimates model the virus's economic effects as a single shock, but COVID-19 could produce multiple shocks, or endure as a chronic threat. As it stands in summer 2020, the current recession is already estimated to be more than twice as bad as the Global Financial Crisis of 2008/9.Footnote ⁴ That is surprising given that, this time around, coordinated central bank action prevented a global financial freeze. Instead of a crisis of finance, the world experienced a crisis of trade, with international trade levels projected to fall by an estimated 20 percent in 2020.Footnote ⁵ In many countries, the trade shock preceded the virus shock. For most people, this crisis will exceed anything in living memory.

Comparative work on the history of economic downturns helps put the current crisis in a longer-term perspective. In the past 150 years, only three worse recessions have been recorded: at the start of the First World War, during the early years of the Great Depression, and following the Second World War.Footnote ⁶ The Spanish Flu Pandemic occurred during World War I, but there is no other case of pandemic-induced global recession.Footnote ⁷ Of course, the real source of economic dislocation was not the pandemic itself but the government response to it: states instituted lockdowns without precedent in peacetime. As lockdowns went into effect around the world, a global downturn unfolded that saw more than 90 percent of countries go into recession.Footnote ⁸ Even the Great Depression left more countries unscathed than the current downturn.

Economic recessions are typically driven by downturns in investment. Consumer services usually stabilize economies that are otherwise contracting, since unlike purchases of consumer goods, purchases of services tend to remain relatively steady over the course of the boom-bust cycle. By contrast, pandemic lockdowns affected services above all.Footnote ⁹ As spending on services collapsed, and with it, the incomes of many service workers, a decline in consumer demand reverberated through the world's economies, with devastating consequences. The International Labour Organisation (ILO) estimates that in April, May, and June of 2020, 14 percent of all work hours were lost, equivalent to 19.2 billion hours, or 480 million full-time jobs.Footnote ¹⁰

A post-industrial workforce

More people's lives were upended by the 2020 pandemic lockdown than would have been true at any earlier point in history, since many more workers than ever before are employed in services. The downturn's depressive effects on working hours were amplified by a set of long unfolding global transitions, which will continue to shape the future of work worldwide. First, the world's urban population has expanded massively. Since 1970, the urban percentage has risen from 40 to 56 percent.Footnote ¹¹ This small relative increase hides a gigantic change in absolute terms: over the same period, the world's urban population increased from 1.4 to 4.4 billion people.Footnote ¹² In most of the world's countries, the prevalence of poor urban housing, often built on squatted land, makes it impossible for populations to self-isolate, since access to water, toilets, and living space has to be shared among many households.Footnote ¹³

Second, the world's urban transition has been accompanied by a shift in employment structures. In the 1980s, half of the world's laboring population was still engaged in agriculture, much of it traditional farming.Footnote ¹⁴ Today, around one quarter remains on the land, although many farming households earn the majority of their incomes from nonfarm activities. Yet, in spite of a global exit from agriculture, the world's industrial employment share has hardly risen. On the contrary, many developing countries, including Mexico, South Africa, and Egypt, deindustrialized “prematurely” after 1980; other countries never industrialized at all.Footnote ¹⁵ Worldwide, the industrial employment share has been falling for almost a decade.Footnote ¹⁶

The result has been a strong increase in service-sector employment, placing much of the world's workforce in precisely the sorts of jobs that have been most affected by the pandemic lockdown. In the richest countries in the world, like the United States and France, services already account for 70 to 80 percent of all employment.Footnote ¹⁷ Less well known is that services account for the majority of employment in many Global South countries, such as Brazil and Iran.Footnote ¹⁸ In fact, we are either just approaching or have passed the turning point at which services account for half of all employment globally.Footnote ¹⁹ Precarious urban workers in the world's low-wage service sector have suffered the most from the pandemic lockdown.

Faulty unemployment statistics

The world's service-sector based workforce lost work so rapidly in 2020 that it defied the capacities of statistical agencies to measure the severity of the decline. The form that this decline took revealed the weakness of the unemployment rate as a measure of work lost. “Unemployment” has long faced criticisms for its conceptual inadequacy in the face of a precariously employed workforce.Footnote ²⁰ As more workers have been absorbed into nonstandard employment with fewer job protections, the boundary between employment and unemployment has blurred. In 2020, the problem with the unemployment rate was different. Pandemic lockdowns have blurred the boundary between unemployment and economic inactivity.Footnote ²¹

For example, in the United States, the number of people filing for unemployment benefits each week hit incredible heights once the lockdowns began. Almost seven million workers filed for unemployment in late March 2020—far higher than any other value yet recorded—with many more millions filing in the weeks that followed.Footnote ²² The unemployment rate jumped from 3.5 percent in February to 14.7 percent in April, yet that was a severe underestimate.Footnote ²³ First, the latter figure did not register the large number of workers who kept their jobs but lost hours. Including those workers, the share of the labor force losing work rises to nearly 23 percent. Further distorting the unemployment rate, many people who lost their jobs due to the pandemic officially registered in labor statistics as “inactive” rather than “unemployed,” since they were not actively looking for work (at a time when there was clearly no work to be found). Economists at the Federal Reserve estimate the true unemployment rate in April was 30.7 percent, higher than the estimated peak rate of 25 percent recorded in 1933.Footnote ²⁴

In Europe, statistical issues with the unemployment rate took yet another form. States intervened to prevent mass layoffs of workers, rather than to provide unemployed workers with additional cash support.Footnote ²⁵ European workers on furlough continued to receive the majority of their wages but were paid by governments rather than businesses. The unemployment rate in the Eurozone hardly edged upward: from 7.2 percent in February to 7.3 percent in April.Footnote ²⁶ Yet in early May, an estimated 42 percent of workers in France and 23 percent in Germany were on furlough.Footnote ²⁷ It is unclear what percentage of European jobs are now “zombie jobs,” which continue to exist only because of state support: Allianz estimates that nine million workers, about one fifth of those currently on furlough, will lose their jobs when furlough programs end, causing unemployment rates to spike across the European continent.Footnote ²⁸

The global labor crunch

At the global level, few workers have access to government assistance, whether in the form of unemployment insurance or furlough payments. Approximately 70 percent of workers in the Global South are so-called “informal” workers; they do not pay into state insurance schemes and receive no benefits in turn.Footnote ²⁹ Statisticians developed the category of economic informality precisely because it was so difficult to get surveys of unemployment to furnish reliable data in this context.Footnote ³⁰ The world's informal workers have largely faced the pandemic storm alone. Their loss of work has been catastrophic. Many poorer households must spend the money they earn each day on the nourishment they need to survive to the next. In Manila, where 70 percent of workers lost their jobs due to the lockdown, incomes shrank by half in April, causing the majority of households to reduce spending on food.Footnote ³¹

The ILO estimates that worldwide, 1.6 billion informal workers lost 60 percent of their incomes in first months of the coronavirus crisis, reversing decades of poverty reduction and renewing the spread of hunger.Footnote ³² Comparing this 60 percent decline to the 6.2 percent decline the World Bank estimates for the world as a whole gives a sense of how unevenly income loss is being distributed. Populations are going hungry today not because food supply chains have broken down. Workers are simply not earning enough wages to buy the food they need to live.Footnote ³³ This is the crisis of a market society that temporarily shut down its markets and largely lacks alternative mechanisms of resource allocation.

The pandemic-led destruction of work has been particularly bad for women, who are overrepresented in activities such as retail trade, which the lockdowns hit hardest. Women are therefore likely suffering from a greater loss of income than men. Compounding this disruption, women have undoubtedly been forced to undertake the majority of the increase in unpaid care work demanded by the pandemic. More than one billion children were estimated to be out of school in Spring 2020.Footnote ³⁴ Especially in poorer countries undergoing demographic transitions (where there are more young children), women assumed an additional burden of care—to which was added the work associated with having other household members spend more time at home and the work involved in taking care of the sick and the dying.

A slow growing world economy

How long will it take for the world to recover from the pandemic recession, and how will that recovery shape the future of work? Much depends on whether it is possible to produce an effective vaccine, as well as on the time required to distribute it globally. Achieving immunity may require frequent booster shots (there is also the dire scenario in which an effective vaccine is never manufactured).Footnote ³⁵ In the meantime, economic recovery hinges on the success of each country in reopening businesses without reigniting the contagion's spread. A range of factors will prove critically important. One is the global financial system's stability, which the extraordinary actions of central banks have so far maintained. Another is the effectiveness of governments’ fiscal interventions. As of June 2020, about 10 trillion dollars USD had been spent worldwide to mitigate the crisis (equivalent to 11 percent of global GDP).Footnote ³⁶ However, 88 percent of that total was spent by advanced countries to stabilize their own economies.Footnote ³⁷ Spending in the rest of the world has been lower due to the constraints imposed by previously accumulated public debts, which were higher in 2020 than they had been facing the global financial crisis in 2009.Footnote ³⁸

Past accumulated debts are a sign that the coronavirus crisis did not attack an otherwise healthy economy, which could feasibly bounce back quickly if the pandemic could be contained. On the contrary, the pandemic arrived when the world economy was deeply in trouble. The advanced capitalist countries—where public debt levels already approached 100 percent of GDP before the pandemic struck—have been beset by worsening economic stagnation for decades. Organisation for Economic Co-operation and Development (OECD) member states saw average annual economic growth rates slow from 5.7 percent in the 1960s to 3.6 percent in the 1970s, 3.0 percent in the 1980s, 2.6 percent in the 1990s, and 1.9 percent between 2000 and 2019.Footnote ³⁹ The rapid expansion of the Chinese and Indian economies masked the tendency toward secular stagnation on the global level. However, starting in 2014, those fast growing economies began to slow too, causing global commodity prices to fall and worklessness to rise across the Global South.Footnote ⁴⁰ Brazil, South Africa, Turkey, and Nigeria were all struggling with rising or persistently high levels of unemployment and underemployment before the 2020 global downturn.Footnote ⁴¹

Economies the world over—already facing strong headwinds due to slowing economic growth rates—will now be beset, as well, by the legacies of a global pandemic. As the World Bank emphasizes, COIVD-19 will intensify the “weakness in private investment” that has already “been a feature of the past decade,” further depressing economic growth rates worldwide.Footnote ⁴² What limited evidence there is suggests that pandemics tend to have a long-term, dampening effect on economic growth rates, as sickness leaves legacies of death, loss of income, and accumulated debts.Footnote ⁴³ The implication is that recovery will take a long time.

Overcrowded markets and jobless recoveries

The increase in the global service-sector employment share, which left so many workers susceptible to losing hours, will make the recovery of those hours more difficult to achieve. In a sense, the global economy has proven a victim of its own success. Suppliers in more and more countries have built up productive capacity in agriculture and industry, making for crowded global markets.Footnote ⁴⁴ As new investments slowed, so too has the growth of employment in agriculture and industry.Footnote ⁴⁵ Workers the world over have been pushed out of those tradable economic sectors and into nontradable services, which are protected from global competition by their nature. Even countries that appeared to be relatively early in the process of economic development, when taken in isolation, began to deindustrialize prematurely in the 1980s, since those countries were actually part of a larger global economy and were subject to market forces associated with an intense competitive environment (Global South countries were additionally disadvantaged by the imposition of International Monetary Fund-led structural adjustment).

With global industry and agriculture beset by overcapacity, it was increasingly left to services to drive the economy. However, as economist William Baumol explained in the 1960s, services are in large part a stagnant economic sector.Footnote ⁴⁶ Unlike manufacturing during its heyday, most services do not exhibit dynamic patterns of expansion driven by high rates of labor productivity growth and falling prices. Instead, increases in the demand for services generally depend on spillover effects from productivity-enhancing innovations occurring in other economic sectors. There is a clear link between the global expansion of the stagnant services sector and the ever-worsening stagnation of the wider economy. In the years to come, average economic growth rates will fall further, due to the legacy of the COVID-19 pandemic shock.

The likely outcome is that work in the future will look much like it has in the recent past, only worse. In slow growing economies, the demand for labor is weak. Even when economic contractions officially end, few new jobs are created, leaving all workers in a worse bargaining position vis-a-vis employers.Footnote ⁴⁷ Under these conditions, workers are forced to accept low wages and poor working conditions as the condition of working at all, making for an economy shaped to an ever greater extent by the whims of business managers and asset owners, without any input from the workers they employ. Businesses have taken advantage of labor's weak bargaining position to build cost-cutting, lean-and-mean global supply chains.

Facing falling tax revenues and higher levels of public debt, governments have engaged in cost-cutting measures as well, periodically visiting austerity on health and education, as well as urban and other social services.Footnote ⁴⁸ The result, in many countries, has been a reduction in hospital beds, or a failure to invest in them in the first place. Urban housing remains, for many people, poorly constructed, crowded, and ill served. The world economy was not only unprepared for a global pandemic; many countries became less prepared over time, even as rising meat consumption and international travel made a global pandemic like COVID-19 more likely.Footnote ⁴⁹ A world economy run on a shoe string budget needs long-tail crisis events like this one never to occur even as it makes their occurrence all but inevitable.

The future for working people

The future for labor looks bleak. As Dani Rodrik and Stephanie Stantcheva argue, firms will continue to find no reason to give workers a say in “decisions about employment, investment, and innovation,” with the result that an increasingly underemployed workforce will be left to deal with legacies of “broken families, substance abuse, and crime” in societies marred by “declining trust in government, experts, and institutions.”Footnote ⁵⁰ Facing up to another decade of labor insecurity will be particularly difficult for workers under forty years of age, for whom the 2008 global crisis came at an early point in their working lives. Valerio Lofoco, a thirty-one-year-old university graduate who has been waiting tables and delivering food to get by, told the Financial Times, “I was in my twenties when the economic crisis hit in 2008. This is the second global crisis facing my generation since I entered the job market.”Footnote ⁵¹ How can workers like Lofoco be expected to face down another lost decade? The last crisis had a long-term negative effect on their lifetime earnings.Footnote ⁵² The present crisis will be more punishing.

Meanwhile, the climate crisis is likely to deliver its own economic shocks before a full recovery from the pandemic crisis is achieved. Acknowledging the impossibility of continuing business as usual, even the World Economic Forum in Davos is calling for a “Great Reset” of global capitalism in response to the COVID-19 crisis.Footnote ⁵³ However, governments are unlikely to enact the changes that a true reset would necessitate—above all clawing back wealth from the world's richest families to invest in health, housing, food, and energy security for the world's poor. Increasing the autonomy of those with the least economic and political power at the expense of those with the greatest will be a hard sell even with Davos's blessing. Still, economic stagnation and high levels of social inequality remain a potent brew. Over the proceeding decade, many countries have seen peaceful protest movements give way to more directly confrontational struggles.Footnote ⁵⁴ We can expect more of the same in the 2020s.