Labor market tightness during recessions

In their working paper, Anderson and Chang relate their research to other literature that addresses the aftermath of WWI, the 1918 influenza pandemic, and the 1920–21 recession. The authors also observe the behavior of the labor markets and the Federal Reserve’s monetary policy and its effect on the 1920–21 recession. As a result, the authors attribute the behavior of the U.S. labor market between 1918–21 to two key aspects: the 1920–21 recession and the public employment offices (created to match employees and workers to reduce labor market inefficiencies). In addition to helping address reoccurring unemployment among the workforce, the public employment offices help provide labor market data, such as the supply and demand of labor and the probability of getting hired. Using data from the New York public employment office, the authors examine data of labor markets before and after WWI by using the Labor Market Bulletin, which reported labor statistics from 1916 to 1921 for New York by industry-occupation group and gender, including counts of jobseekers, vacancies, job placements, and wages.

The authors found that during the mild recession of 1918–19 and the more severe recession of 1920–21, the federal government reduced fiscal spending, which maintained an easy monetary policy, and then tightened monetary policy. Naturally, a tight labor market would result in high employment and rising real wages. Immediately following the war, wartime restrictions ended and the demand for labor increased as households increased consumption. However, with monetary policy tightening, labor demand fell quickly and the economy fell into a recession. Labor supply remained stable while job vacancies decreased. Demand for labor decreased within manufacturing and industrial sectors, resulting in less job vacancies and openings. This recession disproportionately highlights the gender inequalities within the labor market. The sectors most affected by the recession were male dominated, such as manufacturing. And service sectors, which are more female dominated, were little affected.

From their findings, Anderson and Chang reveal that because inflation in 2022 has reached its highest level in the past 40 years, policymakers are worried about the economic recovery from the COVID-19 pandemic. By observing the economic conditions of a similar recession with macroeconomic qualities, however, analysts can better understand how to address the recession that has resulted from the COVID-19 pandemic. In addition, the authors conclude that tightening monetary policy under macroeconomic risks can unintentionally disrupt the labor market across sectors and genders.