Fitch: Low-Wage Sectors Have the Steepest Uphill Climb

U.S. employment recovery from the pandemic is far from complete and largely unequal, with a new Fitch Ratings report illustrating how the pandemic is disproportionately hitting relatively lower-wage service jobs where human interaction is essential.

There are early signs of this labor market mismatch in some states. For example, although the labor market is very tight in Vermont and New Hampshire, it’s showing more slack in Hawaii, California and New York. Relatively low-wage service jobs in the leisure and hospitality sector (L&H) are accounting for a disproportionate share of these job losses, a disconnect that will likely remain in place through at least the end of next year.

“It would be hard to design a labor market shock that more drastically targeted low-wage workers. We’re seeing widening of existing inequalities and a rise in the risk of long-term labor force detachment and economic scarring in the most affected states,” said Fitch senior director Olu Sonola. “The segment of the population that has been unemployed for an extended period of time is most at risk for the impending government support cliff.”

This mismatch shines more of a light on the employment to population ratio (EPR), which Fitch views as a more holistic measure of disequilibrium than the unemployment rate because it combines the impact of both labor force participation and unemployment. South Dakota, Kansas and Mississippi are the only states that are now back to pre-pandemic EPR levels. 

However, Fitch reports that despite significant recovery, Mississippi, West Virginia and New Mexico have the three lowest EPR levels. “This suggests that that the long-term economic growth trajectory of these states will likely continue to be slower, relative to other states, absent offsetting productivity gains.” 

Three sectors have been the main contributors to job losses since February 2020: L&H, education and health services, and local government. These three sectors combined account for approximately 60% of total job losses as of June 2021, relative to February 2020 employment levels, reflecting the pandemic’s outsized effect on these sectors. 

Job losses in the local government sector are mostly concentrated in the public education subsector (approximately 70%). The pervasive nature of jobs losses related particularly to the L&H sector explains why demographic groups largely exposed 

to the L&H sector continue to significantly lag recovery in the broader economy. 

“The longer the employment recovery, the greater the likelihood of some labor market scarring due to long term unemployment (i.e. unemployment duration greater than 52 weeks),” the rating agency warns. “Long-term unemployment is more likely to lead to increased labor market detachment, potential loss of skills and ultimately a permanent decline in earnings, all of which may further pressure labor supply.”