Doomsday for bad bosses

Numerous stories have been written recently about how low-wage service businesses are struggling to hire workers, with bosses often placing blame on enhanced unemployment benefits. The disappointing April jobs report released last week inspired many commentators to echo this analysis: The post-pandemic recovery is slowing down because government benefits are too generous.

The business class is right to be scared. But it's not because the recovery is slowing.

The coming months are set to turn into a time of reckoning for bad employers. The unique dynamic of the pandemic recovery could prove quickly unsurvivable for companies that are inefficient, as well as those that offer low pay, toxic work environments, or abusive bosses.

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In the short term, the problem with the supply of workers is similar to the problem with almost every commodity during the pandemic, from toilet paper to lumber to chicken. A massive pandemic-induced drop in demand followed by a rapid, unpredictable increase in demand requires time for the whole system to adjust. Many young workers only just started being able to get vaccinated in April, so they're not fully protected yet. Meanwhile, schools and child care facilities still haven't returned to normal. In major cities like Portland and San Francisco, many schools only started reopening at the end of April. These support systems need to open and restaff before many parents can even start looking for work. The latest jobs report shows all the gains were effectively among men while 165,000 women dropped out of the workforce. Over the next few months, though, the dynamic will change.

Assuming the U.S. avoids the emergence of any new vaccine-resistant variants, the rapid rollout of the vaccines combined with the unusually aggressive government stimulus will likely create the first major recession which almost immediately transitions into full employment. Despite the pandemic causing massive job losses in the leisure and hospitality sector the average hourly earning in that sector is now back on trend to where it would have been without the pandemic. We could see a dynamic more like the end of WWII than the end of most recessions. Moody's is now projecting economic growth of 7 percent this year followed by 5 percent next year.

Reaching near full employment is normally not good for bad employers. Full employment normally causes businesses that are too inefficient to be able to raise pay, or those that have bad bosses, to eventually go under. They start slowly losing employees to other companies that can offer better pay or perks, and have trouble recruiting workers to fill those job vacancies. But in more normal times this is a relatively gradual process, thanks to status quo bias.

Most people are inherently reluctant to change things, even when it could be to their benefit. We see this dynamic everywhere. People rarely switch jobs, even though job switchers often end up making more money as a result. Studies have found millions don't refinance their mortgage, even though it would save them significant money with no downside. Similarly, people rarely switch health insurance even if it would be to their financial benefit. People often go with whatever treatment center their doctor refers them to, even if shopping around could save them hundreds.

The pandemic though has forced people to rethink their plans. Pew Research found two thirds of unemployed people are seriously considering changing the field they work in.

While status quo bias during past periods would potentially allow low-quality employers more time to adjust, that is not what we will see at this unique moment. The pandemic took the entire job market and gave it a big shake — the reshuffling that normally would take years is taking months or weeks. The rapid job and hour cuts, followed by rapid rehiring, has broken people out of old patterns and will force many to reexamine their options. Continuing to go to the same job day after day is very different psychologically than deciding to return to the same job after months of being away. We are watching examples in real time of low-wage companies realizing their only hope to stay in business is immediately becoming much better employers.

In addition, the government response to the pandemic has allowed many small inefficient businesses to continue to limp along. The Paycheck Protection Program (PPP) was designed to save businesses, like theaters, which would have been forced to go out of business by government public health restrictions, but it also inevitably provided a lifeline to many poorly run businesses that may have gone out of business or lost workers over the last year under normal circumstances.

Doomsday could be coming for bad bosses, exploitative companies, and inefficient businesses, and it could be coming much faster than many realize. We just need to hope that policy-makers don't misinterpret a unique dynamic as inflation instead of growing productivity.