More Economic Effects of Our Ongoing Covid Pandemic (with Cognitive Dysfunction and the Labor Market) | naked capitalism

By Lambert Strether of Corrente.

Previously in this series of round-ups, we looked at Covid and global GDP, as well as GDP in various counties; at the effects of interventions, pharmaceutical and not; and at “belief scarring,” a form of hysteresis. That was January; in February, we looked at labor force participation, as well as the quality of the labor force, positing that cognitive dysfunction from (often repeated) Covid infection degraded skills. This month we will repeat and expand on these themes, first looking at the so-called post-Covid economic recovery, then at Covid and the labor market and labor force participation, and finally at Covid and cognitive dysfunction in skilled workers, especially pilots.

The Economic Recovery from Covid

The Center on Budget and Policy Priorites has released (April 2024) “Chart Book: Tracking the Recovery From the Pandemic Recession.” For those who remember the brutal “recovery” frpm the Great Financial Crisis under Obama:

Real gross domestic product (GDP) early in the pandemic fell abruptly to 9 percent below its level at the start of the recession — a much steeper decline than the nearly 4 percent drop in the deepest part of the Great Recession. But the recovery and relief legislation enacted in March and April 2020, plus the relaxation in May of some restrictions on economic activity, led to a sharp (though partial) bounce-back in GDP in the third quarter of 2020. Subsequent relief and recovery legislation enacted in December 2020 and early 2021 gave the recovery an added boost.

As a result, real (inflation-adjusted) GDP surpassed its pre-recession peak in the first quarter of 2021, less than a year after the trough of the recession. GDP rose above the Congressional Budget Office’s (CBO) February 2024 estimate of potential GDP — the high-employment, maximum sustainable level of GDP — from the third quarter of 2021 through the first quarter of 2022 and then again in the third and fourth quarters of 2023. In the Great Recession, in contrast, GDP didn’t surpass its previous peak for two years and the actual-potential gap did not close until the third quarter of 2018, more than eight years after the recession ended.

Here is a handy chart:

And regarding the labor market (of which more shortly):

Like GDP and payroll employment, the official measures of household employment and unemployment… improved faster than initial projections. This is especially impressive because, as discussed below, some of these measures failed to fully capture the amount of labor market slack — that is, excess joblessness and underemployment — in the depths of the recession and early in the recovery.

Employment normally recovers more slowly than output after recessions, usually because employers are uncertain about how permanent an increase in demand for goods and services will be and they have an underutilized existing workforce they can use initially to meet an increase in demand. Until recently, however, labor markets in the current recovery were tight, with demand for workers growing faster than the supply.

This is what the economists are saying, of course. Your mileage may vary — and apparently that’s true for a lot of people. (For those of us who remember how Obama butchered his agonizingly slow recovery, today’s economy may seem preferable.)

Covid and the Labor Market

The Brookings Institution has published (March 2024) “The US labor market post-COVID: What’s changed, and what hasn’t?“, which is a report from a conference held in January with about 40 leading labor economists. There’s a lot here, and I picked out two nuggets. On wages:

After decades of growing wage inequality, the post-pandemic period has seen a substantial decrease in earnings dispersion between the 10th and 90th percentiles. However, participants noted that this reduced inequality is confined to those at the very bottom: Workers at the median of the earnings distribution, who have also been losing ground relative to the top decile for decades, have not seen gains post-pandemic.

Participants noted that, in typical business cycles, low-wage employees experience higher earnings when the economy is strong because they work more hours, not because their wages increase, making the wage compression during the COVID episode atypical….

Brad Hershbein of the Upjohn Institute noted that while wages have grown fastest for very low-wage workers, inflation has likely grown fastest for them as well, because they are more likely to spend a high proportion of their income on goods whose prices have risen the most since COVID-19. Steven Davis showed charts using data from the Atlanta Federal Reserve Wage Growth Tracker and the Employment Cost Index, published by the Bureau of Labor Statistics, in which inflation-adjusted compensation is, if anything, a little below its pre-pandemic level. Other economists took issue with the specific measures he chose and insisted the picture was less pessimistic. More generally, the participants agreed that using different measures of inflation and wages can significantly change one’s findings about the trends in real wages growth in recent years.

Weak wage growth across the board despite a tight post-pandemic job market puzzled many in the room. Ball hypothesized that goods whose prices increased due to supply shocks may have fed into inflation without putting upward pressure on wages. Some reiterated that the real wage declines could be partially explained by the non-pecuniary benefits offered to workers through remote work. Others pointed out that the labor market may not be as tight as suggested by recent increases in payroll growth because a surge in immigration has increased labor supply in the past two years.

And speaking of immigration, this chart from a presentation in the second session:

The economists don’t discuss the causes of the pre- and “post”-Covid discontinuity, but it’s hard to imagine that a million deaths and a mass disabling event didn’t create demand for foreign workers.

Fortune points out (April 2024) that “The number of job vacancies around the world is still unusually high–and there is no end in sight to the global labor shortage“, so it’s not just us:

In addition to an aging world, the Great Resignation was real, with many workers having left the workforce since the pandemic. In the U.S., an unprecedented 50 million workers stepped down in 2021 and 2022, reflecting a growing dissatisfaction with work following the COVID-19 pandemic. Although initially perceived as predominantly an American trend, the data suggest that this general dissatisfaction has spread to other parts of the world. France witnessed a record 2.7 million voluntary resignations in 2022, with similar trends observed across Europe, though Asia saw a decline in resignations. In Australia, there are growing signs of similar worker discontent. And even in the U.S. where quit rates have recently fallen, certain industries like personal care services continue to report higher-than-average resignation rates.

The labor shortages we observe can partly be traced back to the devastating impact of COVID-19, including the lingering effects of long COVID. In the U.S., the workforce has not only mourned the loss of over a quarter-million working-age individuals to the virus but has also seen a lasting reduction, with a figure more than twice as large across various age groups withdrawing from employment. Particularly affected were migrant communities, which suffered higher COVID-19 mortality rates, further exacerbating the decrease in available migrant labor.

Following the pandemic, a pronounced shift in work preferences has emerged, with a growing demand for reduced hours, enhanced flexibility, and better work-life balance. In the U.S., a substantial number of employees, for whom resignation isn’t a viable choice, have voiced a clear preference for more flexible working conditions, remote opportunities, and improved work-life balance–an enduring legacy of the pandemic’s impact on workplace norms.

The National Association of Manufacturers (NAM) also exhibits (March 2024) a welcome sense of realism, writing “Increase in Long COVID Cases Could Continue“:

A recent increase in cases of long COVID—the continuation or appearance of virus symptoms months after initial infection—could go well into this year, according to Medscape.

“About 17.6% of those surveyed by the Census Bureau in January said they have experienced long COVID. The number for February was 17.4[%]. Compare these new numbers to October 2023 and earlier, when long COVID numbers hovered between 14% and 15% of the US adult population as far back as June 2022.”

Researchers and clinicians say they are also seeing an increase in long COVID cases among patients who have had the virus two or three times.

The numbers could be even higher, however. In many cases, people either test positive at home or don’t know they have COVID-19.

NAM doesn’t explain why it’s concerned in this piece, but published “‘Long COVID’ Casts Long Shadow Over Workforce” in 2022.

Covid and Labor Force Participation

The Federal Reserve Bank of San Francisco published (March 2024) “To Retire or Keep Working after a Pandemic?” It includes this claim:

Before the pandemic, the rate of participation in the labor market for workers age 55 and older had remained fairly stable since 2012, at around 40%. At the onset of the pandemic, the rate abruptly stepped down to a new lower level, with no indication that workers would return to prior levels of active participation in the labor market. This description, however, masks a significant difference across this age group according to workers’ level of educational attainment.

The data in Figure 3 show that nearly all the surge in retirements around the arrival of COVID-19 is explained by the behavior of people age 55 and older without a college degree.

A further breakdown of the data (not shown) reveals that this rising share of retirements among workers without a college degree age 55 and older is similar across men and women and is concentrated among white individuals. The shares of retirements in 2023 among Hispanic and Black workers approximately align with their respective pre-pandemic trends. Other research suggests that this may be due to higher wealth saved for retirement among White workers compared with workers of other races and ethnicities, in combination with the safety and physical concerns associated with the occupations of workers without college degrees (Montes et al. 2022).

Meanwhile, the Federal Reserve Bank of St Louis had published (Q1, 2024) “Pandemic Labor Force Participation and Net Worth Fluctuation.” From the Abstract:

The US labor force participation rate (LFPR) experienced a record drop during the early pandemic. While it has since recovered to 62.2 percent as of December 2022, it was still 1.41 percentage points below its pre-pandemic peak. This gap is explained mostly by a permanent decline in the LFPR for workers older than 55. This article argues that wealth effects driven by the historically high returns in major asset classes such as stocks and housing may have influenced these trends. Combining an estimated model of wealth effects on labor supply with micro data on balance sheet composition, we show that changes in net worth caused by realized returns explain half of the drop in LFPR in the 2020-21 period and over 80 percent of “excess retirements” during the same period.

We have “nearly all” from the San Francisco Fed vs. “half” from the St Louis Fed, but from a narrative standpoint, the idea that older working class whites who had some money socked away in the house got out while they could seems to be consistent with both papers. Perhaps if we have some real economists in the readership they can comment!

Covid and Cognitive Dysfunction in Skilled Workers

The idea that our ongoing and unchecked Covid pandemic has created a mass disabling event seems to be slowly penetrating the public mind. Here for example is a Saturday Night Live sketch:

I can’t tell you how many stories like this I’ve read on the Twitter; and I’m sure if I followed Covid on Reddit, I would say the same. Meanwhile, the science on Covid (post- or Long) continues to pop. From Nature (February 2024) “Insights into attention and memory difficulties in post-COVID syndrome using standardized neuropsychological tests and experimental cognitive tasks“:

The COVID-19 pandemic has given rise to post-acute cognitive symptoms, often described as ‘brain fog’. To comprehensively grasp the extent of these issues, we conducted a study integrating traditional neuropsychological assessments with experimental cognitive tasks targeting attention control, working memory, and long-term memory, three cognitive domains most commonly associated with ‘brain fog’. We enrolled 33 post-COVID patients, all self-reporting cognitive difficulties, and a matched control group (N = 27) for cognitive and psychological assessments. Our findings revealed significant attention deficits in post-COVID patients across both neuropsychological measurements and experimental cognitive tasks, evidencing reduced performance in tasks involving interference resolution and selective and sustained attention. Mild executive function and naming impairments also emerged from the neuropsychological assessment. Notably, 61% of patients reported significant prospective memory failures in daily life, aligning with our recruitment focus. Furthermore, our patient group showed significant alterations in the psycho-affective domain, indicating a complex interplay between cognitive and psychological factors, which could point to a non-cognitive determinant of subjectively experienced cognitive changes following COVID-19.

No wonder people’s performance on the job is affected. From Nature (April 2024), “Long COVID still has no cure — so these patients are turning to research“:

In the weeks after her initial COVID-19 infection, Hannah Davis found herself struggling with severe brain fog, to the point at which she could barely string two sentences together. Davis, who at the time was working as a data analyst and artist, with a particular focus on addressing biases in machine learning, kept waiting for her cognitive function to go back to normal, only for it never to return. ‘I had, and continue to have, terrible, terrible cognitive impairment,’ says Davis, who is one of the co-founders of the [Patient-Led Research Collaborative (PLRC)]. Brain fog is having a significant impact on people’s livelihoods, says Wes Ely, a physician-scientist who works in intensive care at Vanderbilt University Medical Center in Nashville, Tennessee. People with long COVID have a form of cognitive impairment that is often ‘like mild and moderate dementia’, he says.

One industry where cognitive functioning is especially important is the airline industry; not only air traffic control (here; here), but on pilots. Alert reader JB threw the following over the transom. From the Public Health Communications Centre in Aotearoa, NZ (March 2024) “Long Covid in Aotearoa NZ: Risk assessment and preventive action urgently needed“:

The frequency of (often undiagnosed) cognitive impairment after a mild infection indicates a need for risk assessment of impacts on occupational safety and performance. Occupations of particular concern because of safety implications include healthcare workers, airline pilots, electricians, truck drivers, and first responders.

JB comments:

It’s clear to me this language is going to spread. And with good reason. Especially if the crash in NC where 8 souls were lost is affirmatively attributed to a pilot who had once contracted COVID19[1]. Meaning, he lost control and killed himself and 7 others due to suffering from the effects of PASC (long-COVID). If this is ever determined to be the proximate cause, all Hell is going to shake loose. And not just for pilots, but drivers, and anybody who’s hand-eye coordination is part of the deal – think crane operators, commercial divers, demolition experts, miners, etc.

Meanwhile, as you may know, I’m a pilot and job one before a flight is to self-certify that I’m good to go. Means if I don’t feel well, or am hung over, have taken some drug that may poses a risk of me falling asleep (antihistamines being an example), then *I* must decide if it’s better to postpone the trip. This is the meaning behind self-certify – there’s no *mother may I* – mechanism. It’s 100% on me as the pilot in command (and this is the language – PIC – pilot in command) to make the determination.

Really, this is no different, if you think about it, than what we as drivers decide before taking the wheel. Except unlike in pilot training, I don’t recall in Driver’s Ed. actually being taught this (beyond the obvious, don’t drive and drunk – and not even sure that was mentioned, e.g. it was implicit). Ditto regarding the wisdom of driving whilst feeling sleepy. However, with pilots, it’s specifically taught. It’s a responsibility that comes with the territory and which I, for one, take quite seriously (and this seriousness is shared, I’m pretty certain, by all pilots).

Yes, *all* is doing some heavy lifting in that last sentence. So do they all take it as seriously as me? Nope! No more so than all drivers will never take the wheel whilst drunk. But we are (we being collectively, the pilot population) taught to self-certify and I believe, we’re doing the best we can. Do some break the rules? Definitely, recall recent news of some airline pilot being dragged off a flight as unfit for duty due to being *very* hungover.

Problem (predictably) is going to arise in the adversarial relationship between FAA and pilots. Similar to the adversarial relationship between commercial pilots and their employers (reason an unfit pilot thought he could depend on his copilot to perform the duty whilst he slept it off). Had he raised his hand, e.g. called dispatch and said he was sick or otherwise unfit, he’d soon lose his job.

Added to which, there are economic consequences for losing a pilot’s license just as there would be for a commercial trucker losing his CDL (commercial driver’s license). Outsized consequences as in meaning they wouldn’t be able to earn a living so in addition to the rest of their bills, they may be on the hook for payments for the truck/airplane, etc. Since nobody will make them whole, they’re going to cheat the system. Human nature.

Also, people aren’t necessarily aware that they are cognitively impaired. That’s human nature too. I imagine when executive jets start colliding or falling out of the sky, some notice will be taken. So, optimism.

Conclusion

I keep toying with the slogan that “the only market is the labor market.” If you can’t get workers because of a labor shortage, or if the workers you can get are cognitively impaired, your business is at the least under stress, and might go under (think Boeing and MCAS, except with cognitive impairment). In other words, the labor market is — or at least can be — material. From ginormous accounting firm KPMG, “COVID-19 and income statement presentation and disclosure“:

Under IAS 11, when items of income or expense are material, a company discloses their nature and amount separately, either on the face of the income statement or in the notes. A company’s approach for COVID-19 will depend on its ability to determine the impacts on a non-arbitrary basis (i.e. quantify them reliably) and on the pervasiveness of those effects to the financial performance of the company.

Quantifying the impacts of COVID-19 on a non-arbitrary basis may require significant judgment – distinguishing between income and expenses that are part of normal operations versus those that specifically relate to COVID-19. As a company adjusts its operations to the new reality, making that cut is becoming more and more challenging. If the impacts cannot be determined on a non-arbitrary basis, we believe the company should not present them on the face of the income statement, but consider disclosure in the notes, providing quantitative (when possible) and qualitative information and stating whether only some, or all, of the effects have been identified.

In some cases, a company may be able to determine the impacts of COVID-19 but find that they are pervasive – e.g. affecting nearly all line items of the income statement. In that case, we believe it may be impracticable or less meaningful to present the impacts on the face of the income statement. Instead, the company should consider disclosing them in the notes.

From a purely business perspective, since the damage from repeated Covid infection is cumulative, it might make sense for companies to address (“quantify”) potential cognitive dysfunction in the workforce sooner rather than later (ditto, from the other side of the house, hedgies and shorts). Pilots, surgeons, nuclear power plant operators…

NOTES

[1] See here from AP: “The pilot of a small plane that crashed off North Carolina’s coast in 2022, killing the pilot, four teens and three other adults, was likely distracted while trying to program the aircraft’s flight management system.” Oh.