THE FOCUS (3/26/2021)

LABOR MARKET: The Great Recession vs the COVID Pandemic

The Great Recession and the COVID pandemic share some similarities in terms of their impact on the labor market


By Republic Report

The Great Recession and the COVID pandemic share some similarities in terms of their impact on the labor market. The Great Recession started in December 2007 and lasted through mid 2009. However, its negative impact on the labor market was still in effect until 2010 where the unemployment rate continued to climb at 9.6% before declining to 8.9% in 2011. For the purpose of this labor market analysis, we use the period of the Great Recession from the end of 2007 to 2010 and the pandemic from late February to December 2020.

During the Great Recession, the unemployment rate increased by 5 percentage points, from 4.6% to 9.6%. While the coronavirus outbreak started in China in late 2019, the pandemic began in the US in late February 2020. During the month, the unemployment rate was 3.5%, one of the lowest in US history. The unemployment then went on a roller coaster ride to reach an average of 8.1% in that year, or at 4.6 percentage points higher than the pre-pandemic level.

In terms of the number of people unemployed, during the Great Recession, there were 7.75 million people in the labor force who were unemployed, which was about 500K higher than the 10 months of COVID pandemic in 2020—7.23 million people.

The second important labor market indicator is labor participation rate which measures the percentage of the working-age population who are in the labor force. One of the interesting aspects of the US labor market is the labor participation has continued to decrease since the Great Recession, from 66% in 2007 to 61.7% in 2020. The “loss” in 4.3% of the participation rate translates into about 11.1 million among the working age population who have decided not to be participating in the labor force since 2007.

During the Great Recession, the number of working age population who were not in the labor force jumped by 5.2 million. Within 10 months of the COVID pandemic, this number sharply increased by 4.4 million. This indicator is a measure of how tight the labor market is. If the labor market is rosy, the number of working age population who will quit or not participate in the labor force will be lower than in the tight market. For instance, from February 2019 to February 2020 when the labor market was rosy, the number of working age population who were not in the labor force actually decreased by 180K.

Another labor market indicator is the proportion of employed working age population (EP). During the Great Recession and the COVID pandemic, the percent of EP dropped by 5 and 4 percentage points, respectively.

The severity of the labor market on employment can be proxied by the proportion of unemployed who remain unemployed for more than 27 weeks. During the Great Recession, the percentage of unemployed who were unemployed for more than 27 weeks increased by 16.4 percentage points, from 9.9% in 2007 to 6.3% in 2010. During the COVID pandemic, the proportion increased by 17.8 percentage points, from 19.3% to 37.1%.

Let us assume that the decrease in the labor participation rates of 1.3% during the Great Recession and 1.6% during the pandemic was because the unemployed quit the labor market as they gave up looking for jobs. We can call them “discouraged” workers. By adding the “discouraged” workers, the total unemployment at the end of the Great Recession in 2010 were 17.92 million. At the end of December 2020, the total unemployment was 18.67 million. The unemployment rate at the end of each period was 8.6%.


It took less than one year for the COVID pandemic to turn a highly prospective labor market in 2019 and early 2020 into one during the first three years after the Great Recession commenced in December 2007. The Great Recession was caused by poor fundamentals of the economy, notably in the housing market, while the pandemic was caused by sudden disruption in the economy-wide production due to the lockdown and restrictive protocols.  Whether the current labor market will rebound slowly such as the one during the Great Recession or not it depends on how fast the economy, in all sectors, will be fully reopened nationwide.