MARCH 16, 2020
The odds of slipping into a recession are increasingly likely as the global coronavirus outbreak puts acute stress on the U.S. economy. That could be bad news for American workers, who may lose jobs by the millions in a downturn.
For those workers who don’t receive severance pay, the financial impact could be especially devastating.
“It’s really hard to predict how it’s going to play out,” said Wayne Outten, founder and chair of Outten & Golden, an employment law firm in New York, of the coronavirus fallout. “The ripple effect can be dramatic in so many different industries.”
The coronavirus, which causes a disease officially known as COVID-19, has spread rapidly around the globe since it originated in China late last year. More than 169,000 people have been infected worldwide, and more than 6,500 have died.
Financial markets have cratered. American life has come to a screeching halt, as schools and cultural institutions have closed, sports leagues have suspended their seasons, major events have been canceled and state officials have moved to ban large gatherings. Officials from major cities like New York have ordered bars and restaurants to close to limit community spread.
Economic cracks are beginning to emerge. Small-business owners are starting to report supply-chain problems and lost sales. The travel industry is reeling. Big oil and gas companies are slashing spending and cutting dividends amid a plunge in oil prices. Consumer spending has fallen as Americans pull back from their daily routines.
The coronavirus fallout has been so dramatic that many economists think the U.S. is headed for a recession. Some economists believe the recession has already begun.
“I wouldn’t be one bit surprised if when we look back at the data, it is decided … that the recession started in March,” Blinder, a former Federal Reserve vice chairman and now a professor at Princeton, told CNBC’s “Squawk Alley.”
Financial backstop lacking
Some reports have emerged that layoffs have already begun in businesses across the country.
Many workers don’t have an adequate financial backstop in layoff situations, experts said.
Half of U.S. adults expected to be living paycheck to paycheck this year and 53% did not have an emergency fund that covers at least three months of expenses, according to a financial planning survey conducted prior to the coronavirus outbreak by First National Bank of Omaha in Nebraska.
Federal law doesn’t require American companies to pay severance in the event of layoffs, leaving it up to the discretion of business owners.
A new law signed earlier this year made New Jersey the first state to require large employers to pay severance during mass layoffs.
The state mandates businesses pay a week of severance for each year of service, and that employers give 90 days’ notice — more than the federally mandated 60 days for some types of businesses. It applies to businesses with 100 or more full- or part-time workers laying off at least 50 people.
A large share — 90% — of businesses pay some type of severance to their employees, according to a 2019 survey conducted by Willis Towers Watson. However, that figure masks wide variations in how employers treat different types of workers.
For one, while some companies may pay several weeks of severance, others have more lax policies.
More than half of businesses — 56% — also don’t extend severance pay to all employees, according to a survey from RiseSmart, a human resources consulting firm.
Most of the benefits tend to go to higher-ranking employees instead of rank-and-file workers. Around 40% of officers, senior executives and managers are eligible for severance, whereas that’s only true for 19% of administrative and clerical workers, according to RiseSmart.
Nearly 40% of companies also require at least a five-year tenure for workers to qualify for any type of severance benefit, RiseSmart found.
And while the vast majority of companies pay some sort of severance to their full-time salaried employees, that’s only true for half of hourly part-time employees and three-quarters of hourly full-time workers, according to Willis Towers Watson.
“I think the odds are now heavily weighted toward there being a recession,” according to David Wilcox, a senior fellow at the Peterson Institute for International Economics. “That’s a not a sure thing at this point, but I think it’s better than an even-odds bet.”
To be sure, government officials are trying to head off economic disaster. President Donald Trump on Friday declared a state of emergency, which frees up financial resources to assist Americans affected by the outbreak.
The Federal Reserve slashed interested rates to zero over the weekend in an attempt to limit the economic damage — a measure not taken since the 2008 financial crisis. The House of Representatives passed a bill early Saturday morning aimed at offering aid to individuals struggling financially due to the coronavirus crisis. The Senate hasn’t yet scheduled a vote on the bill, which includes provisions around expanded unemployment insurance and paid sick leave.
New York Gov. Andrew Cuomo said Friday that the state would waive the seven-day waiting period for unemployment insurance. He also told utilities not to cut off electricity, gas or water service to those unable to pay their bills.
3.5 million jobs
The typical post-World War II recession has led the unemployment rate to increase about 2 to 2.5 percentage points, Wilcox said.
An economic downturn due to the coronavirus would put an abrupt end to the longest-running expansion in U.S. history. If it were like an average recession, it would translate to a roughly 6% unemployment rate (given today’s 3.5% rate, which is near 50-year lows).
That would mean about 3.5 million lost jobs, Wilcox said.
Recessions are often defined as two consecutive quarters of negative growth in gross domestic product, a measure of the country’s output.
During the country’s last recession — the Great Recession, the worst downturn since the Great Depression — about 8 million Americans lost their jobs.
Job loss during recessions doesn’t all come via layoffs, Wilcox said.
And rather than reducing the size of their workforce, businesses could instead cut employees’ hours and overtime pay. That approach could still strain workers’ finances but wouldn’t leave them jobless.
Recessions don’t impact Americans uniformly — workers in certain industries, such as hospitality, restaurants and food services, which tend to employ many younger workers under 40, are more likely than others to be laid off in the event of recession, according to Carter Price, a senior mathematician at the RAND Corporation.
Minorities and Americans with less education also tend to lose their jobs with greater frequency during recessions, Wilcox said.
“The economic cost, the burden of a recession, is very unequally distributed,” he said.