Introduction and summary
The economic crisis triggered by the COVID-19 pandemic raised extraordinary challenges. Stemming the spread of the coronavirus required the shutdown of large segments of the U.S. economy and caused unprecedented changes to nearly every aspect of American life. Building off the lessons learned from the response to the Great Recession and motivated by the unique considerations of a global pandemic, lawmakers approved a massive federal response that protected the economic security of families and communities, mitigated the impact of the downturn, and—by enabling many workers to stay home during the bleakest moments of the pandemic—saved tens of thousands, if not hundreds of thousands, of lives.
The U.S. economy recovered swiftly and strongly from the pandemic-induced downturn, with employment surpassing its pre-pandemic peak in record time. By August 2022, the economy regained all the jobs that had been lost since April 2020.1 In contrast, it took 76 months for employment to reach its pre-recession peak after the Great Recession. Importantly, recent wage and job growth has been strong among those who fared the worst after the Great Recession: young, low-wage, and nonwhite workers. The labor market’s speedy rebound is important. Research on the Great Recession suggests that the subsequent slow recovery, with the economy taking years to return to full employment, not only inflicted pain on workers during those years, but also left scars. As discussed below, persistently weak labor markets following the Great Recession led to negative employment and earnings outcomes and widening inequality that continued long after the downturn ended.2
The emergence of high inflation in the United States and around the globe has sparked discussion as to whether pandemic relief efforts overheated the economy, fueling recent price hikes. The causes of rising inflation largely reflect problems on the supply side of the economy, including disruptions caused by Russia’s war in Ukraine, import bottlenecks due in part to the ongoing impact of the pandemic, and changes in consumer spending patterns due to the pandemic.3 Economists will debate the extent to which the magnitude of federal pandemic relief contributed to rising inflation. But while inflation has taken a real toll on the economic well-being of American families, it is critical to acknowledge the enormous short- and long-term benefits resulting from the federal response to the pandemic, which set the stage for a robust and rapid recovery, while providing a lifeline for families during the worst of the crisis. Overly aggressive action by the Federal Reserve to stem inflation at this point could induce a recession that could reverse the benefits of recent gains and cause greater harm to those who can least afford it.
Overly aggressive action by the Federal Reserve to stem inflation at this point could induce a recession that could reverse the benefits of recent gains and cause greater harm to those who can least afford it.
This report reviews the evidence documenting the lasting harm, or scarring, associated with severe and lengthy economic downturns. It then contrasts the current recovery to that following the Great Recession, with a particular focus on indicators central to families’ economic well-being and on those populations most affected by the long-term consequences of the slow recovery following the Great Recession. This comparison shows that the lessons learned from the prior downturn regarding the importance of the size and structure of fiscal policy response, which informed the development of federal COVID-19 relief measures, helped fuel rapid job growth while protecting economic well-being in the wake of the unprecedented and pandemic-induced downturn.4 It is important to underscore that neither the pace nor the magnitude of the recovery was a foregone conclusion. The lingering impact of the pandemic and its related impacts on the economy had the potential to prolong the recession. Continued fiscal relief helped bolster demand and ensured that the recovery did not falter.5
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The Great Recession’s lingering effects destabilized the economic well-being of many workers and families
The Great Recession, which lasted from December 2007 through December 2009, inflicted deep and lasting harm on the U.S. economy, workers, and their families. The crisis, which began in the financial sector and spread across the economy, resulted in 8.7 million workers losing their jobs and slowed wage growth, particularly for those at the middle and bottom of the earnings distribution.6 The downturn disproportionately affected young workers entering the labor market during the downturn, older workers nearing retirement age, and those who lost homes and/or savings due to the collapse of the housing market.
Policy inventions, including the American Recovery and Reinvestment Act signed into law by President Barack Obama shortly after he assumed office, pulled the economy out of its free fall and helped spur an economic recovery. However, the infusion of federal funds was short-lived compared with past severe downturns, and, in 2011, budget reductions enacted in response to congressional Republicans’ demands significantly cut federal discretionary spending.7 Concerns over rising deficits prompted similar pivots toward austerity in other major economies.8 Together, these actions slowed the nascent recovery both in the United States and abroad. In the wake of the crisis, broad consensus emerged that the depth and length of the Great Recession was exacerbated by fiscal stimulus that was too small and too short-lived.9 As a result, the recovery took longer and was weaker than it might otherwise have been, causing more lasting harm that continued long after the recession formally ended.
During the past decade, researchers have examined the impact of the Great Recession and the effectiveness of policy actions designed to address it, drawing lessons that lawmakers could use to inform future policy deliberations.10 This research reaffirms the importance of fiscal policy as an effective tool for minimizing the depth and length of a downturn and for minimizing the risk of long-term harm to workers’ employment prospects and families’ economic security. Policymakers applied these lessons by enacting a robust fiscal response when the economy fell into recession due to the COVID-19 pandemic, including two major relief measures enacted in 2020 and the American Rescue Plan Act (ARP), enacted in early 2021. As this report documents, these decisive interventions were critical, not only in cushioning the impact of the pandemic and kick-starting recovery, but also in averting the kinds of long-term harms inflicted by the slow recovery from the Great Recession.
The pandemic-induced downturn was shorter, but deeper, than the downturn caused by the Great Recession
The onset of the COVID-19 pandemic led to a swift and sharp drop in economic activity as government restrictions imposed to limit the spread of the virus and protect public health shuttered businesses and kept all but essential workers in their homes. The 9.3 percent drop in gross domestic product (GDP) recorded in the first quarter of 2020 far exceeded that of all other downturns in the post-World War II era.11 Employment plummeted overnight—falling by 22 million—as large swaths of the economy shut down to minimize the spread of the virus.12 As a result of a combination of federal policies to protect families and businesses, and the gradual reopening of the economy, the COVID-induced recession was also the shortest of the post-World War II period, returning to growth in May 2020. By January 2021, nominal GDP had surpassed its pre-pandemic height. In contrast, it took more than twice as long for GDP to recover in the wake of the Great Recession.13
The Great Recession inflicted lasting harm on many workers and families
The effects of the Great Recession lingered long after the recession had formally ended, exacting a severe toll on American workers and the economy:
- The U.S. unemployment rate remained high for an unusually long period of time. After rising 5.6 percentage points between mid-2007 and late 2009, from a pre-downturn low of 4.4 percent in May 2007 to 10.0 percent in October 2009, the unemployment rate took 10 years to return to pre-recession levels.14 The Black or African American male unemployment rate peaked at 19.3 percent in March 2010, meaning that 1 of out of every 5 Black men in the labor force were unable to find work.15 It took just short of 10 years for the unemployment rate for Black men to return to its pre-downturn low.16
- While the overall unemployment rate for prime-age workers—those aged 25 to 54—rose by 5.5 percentage points, from a pre-downturn low of 3.5 percent in March 2007 to 9.0 percent in October 2009, the unemployment rate for 20- to 24-year-olds rose by 8.9 percentage points from its pre-recession low, peaking at 16.1 percent in November 2010.17 University of California, Berkeley, economist Jesse Rothstein described college graduates entering the labor market during and immediately following the Great Recession as the “lost generation” due to the lasting impact of high unemployment on young workers’ employment rates.18
- Workers who lost their jobs struggled to reenter the workforce, with the share of the labor force unemployed for six months or longer increasing dramatically during and after the Great Recession, rising more than fivefold from 0.6 percent of the labor force in December 2007 to 3.4 percent of the labor force in September 2010.19 Long-term unemployment remained high, taking nearly one decade to return to pre-recession levels. Black workers’ long-term unemployment rate, which was roughly twice that of the workforce as a whole prior to the downturn, peaked at 6.1 percent in August 2011 and took until January 2019 to return to pre-downturn levels. Prolonged periods of joblessness place workers at particular risk for long-term scarring by diminishing the skills needed to find and maintain employment.20
- The employment rate, a measure that takes into account the share of adults in the workforce or actively seeking work, dropped by 5.2 percentage points as a result of millions of Americans leaving the workforce, and it recovered slowly.21 Employment rates for young workers were particularly slow to recover. Evidence suggests that the impact on employment prospects can be long-lasting, potentially decades into a worker’s career.22
Lengthy recessions can disconnect workers from the labor market, making it difficult to recover lost ground
The length of an economic downturn is crucial because prolonged periods of unemployment can lead to a loss of the skills, experience, and connections that are fundamental to a worker’s ability to secure employment. In a seminal paper, economist Daniel Yagan documented the long-term impact of the Great Recession on workers’ earning and employment prospects and found that recessions can take a lasting and severe toll.23 Yagan tested a set of hypotheses to understand how and why the negative consequences of a recession continue once the economy recovers. He concluded that the lasting impact or scarring from an economic downturn is most consistent with a decline in human capital associated with long-term unemployment.24 His research, as well as that of others, underscores the importance of swiftly restoring full employment to limit the harm attributable to long-term spells of joblessness:
- Young workers who entered the labor market in the wake of the Great Recession had trouble gaining a “toehold” and generally experienced poor outcomes.25 Recent college graduates entering the labor market in 2010 had employment rates 2 percentage points lower than what would have been expected under pre-recession trends; 2015 labor market entrants had employment rates 3 percentage points lower than would have been expected. Workers entering the labor market for the first time also initially experienced lower wages, but this disparity diminished over time. The disparity in employment rates, however, did not diminish and appears to be permanent, with lower employment rates continuing throughout their careers.26
- Older workers are particularly vulnerable to the impact of job loss, suffering a long-term reduction in earnings of as much as 25 percent, often with reduced health and pension coverage.27 Research on the long-term effects suggests that the earnings and job security of workers who lose a job during a downturn may never recover. For older workers, heightened insecurity can lead to health problems and even premature death.
- Low-income, young, and middle-aged Black and Hispanic workers, and families headed by people with lower levels of education, experienced the largest percentage reductions in wealth during the Great Recession. These households were more likely to have drawn down assets during the downturn and were negatively affected by stagnant home prices, reflecting the fact that home equity makes up the largest source of wealth for many fam28
- Wealth losses were higher for those experiencing unemployment who likely liquidated assets to make ends meet during spells of joblessness.29 The large reductions in the wealth of disadvantaged households during the Great Recession exacerbated long-term trends of widening inequality of wealth, including increased racial wealth disparities.30
The length of an economic downturn is crucial because prolonged periods of unemployment can lead to a loss of the skills, experience, and connections that are fundamental to a worker’s ability to secure employment.
The Great Recession took a severe toll on the wealth of young families
The Great Recession’s roots in the housing sector worsened its effect on the nation’s families. The combination of falling home prices, which left an estimated 1 out of 5 borrowers owing more on their mortgage than their home was worth, and battered household budgets due to the weak labor market led to widespread default.31 Ultimately, many families lost their homes through foreclosures, and some made early withdrawals from retirement accounts to cover basic living expenses after a job loss.32 Researchers estimate that the downturn reduced average family wealth by more than one-quarter, with young families and families of color experiencing the greatest losses. The wealth of middle-income and Hispanic families was hit particularly hard during the Great Recession and had not recovered by 2016.33 While income and wealth recovered for many families, albeit slowly, by 2016, the wealth of young families—those headed by someone born in the 1980s—remained more than one-third lower than would have been expected based on the experience of earlier generations at a similar age.34
Policymakers deployed an aggressive, targeted response to mitigate the pandemic’s effects on families and the economy
A swift and substantial federal policy intervention, first in 2020 and subsequently in 2021 with the ARP, cushioned the economic harm of the COVID-19 pandemic and helped the economy move quickly to a strong recovery. Overall, federal actions infused $5 trillion into the economy—equivalent to 25 percent of 2019 GDP.35 Forecasters credit the speed and the scale of the response with its impact. Without a sustained policy response, the United States was at risk of a double-dip recession, GDP would have fallen much further, and unemployment would have risen much higher with the most severe toll imposed on low-wage workers.36 Moody’s Analytics credits the ARP with adding more than 4 million jobs to the economy in 2021 and speeding the pace of recovering all jobs lost during the downturn by a year.37 The structure of the ARP drew lessons from the Great Recession, with specific provisions designed to mitigate the factors that led to the lasting harm associated from the prior downturn:38
- The ARP made the child tax credit (CTC) fully refundable. The ARP made families with the lowest incomes eligible for a full CTC, expanded the size of the credit, and paid part of the credit to families, not than as a lump sum, but in the form of a monthly amount at tax time.39 During the second half of 2021, these monthly payments helped families cover the cost of basic needs, with tracking studies finding that the most frequent use of initial CTC payments was for food, with other common uses including essential bills, clothing, and housing costs. Approximately 1 out of 5 families used their CTC to pay down debt, and about 1 out of 6 reported savings.
Child poverty, as measured by the supplemental poverty measure (SPM), which takes tax credits and noncash public benefits into account, fell to its lowest recorded level in 2021.40 The 46 percent reduction—from 9.7 percent in 2020 to 5.2 percent in 2021—lifted 3.7 million children out of poverty and is largely due to the expansion of the CTC.41 The divergence of the official poverty measure, which is based on pre-tax income, and the SPM demonstrates the importance of public supports. The official measure held relatively steady in 2021, dropping from 16 percent to 15.3 percent, in contrast to the substantial drop in the SPM.
- A federal moratorium provided protections against foreclosures and evictions. Over the long , housing instability can also result in a range of negative child and adolescent development outcomes, including lower school achievement.42 The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, instituted a 120-day federal moratorium that protected many renters from eviction and homeowners with federally backed mortgages from foreclosure.43 The original moratorium was extended by the Centers for Disease Control and Prevention (CDC) multiple times over the course of the pandemic.44 A number of states and localities enacted protections that built off the federal provisions, with many relying on federal aid to provide rental assistance payments. Designed to allow people to practice social distancing and comply with pandemic-related lockdowns, these provisions helped stabilize people unable to pay their rent or mortgage due to a loss of income. The combination of federal protections, along with cash payments made to households as stimulus payments or through the CTC, pushed mortgage delinquencies to historically low levels.45 Thus, in contrast to the Great Recession, far fewer families were pushed into homelessness or suffered a loss of the wealth accumulated in the form of home equity.
Similarly, federal and state moratoriums reduced the number of households faced with eviction. While comprehensive national data are lacking, an analysis by Princeton University’s Eviction Lab estimates that there were 1.55 million fewer evictions than would normally have been expected while the CDC’s moratorium was in place.46 This reduction provided stability during a precarious period. Housing instability and homelessness has far-reaching negative consequences for children, including poor school performance and physical and mental health problems.47 Eviction also increases the risk of job loss, which precipitates a spiral of financial and economic issues for families.48
Figure 1
- Supported by pandemic relief assistance, including the CTC, families boosted savings and paid down debt during the downturn. After a modest uptick in 2020, credit card and auto loan delinquencies also dropped in 2022 as the labor market posted a strong comeback.49 Falling delinquency rates may also reflect survey results showing that, beginning midyear, a substantial fraction of families receiving advance CTC payments used amounts received to pay down debt.
- Wealth and income inequality has modestly narrowed since February 2020. After declining sharply at the start of the pandemic, inflation-adjusted, after-tax household income increased by 4.4 percent from February 2020 to June 2022, with growth in the bottom half of the income distribution outpacing that for households as a whole.50 Real household wealth—the inflation-adjusted value of households’ assets—also rose during that period. Notably, in a reversal of recent trends, growth was stronger in the middle of the income distribution than it was at the top.51
Figure 2
- The student loan repayment pause kept borrowers from falling more deeply in debt.52 The Great Recession marked a rise in student loan borrowing that has continued to the present.53 Three factors fueled the rising balance of student debt: 1) rising enrollment; 2) rising tuition costs at public and nonprofit institutions due to cash-strapped state budgets and declining endowment balances; and 3) a sharp increase in the share of students enrolled in for-profit institutions.54 Burdened by rising debt, many students were unable to make debt payments, causing student loan delinquencies to rise sharply during and after the Great Recession. Rising for-profit enrollment, in particular, contributed to an increase in delinquencies, and research has shown that these students took out more loans, had larger loan balances, and were more likely to experience weak labor market outcomes, all of which combined to raise default rates.55 This trend was exacerbated by the fact that, as noted above, young workers were particularly hard hit by persistently weak labor markets following the formal end of the downturn, which limited their ability to gain a toehold in the labor market.
The student loan payment pause, originally enacted as part of the CARES Act and extended through the end of 2022, suspended loan payments, imposed a 0 percent interest rate, and stopped collections on defaulted federal loans.56 With the pause, the percentage of new serious delinquencies dropped dramatically over just a year from 8.9 percent at the beginning of 2020 to just 1 percent in the beginning of 2021—a rate that has remained low through to the present.57 While the job market for those graduating in 2020 and 2021 was weak due to the pandemic, it recovered quickly. The pause on federal student loan repayment, as well as a freeze on interest accrual, provided an important cushion for young workers that did not exist during the Great Recession.
Without a sustained policy response, the United States was at risk of a double-dip recession, GDP would have fallen much further, and unemployment would have risen much higher with the most severe toll imposed on low-wage workers.
The benefits of a strong recovery have been broadly shared
In contrast to recent downturns, the benefits of the current recovery have been broadly shared and provide hopeful signs that any long-term negative consequences of the recent downturn will be minimal. By August 2022, the nation had regained all the jobs lost during the downturn, just 2 1/2 years after the downturn began. By contrast, it took more than six years to reach the same benchmark after the onset of the Great Recession.58
Figure 3
The unemployment rate for the labor force as a whole has fallen dramatically and is now near the bottom of its range during the past 50 years.59 Significantly, long-term unemployment—defined as 27 weeks or longer—as a share of the labor force quickly returned to pre-pandemic levels, minimizing the risk that workers would suffer a loss of the human capital needed to succeed in the workforce.60 As a result of tight labor markets, employment and earnings for nearly all groups of workers neared or surpassed pre-pandemic highs by May 2022.61 The pace and the breadth of the gains has minimized the period of dislocation where workers are at risk of falling behind. Notably, while workers who changed jobs immediately after the Great Recession experienced slower-than-average wage growth, the reverse has been true in the current recovery, with job switchers’ experiencing strong wage growth, leading some to call this the “Great Upgrade.”62
Importantly, groups of workers most affected by the scarring effects of the Great Recession have fared far better during the current recovery than they did after the prior downturn. By May 2022, the male unemployment rate had fallen below pre-pandemic levels, and by June 2022, the rates for Black women and white and Hispanic men and women were nearing where they were in February 2020.
Figure 4
Long-term unemployment, a critical risk factor for long-term scarring, posted a smaller rise during the pandemic than after the Great Recession and begun to return to pre-recession levels more swiftly.63 Black male long-term unemployment, for example, peaked at 3.5 percent in September 2021 as compared to a 7 percent peak after the Great Recession.
Wage growth, prior to adjusting for inflation, has also been strong across the earnings distribution, with the largest gains posted by those groups that fared worst after the last downturn—young workers, workers at the bottom of the earnings distribution, and workers of color.64 While inflation has raised the cost of living for American families, the strength of recent growth has provided a cushion against economic insecurity.
Figure 5
The pace of the recovery has been strong, but some groups of workers still lag behind
While the pace of overall job growth has been strong, labor markets have yet to fully recover, and some groups of workers—including women, particularly Black women, and those with lower levels of educational attainment—have lagged behind. The share of the total population employed remains below pre-pandemic levels.65 Moreover, while the unemployment rate for Black male workers has fallen below its pre-pandemic level, it remains nearly twice that of white male workers.66 And while private sector job growth has been strong—accounting for all of the net job growth since the start of the pandemic—public sector employment remains significantly below pre-recession levels.67 These workers’ progress could easily be stymied should the Federal Reserve push the economy back into a downturn with overly aggressive interest rate hikes before it has fully recovered.
Conclusion
The strength of the United States’ economic recovery shows the importance of robust public investment at a scale commensurate with the magnitude of the crisis for stabilizing the economy and setting the stage for a return to growth. The COVID-19-induced downturn posed unprecedented challenges, as efforts to protect public health made it impossible for the economy to function normally. Drawing on the lessons learned from past downturns, Congress acted swiftly and aggressively to cushion the shock to the economy, workers, and their families. The pace of wage and job growth confirms the wisdom of these efforts—as does the fact that the benefits of this recovery have been more equitably shared.
Acknowledgments
The authors would like to thank Rose Khattar, Christian Weller, Seth Hanlon, and Nicole Ndumele for their thoughtful comments on prior drafts, and Justin Fernando for fact-checking this report.