Global Economic Weekly

The recovery in private employment has been much lower in bigger city centers compared to the surrounding suburbs. The pandemic has had a "Donut Effect," causing greater domestic migration out of urban counties and into the surrounding suburbs. Increased adoption of hybrid work and remote work have shifted the geographic location of demand for leisure and hospitality, other services and other industries. As a result, the temporary geographical mismatch in labor demand and supply could take time to resolve.

Donut effect

Ramani and Bloom (2021) call the shift from cities to suburbs the “Donut Effect”. Data from William H. Frey at the Brookings Institute shows that urban counties have seen a significant decline in domestic migration and a decline in overall population. Suburbs, on the other hand, experienced an increase in domestic migration based on change of address data from United States Postal Service (USPS). 

Permanent address changes (Change from 2019 average, thousand)

Change of address data show that people moved from urban counties to suburbs at a higher rate than prior to the pandemic.

One of the main reasons for this is that businesses are adopting official remote work or hybrid work policies. This has led to both changing residences and a slow and incomplete recovery in office occupancy. More densely populated city centers like New York and San Francisco are seeing a much slower recovery as compared to less densely populated city centers like Houston and Dallas.

Leisure and hospitality feeling the biggest impact

The population shift and the drop in full time commuters has led to decreased visits towards "retail & recreation" in the city centers as compared to the suburbs. To a large extent, businesses in the leisure/hospitality sector in the city centers like restaurants, cafes, retail stores depend on the workers who commute there during the week. Additionally, revenue from tourism that feeds into these sectors hasn't picked up to its pre-pandemic trend yet. This has caused a shift in labor demand from the city centers to the suburbs, helping cause a weaker job recovery in cities. Combine this with workers leaving the labor force and the labor shortage is particularly high in the suburbs.

What to expect going forward

Mismatches in the labor market add to the supply constraints on the economy. Hence they are part of the ongoing supply-driven inflation. In economic jargon, if they persist they raise the inflation neutral unemployment rate. In our view, it could take some time to resolve. It is hard for low wage workers to follow jobs into the suburbs because of limited low cost housing. As workers start spending a bit more time in the office, that will help ease the imbalance, but a return to the old living and commuting patterns is highly unlikely.

This geographical shift will eventually cause the businesses in the leisure and hospitality space in the city centers to either downsize/close or shift operations to the suburbs (Source: Levanon and Papadopoulos, 2022) to meet the increased demand there. The broader mismatch between labor supply and demand should also slowly improve. A recent survey conducted by Indeed shows that job seeker interest in high-touch jobs is in fact rebounding. This should help in resolving the geographical labor demand-supply mismatch. So the Fed will get some help in rebalancing the labor market, but we still think they need to bring job growth down below 100k and engineer a moderate upward shift in the unemployment rate.

Global Economic Weekly will return 7/8 due to the 4^th of July weekend.