Arvind Krishnamurthy, The John S. Osterweis Professor of Finance, Graduate School of Business:

COVID impacts the U.S. economy significantly — from the tight labour market and rising inflation to real estate problems. On jobs, the unemployment rate is at a historical low. Yet, extrapolating from pre-pandemic growth rates in the labour force suggests that we are currently missing roughly 3 million workers. I am persuaded by the work of SIEPR scholars that point to significant COVID-19 effects on the supply of workers. Falling ill (Goda and Soltas, 2022) and fears of falling ill (Barrero, Bloom, and Davis, 2022) keep people out of the workforce.

COVID has also impacted workers’ preferences for labour and leisure. It’s harder to pin down, but this factor keeps appearing in the news. Senior management must persuade workers to come into the office twice a week. All this incentivizing is undoubtedly costly. Thus, while work-from-home may be productivity-enhancing in some sectors, this must not be true in most sectors. Effective labour hours have fallen, tightening labour supply further. Moreover, the fall in productivity can explain the decline in real wages, as prices have risen faster than wages.

The COVID-induced tight labour market has pushed up prices and wages, and I expect these inflationary pressures to continue despite rising interest rates. COVID has also impacted asset values, particularly in real estate. Mortgage rates almost doubled in 2022, and significant declines in office occupancies are creating revenue problems for commercial real estate. Rising interest rates also mean that refinancing commercial property will be difficult. Keep a close eye on signs of trouble in real estate. They have a way of causing more comprehensive damage to the economy.

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