Ripple Effect

I understand this past year was not good for most pawn shops. This does not surprise me. You would think downturns would be good for pawn shops, but they generally are not. Pawn shops have two parts to their business. One part is lending money. The popular image is that people who borrow from pawnshops are desperate, and some are. But many are not, although most have bad credit ratings or no credit ratings. A significant share of pawn customers are borrowing for discretionary expenditures. When times are good and they are feeling optimistic, these customers are more likely to borrow. In this sense, they are just like other consumers who are more likely to borrow to buy a car or renovate their kitchen when times are good.

The other side of the pawnshop business is sales. The shops sell items people have defaulted on or that the shops have acquired in other ways. Just as this past year was hard for many retail stores, this was probably a bad year for pawn shop sales.

Many people are surprised to learn that the Great Depression was terrible for pawn shops and record numbers went out of business during that era.

That’s a tricky question, because typically in response to economic shocks, the American labor force gets hit harder and then rebounds faster. We saw this pattern play out in the unemployment rate: It shot up more than 300 percent in the US, whereas the OECD’s average unemployment rate increased by less than 60 percent. However, by the start of 2021, the U.S. had a slightly lower unemployment rate. But a story like that doesn’t give the full picture. Comparing the fourth quarter of 2019 to the fourth quarter of 2020 (the latest OECD data available), we see that there were still nearly four million fewer people employed than prior to the pandemic, a decrease of 2.3 percent, which is the 6th largest percent decline out of 37 OECD countries. This reflects the fact that many American workers have left the labor force.

The reason the U.S. labor force gets hit so hard and why the unemployment rate recovers quickly while the actual number of people employed lags is because workers in the U.S. are generally less attached to their job and employer than workers in other industrialized countries. By contrast, Europe has many more types of safety nets and programs that they have used extensively to keep workers attached. A good example is work sharing, which is basically a subsidy from the government to say, “If you don’t fire people, we will share with you the cost of those salaries for a certain time.” Many European companies, instead of going bankrupt or shedding all their workers, take advantage of those programs. Though work sharing programs are expensive, the whole economy saves on the cost of firing and rehiring, whereas in the U.S., food service, retail, or hospitality companies are now trying to rehire workers they were forced to lay off.

Many argue that the flexibility of the U.S. system that allows for this rapid firing and hiring may actually make the whole economy more adaptable. The aggregate economy is recovering, but its structure is changing. People are spending much less on transportation, food, hotels, and recreation, and it’s far from clear that those sectors will ever fully recover. Businesses in those sectors may no longer be viable. The government indefinitely supporting them and their workers at significant cost would be difficult to justify.

However, this cold macro-level analysis ignores the individual impact of unemployment that can scar the reemployment prospects of workers for the rest of their careers, not to mention the effects of unemployment on workers’ families and their communities. The ideal labor force system is one that maintains the flexibility that allows the economy to quickly readjust, while also supporting workers through periods of unemployment by meeting their immediate material needs, guiding them to new opportunities, and equipping them with the new skills they may require as the economy transforms.

My work at Brookings focuses on workers job transitions so that when the productive structures of the economy are disrupted, either by trade, new technology, or even a global pandemic, we can understand how the hardest hit segments of the labor force can be rapidly redeployed into new jobs that best suit workers’ work histories and are likely to be resilient to future shocks.