Board of Governors of the Federal Reserve System

July 28, 2023

The Persistent Urban Shortfall in Leisure and Hospitality Employment

Brendan J. Chapuis, Seth Murray, and Brendan M. Price¹

Introduction

As a high-contact service sector with limited capacity for remote work, the US leisure and hospitality sector—which includes restaurants, bars, hotels, museums, and movie theaters—was hit particularly hard by the COVID-19 pandemic. In the first two months of the pandemic, leisure and hospitality lost over 8 million jobs, nearly half its employment (Figure 1, solid red line). In those same two months, the rest of the private sector (dashed blue line) lost about 13 million jobs—such that leisure and hospitality accounted for almost 40 percent of private-sector job losses, despite comprising just 13 percent of pre-pandemic private employment. In the subsequent recovery, leisure and hospitality has consistently posted monthly job gains far in excess of what was typical before the pandemic. But even as of May 2023, employment in leisure and hospitality remained about 350,000 below its February 2020 level. Since the sector was poised to keep growing in the absence of the pandemic, the true shortfall is undoubtedly larger.

Figure 1. The shortfall in leisure and hospitality employment

In this Note, we show that the employment shortfall in leisure and hospitality has been heavily concentrated in the densest counties within the largest metro areas. Since the start of the pandemic, these dense urban cores have seen especially low foot traffic to restaurant, recreation, and retail establishments, as many urban professionals have shifted to more remote work. In tandem with weaker demand for leisure services in dense urban cores, the sector's labor demand is also particularly depressed in these areas. At the same time, demographic patterns in the pre-pandemic workforce suggest that leisure and hospitality businesses in denser areas faced more acute labor supply shortages than those in less dense areas. Tellingly, the number of restaurants and bars in dense urban areas remains well below its pre-pandemic trend, suggesting that the pandemic's imprint on the geography of leisure and hospitality employment is likely to persist.

I. The employment shortfall in dense urban cores

We measure local employment shortfalls in leisure and hospitality—"LH" for short—using county-level data from the Quarterly Census of Employment and Wages (QCEW). Figure 2 plots LH employment in three geographic categories: "dense urban cores", which we identify by selecting the densest county within each of the 40 largest metro areas; "other urban counties", which include both smaller metros and the peripheries of larger metros; and "rural counties".² Relative to other counties, dense urban cores (solid red line) saw similar growth in LH employment before the pandemic but a steeper drop in spring 2020 and a much weaker recovery in subsequent months. The urban deficit has proven persistent: whereas dense urban cores comprised just 23 percent of LH employment in February 2020, they accounted for 49 percent of the employment shortfall as of December 2022, the latest month for which QCEW data are available.³

Figure 2. Leisure and hospitality employment by metro category

II. Weak demand in dense urban cores

Just as LH employment losses have been most acute in dense urban cores, so too has demand for leisure services been especially weak in these areas. Using data from Google's COVID-19 Community Mobility Reports, Figure 3 plots the number of trips to restaurant, recreation, and retail establishments in each metro category.⁴ At the outset of the pandemic, such trips fell more sharply in dense urban cores (solid red line) than in other counties. As of September 2022 (after which these data were discontinued), trips had largely recovered in other counties, but they remained well below pre-pandemic levels in dense urban cores. At the county level, we find a positive and statistically significant relationship between shortfalls in leisure and retail trips and shortfalls in LH employment: foregone trips account for just over one-third of the variation in counties' employment shortfalls in the last month of data.

Figure 3. Trips to leisure and retail establishments by metro category

The shortfall in leisure and retail trips in dense urban cores mirrors the elevated incidence of remote work.⁵ Kastle Systems reports that, as of June 2023, the number of workers badging into office buildings in the 10 largest metro areas remained 50 percent below its pre-pandemic level. Althoff, Eckert, Ganapati, and Walsh (2022) show that the shift away from in-person work during the pandemic, particularly among white-collar workers, disproportionately reduced demand for restaurants, bars, and hotels in the urban cores where these workers tended to work in-person prior to the pandemic.⁶

Weak demand for leisure services has translated into weak demand for labor. Since both filled jobs and vacant jobs signify employer demand, Figure 4 plots the sum of LH employment (as reported in the QCEW) and LH job postings (as reported by Lightcast, an aggregator of online job boards).⁷ This measure of labor demand again shows a persistent shortfall in dense urban cores (solid red line), whereas in other counties demand now exceeds pre-pandemic levels. The stronger rebound of labor demand in these other areas may reflect, in part, a reallocation of demand from city centers. With more opportunities to work remotely, some workers who previously commuted to city centers are spending more time in—or relocating to—less dense areas, where they are likely boosting demand for LH services and labor.⁸

Figure 4. Available leisure and hospitality jobs by metro category

III. Workforce composition and the role of labor supply

Although geographic differences in demand for leisure services can go a long way towards explaining these patterns, the pandemic's pronounced effects on labor supply likely played a role as well. Data from the Current Population Survey indicate that, relative to other areas, LH employment in dense urban cores has been more exposed to some of the pandemic's labor supply shocks but less exposed to others.⁹

Early in the pandemic, the abrupt shift to remote schooling curtailed labor supply among parents of school-age children, especially mothers (Montes, Smith, and Leigh, 2021). Since women are disproportionately represented in leisure and hospitality relative to other sectors (Table 1, line 1), childcare disruptions likely contributed to the particularly sharp drop in LH employment.¹⁰ Geographically, however, women make up a smaller share of LH employment in dense urban cores than in other areas, so gender patterns cannot explain the urban skew in the employment shortfall.

Table 1. Demographic composition of pre-pandemic employment (percent)

Immigration policy also responded abruptly to the pandemic, with border restrictions sharply curtailing net migration in 2020–21. Since immigrants tend to cluster in cities, the drop in international migration contributed to population losses in urban cores (Frey, 2023). And since foreign-born workers made up an outsized share of leisure and hospitality employment prior to the pandemic (Table 1, line 2), the sector was particularly exposed to the resulting reduction in labor supply. Dense urban cores were exposed still further, as a striking 32 percent of their LH workers had been foreign-born prior to the pandemic—more than twice the share in rural counties. Reduced immigration can therefore help explain the geography of job loss.

Lastly, the pandemic had pronounced effects on the age distribution of the workforce. At one end of the spectrum, teenagers increased their labor supply as the labor market tightened over the course of the pandemic. At the other end, the pandemic suppressed older workers' labor supply through increased mortality and a spate of early retirements (Montes, Smith, and Dajon, 2022).¹¹ Since the LH workforce is much younger than the rest of the labor market—with many teenaged workers (Table 1, line 3) and few workers over 65 (Table 1, line 6)—the LH sector's age structure insulated it from the depressed labor supply of older workers. Returning to geography, however, dense urban cores may have benefited less from teenagers' increased labor supply, since LH employment in these areas had drawn less from this age group prior to the pandemic.

On net, impediments to labor supply were likely more acute for LH employers in dense urban cores than for those in other areas. First, LH employers in denser areas had been heavily reliant on foreign-born workers, whose numbers were held back by immigration restrictions during the pandemic. Second, these employers may have benefited less from teenagers' increased labor supply during the pandemic. While it is difficult to quantify the relative roles of labor supply versus labor demand, both sides of the market likely contributed to the concentration of LH employment shortfalls in dense urban cores.

IV. The missing restaurants and bars in dense urban cores

Alongside its effects on employment, the pandemic spurred a wave of temporary and permanent business closures. Using QCEW data, we find a persistent hit to the number of restaurants and bars operating in dense urban cores, relative to the number we would expect to exist in the absence of the pandemic.

Figure 5 plots the number of establishments, by metro category, in food services and drinking places, which account for nearly 75 percent of leisure and hospitality employment. At the start of the pandemic, the number of restaurants and bars fell across the board as government-mandated shutdowns took effect. But relative to other areas, dense urban cores (solid red line) experienced both a larger initial decline and a slower pace of subsequent growth. Whereas other areas have seen establishment counts largely recover to their pre-pandemic trends, the number of food services establishments in dense urban cores—though above pre-pandemic levels—remains well below its previous trend.¹² The lingering shortfall in downtown foot traffic weakens business owners' incentives to keep their restaurants open or to create new ones. Along similar lines, Duguid, Kim, Relihan, and Wheat (2023) argue that urban cores experienced a larger decline in the number of retail establishments because they had more jobs suitable for remote work.

Figure 5. Restaurants and bars by metro category

By contrast, in all three metro categories the number of hotels and lodging places has largely returned to the levels implied by pre-pandemic trends. The stronger recovery in the number of accommodation establishments may reflect differences in the industries' cost structures. Relative to restaurants, hotels typically require much larger upfront fixed costs but comparatively lower ongoing operating costs, so that their owners have an incentive to reopen temporarily closed establishments and to complete new establishments already under development. Accommodation employment nonetheless remains depressed, especially in urban areas, as hotels have adapted to the pandemic by reducing their staffing levels.

The path ahead

Remote work will remain a fixture of the post-pandemic economy. Workers and firms have invested in work-from-home technology and adapted to remote or hybrid work. Many workers now expect increased flexibility around their on-site presence, and employers have revised their personnel policies accordingly. Fewer trips to the office imply fewer trips to downtown businesses that cater to office workers. As we look ahead, business formation can be a useful bellwether: because business entry and exit signal employers' expectations about future demand conditions, the missing restaurants and bars in dense urban cores suggest that entrepreneurs expect ongoing weakness in urban demand for leisure services. Absent a more robust return to the office, leisure and hospitality employment in large city centers is likely to remain below its pre-pandemic trend.

References

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