Evan Soltas
Jan 29, 2012

Petrified Labor Markets? Maybe.

Turnover in labor markets remains weak

One quick new reason to worry about lingering issues in labor markets: the total percentage of the labor force that is moving between jobs fell significantly during the recession. It has not recovered.

By "total percentage," I mean the percentage of the labor force that was hired, fired, quit, laid off, or otherwise took or left a job. This is interesting to me because it gives a sense of the underlying fluidity and flexibility of labor markets, something which is hidden in the net change in payroll employment numbers.

And while payroll employment has grown, although hardly robustly, for several quarters now, we haven't seen labor market flexibility recover. In a recession, we might expect total labor market flexibility to decline or maybe stay constant, as (1) fewer are hired, as firms freeze hiring (2) more are fired, as firms reduce labor costs (3) fewer quit, due to the uncertainty they can get another job, (4) more are laid off en masse, as firms close, (5) fewer are otherwise separated, per reason #3.

For the same reasons, all else equal, we would expect the labor market to revert to more or less normal operation after the recession ended, as firms gain confidence to hire, and then workers observe this confidence and make corresponding decisions to quit or seek to be rehired elsewhere. In other words, we would expect to see the second crude sketch below enfold in labor markets, where the green line is hiring, and red represents all job losses.


Instead, though, we've seen the scenario described in the first crude sketch unfold. Although on net changes in payroll employment are positive, the absolute number of hires and absolute number of separations remains sharply lower than pre-recession.

Two broad reasons to worry about this: (1) inefficient allocation of resources, namely labor, may result from less transition and turnover in employment, (2) this implies lower frictional unemployment, in turn suggesting that economists may be significantly underestimating the fraction of unemployment which is structural.

Update (2/12/12): The Economist's "Free Exchange" column has a new article about labor market "churn."