Less labor market churn may explain falling employment rates

Many economists and policymakers will be paying attention to what Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi say in Jackson Hole, Wyoming today, but the conference also just released the papers that will be discussed over the weekend. The topic of this year’s conference is labor dynamics and the papers cover a variety of topics, including wage polarization, demographics, and general wage dynamics. One particularly interesting paper is on the long-term decline in labor market fluidity, or churn, and its potential effects on employment rates.

Labor market fluidity is broadly defined as the movement of jobs and workers across employers and is sometimes referred to as labor market churn. The paper, by Stephen Davis of the University of Chicago and John Haltiwanger of the University of Maryland, documents the many ways that fluidity in the labor market has declined over the past 30 years. Davis and Haltiwanger show how this churn has declined over the years, particularly the rate at which workers switch jobs.

A declining rate at which workers change jobs isn’t on its face a frightening trend. One major aspect of the reduction in churn has been a decline in the number of workers losing their jobs. In other words, workers are less likely to become unemployed and have more secure jobs, certainly a positive development.

Yet the flow of workers into new places of employment is also on the decline. The main takeaway from the paper is that the reduction in workers changing jobs has a strong negative effect on employment rates. The slowdown in churn may make it harder for workers to find new places of employment and eventually they get locked out of employment in the long run if they cannot improve their skill and opportunities by working on the job. As the authors put it, “employment today begets employment in the future.” The authors find that this effect is particularly strong for young workers, less-educated workers, and men.

Also a lack of job switching may also be harmful for young workers if they end up stuck in positions that are not a good fit for them. We know that a large amount of wage and salary increases for young workers come from switching jobs, not climbing the  job ladder within their current employer.

The decline in labor market fluidity predates the Great Recession of 2007-2009, so the trend may play a large role in the decline in the employment-to-population ratio has never recovered its peak from before the prior 2001 recession. This is a worrying trend for anyone interested in promoting full employment. Davis and Haltiwanger’s paper should help inform economists and policymakers are they think through this important labor market trend.