Turbulence in the U.S. Labor Market:

Boon or Bane?

Erica L. GroshenFederal Reserve Bank of New York

With the help of Michael Strain!

Agenda

• Intro: Thinking about turbulence

• Macro trends—less turbulence

• Micro trends—more turbulence– Mobility– Earnings

• Policy: Benefits and challenges

Economic turbulence

• Definition: volatility of an indicator of economic well-being

• Macroeconomic perspective– National output (GDP)– Employment, inflation, interest rates

• Microeconomic perspective– Firms: Jobs, sales, profits– Workers: Mobility, wages

Macro turbulence trends

• US GDP (output) is less volatile since 1984 McConnell & Perez-Quiros 2000

• As compared to volatility post 1953, since 1984– Fewer, milder recessions– Less volatile expansions

• Explanations– Good luck, good policy, and better management

(thru IT?)

Volatility of real GDP growth has declined

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1984

Real GDP growth 1963 - 1983 (Std. dev.: 4.7)

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Real GDP growth 1984 - 2006(Std dev.: 2.1)

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old

1 sd, post 84

Not limited to GDP

• Other volatilities have fallen– Inflation– Employment– Interest rates

• Std. dev. (1990-2001) / Std. dev. (1960-2001)

• Less than 1 less volatility

Source: Stock and Watson 2002

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Nonagriculturalemployment

GDP deflator(price inflation)

90-dayTreasury billrate

10-yearTreasury bondrate

Micro trends—more turbulence

• Firms

• Workers

• Impact of recessions

Firms’ volatility trends

• Two distinct trends: 1970 - 2000– Publicly-traded firms are more turbulent in

profits, sales, employment, etc. Comin & Mulani 2005

– Exception: Privately-held firms and non-profits are less turbulent

Davis, Haltiwanger, Jarmin & Miranda 2006

• Note: Since 2001, firm turbulence is down from 1990s levels

Traded firms’ 5-year volatility of sales, profits, employment, and wages all trend up

Very Transitory Variance in COMPUSTAT Firms

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1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Employment Real Sales Real Average Wage Profit Rate

Employment

Real average wage

Real sales

Profit rate

Source: COMPUSTAT in Comin, Groshen & Rabin 2006

Why more turbulence among firms?

• Faster pace of innovation

• Deregulation

• More trade and geographic integration of markets

• Deeper, stronger capital markets

Trends for workers:Job tenure declining

• Average job tenure for male workers: 7% decline– 1983 9.2 years– 1998 8.6 years

• Expected remaining tenure for male workers: 22% decline– 1983 18 years– 1998 14.1 years

Friedberg and Owyang (2004)

Trends for workers: Wage volatility rising

• Workers’ wages have become more volatile– White males

Gottschalk & Moffitt 1994, 2002 – Job stayers—wage volatility linked to rising

turbulence in privately-held firms Comin, Groshen & Rabin 2006

• Accounts for 1/3 to ½ of recent increase in wage inequality

5-year volatility of workers’ earnings (PSID) trends up

Figure 1: Variance of Very Transitory (log) of real Earnings

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White males White males empstay All All empstay

White male job stayers

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White males

All job stayers

Restructuring during recessions

• Recessions now more likely to cause – Permanent job loss instead of temporary

layoffs – Industrial reallocations

Groshen & Potter 2003

Bottom line on turbulence trends

• Macro economy is calmer

• More firm and worker “storms” below this calm

Turbulence: Boon or bane?

• Benefits of high mobility (turnover)– Flexibility—resilience/reallocation after shocks– Innovation—rapid adoption– Enhances opportunities for firms and workers

• Benefits of wage flexibility (volatility)– Firms can adjust costs without cutting jobs– Lower turnover and higher employment

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-1.0 -0.5 0.0 0.5 1.0 1.5Firm Turnover Rate (f)

Note: Excluding Brazil and Venezuela. Outliers Excluded.

Correlation Coefficient: 0.2780***

Five-Year Differencing, Real Gross OutputCountry and Industry Time Averages

Labor Productivity - Pooled Manufacturing

Higher turnover sectors sort between very high and low productivity firms

Source: Microeconomic Evidence of Creative Destruction in Industrial and Developing Countries Bartelsman, Haltiwanger & Scarpetta, World Bank WPS 3464.

Higher job security is characteristic of lower income countries

From Siems, FRB-Dallas Economic Letter Feb. 2006.

(Required severance pay)

Employment rates rise with mobility

From Auer, Berg and Coulibaly ILR 2005.

Why mobility might raise employment rates

• Increases chance of a good match– Accommodates changing skills and demands

on either side– Allows more trial and error in matching– Gives workers and employers more options

during search

• Allows firms to adjust easily

• Decreases stigma from unemployment

What triggers mobility?

• Turnover is a mixed bag, with different expected outcomes– Quits—most likely to benefit the worker, not

the firm– Fires for just cause—least likely to benefit

worker, most likely to benefit firm– Layoffs (displacement)—in between

50-60% of US separations are quits, even during a recessionReasons for separation--2003

41%

51%

8%

layoffs and discharges

quits

other separations

Reasons for separation--2005

37%

56%

7%

Source: Bureau of Labor Statistics JOLTS

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Source: Davis, Faberman and Haltiwanger June 2005 (using JOLTS).

Quits dominate layoffs unless an establishment is shrinking rapidly

Benefits and challenges of mobility

Benefits Challenges

IndividualMore chances for a good match, to earn more, be an entrepreneur

Possible lost or lower wages, stress of change; insecurity; retraining/relocation costs

SocialHigher productivity, higher employment

Unemployment insurance and retraining costs, social discord and reactive policy, community decline

Effects of tenure reduction

• Less common tenure-based benefits, such as pension plans

• Increased costs from – Frequently switching benefits, such as health care

plans– Rolling over 401(k)s– Retraining

• Workers reallocate resources to job search• Firm reallocate resources to vacancy postings and

filling positions

Friedberg and Owyang (2004)

Other implications• New wage and shorter tenure risk adds to rise in

other forms of risk– Switch to defined contribution pension plans – Less health insurance coverage– Less job security (conditional on demographics)– Smaller social safety net (welfare reform, underfunding

of Social Security, etc.)

• Blue collar workers almost certainly worse off• Capital markets, savings behavior need to adjust • Internal labor markets

– Once shielded workers from aggregate risk– Now, allow firms to share rising idiosyncratic risk

How much turbulence is too much?

• There is some level at which we can say there is too much turbulence

• When social costs overwhelm productivity effects– Retraining, relocation, redistribution, community

redevelopment, reactive policy

• When it deters workers’ investments in human capital– Lower incentive to invest, because losses are more

likely– Lower access to resources to invest

• There must be some limit…

Conclusions

• Trends: More micro storms below the recent aggregate calm– More turnover and higher earnings volatility

• Mobility and wage flexibility have clear benefits and costs

• Don’t know how much is too much

The end

Why more restructuring during recent recessions?

• Better policy reduces spillover fluctuations• Shocks are more structural• Firms use recessions as an opportunity to

restructure– More pressure to do so (see reasons for more firm

volatility)– Fewer constraints (less unionism, lower regulation,

more temporary workers)– Firms interpret decreases in demand as firm-specific

because macro volatility is low

Decreased Macro Volatility

• Stock and Watson (2002) supports McConnell and Perez-Quiros.

• Standard deviation of four quarter GDP growth:– 1960s 2.0– 1970s 2.7– 1980s 2.6– 1990s 1.5

Some interesting contributions of these chapters

1. Diversity of HRM strategies has potential policy and management sciences implications

– Next, understand what governs HRM strategies – Can/should these choices be influenced by policy?– Are there externalities or cost-shifts involved?– Importance of a good placement and training

programs

Life cycle of products and firm churning

Growth induced elsewhere

Client firms or producers of other goods grow

Experiments by first-moversLearn to lower costs or make new products (high profits)

Take advantage of new technology, maturity of products, new markets

Adoption by competitors First-movers try to grab market share

Competitors forced to imitate, reduce costs, lower prices More jobs affected, peak of churning

Dust settles in that sectorWorkers and consumers gain lower

prices, higher real wagesProfits return to normal

Possible growth

Wealth created

Findings from Brown, Haltiwanger & Lane (2006)

• U.S. workers and firms have been very resilient and resourceful in dealing with economic turbulence. In general, they have learned how to turn the threat of volatility into an opportunity.

• The firm you work for matters.– Within an industry, firm characteristics (and firm

HRM policies) matter in the job ladders offered to workers with the same education, age, and education

• Workers with inferior jobs improve their career paths by changing jobs.

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Weeks without a job after displacement

Source: BLS Displaced Worker Survey (covering 1999-2001), author’s calculations.

Displaced workers have long spells of joblessness

% still not employed

Percent of re-employed displaced workers.Percent of all displaced workers

Average time out of work forre-employed displaced workers: 8 weeks

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