The decline of US labour market dynamism, secular and cyclical | FT Alphaville

The decline of US labour market dynamism, secular and cyclical

This simple graph, pulled from a presentation by economist John Haltiwanger, is a tidy illustration of what David Leonhardt means when he writes that the ongoing labour market ossification is a disturbing mix of both secular and cyclical trends.

Most discussion of jobs growth naturally focuses on the net numbers, but Haltiwanger’s work emphasises that you get a far better understanding of labour market dynamism by looking at the gross numbers for job destruction and job creation.

And as he explains the average trend since the mid-1990s…

Job creation has been headed down in a pretty persistent way since 2000. Job creation rose slightly to a quarterly rate of about 9 percent of total employment in the 1990 recession. Still, job destruction rose even more during that recession. During the 1990s, job creation settled at about an 8 percent rate. Job destruction fell sharply during the 1990s, as did the unemployment rate.

Job creation dipped during the 2001 recession (more normal behavior than in 1991) but the recovery was startlingly weak. Since 2000, job creation has never reached the rates of the mid-1990s. Indeed, in the current recovery, job creation remains at the lowest rate as a percent of total employment of the post–World War II period.

He also finds that the “churn” generated by higher levels of creative destruction has long been a driver of both higher productivity and jobs growth — and the latest recession has obviously had a drastically bigger and more sustained impact on job creation than on job destruction.

That’s the straightforward cyclical story, or at least one version of it, and it’s certainly the bigger one.

Yet there’s obviously a meaningful secular story as well, but it’s more complicated and, indeed, remains something of a mystery, as Haltiwanger can only posit a few educated guesses.

Among them are the increasing share of US employment moving to businesses six years or older; the shift to large-scale retail chains; the aging of the US labour force (and therefore less willingness to experiment); declining job creation rates for startups; economic uncertainty; policy uncertainty.

None of these seems a definitive explanation, and we’re especially suspicious of the last reason. Not that removing regulatory barriers and the like is ever a bad idea, but “uncertainty” is often bandied about as a reason for why businesses aren’t hiring, and there’s very little evidence for this. And “very little” is conservative: we’re not actually aware of any such evidence, though maybe it’s out there. We recommend Haltiwanger’s forthcoming paper, this presentation and a recent interview for more detail.

But if you want a related and relatively unfamiliar explanation for why this decline in dynamism contributes to the US economy’s biggest problem right now — the extraordinary rise in the number of long-term unemployed — it might be this one:

We’re looking at the blue line, the unemployment escape rate, or the probability that someone unemployed will find a job in the next month. As Haltiwanger notes, since the 1970s “the probability of finding a new job quickly dropped not only in recessions but also in recoveries.”

He adds, and we close, on this sobering note:

At the end of the 1960s, the share of the employment base that entered unemployment surprisingly was not very different than it is today — about 2 percent, or about one million people. However, the probability that a person would find a job the next month after being unemployed was roughly 75 percent. In other words, people moved fairly easily from one job to another. Even during the aftermath of the 1970s recession and as the numbers unemployed rose, that probability remained at 50 percent.

That trend took a dramatic turn for the worse in the recent recession. The probability of a newly unemployed person of finding a job in the next month has dropped to 20 percent — one half in some cases of the lows of past recoveries. The effect of these trends can be seen in the sharp rise in the long-term unemployed.

The pace of the movement of Americans out of unemployment is today roughly comparable to the rates we find in Western Europe, where the movement out of unemployment is very slow. Previously, during the 1980s and 1990s, we had distinguished ourselves from Europe with our dynamism, innovation and productivity. We established our uniqueness in part because of the rapid pace of job creation in small and startup firms and the churning of economic opportunities in the U.S. economy.

That uniqueness is fading, it seems.

Related links:
Size doesn’t matter, but age does – FT Alphaville