AUG. 22, 2014
The paper, presented Friday morning at the annual gathering of economists and central bankers at Jackson Hole, Wyo., argues that the share of Americans with jobs has declined because the labor market has stagnated in recent decades — fewer people losing or leaving jobs, fewer people landing new ones. This dearth of creative destruction, the authors argue, is the result of long-term trends including a slowdown in small business creation and the rise of occupational licensing.
“These results,” wrote the economists Stephen J. Davis, of the University of Chicago, and John Haltiwanger, of the University of Maryland, “suggest the U.S. economy faced serious impediments to high employment rates well before the Great Recession, and that sustained high employment is unlikely to return without restoring labor market fluidity.”
Their findings contribute to the growing genre of papers that purport to show that the weakness of the American economy is caused largely by problems that predate the recession — and that the Federal Reserve can’t remedy them with low interest rates.
One of the clearest measures of the economic malaise is that the share of American adults with jobs fell from 62.7 percent at the end of 2007 to 58.3 percent at the end of 2009, and that it has since rebounded only slightly to 59 percent as of July.
At the same time, those who do have jobs are more likely to stay put. The high-profile change in the number of jobs that the government reports each month is a tally of the larger numbers of jobs created and eliminated. In recent decades, that churn has steadily declined. So has movement by workers among existing positions. The net effect is that the share of workers either leaving a job or taking a new one has steadily declined from about a third of the total number of workers in the 1990s to about a quarter of workers last year.
The basic idea at the heart of the paper is that the lack of churn in the labor market is making it harder for younger people to find jobs, and those who don’t are more likely to remain outside the labor force
“Those who seek work are likely to find a suitable job in a fluid labor market,” the authors write. “They then travel a path that involves human capital accumulation, strengthening their attachment to employment. In contrast, some marginal workers fail to find suitable employment quickly in a labor market characterized by reduced fluidity. So their market-relevant human capital depreciates, and their attachment to work weakens. These effects are likely to operate with particular force for younger worker, for whom labor market experience or its absence can powerfully influence whether they follow a path characterized by ‘specialization’ in market work or alternative nonmarket uses of time.”
Or more pithily, “Joblessness today begets joblessness in the future.”
The paper says that a 1 percentage point decline in the churning of the labor market lowers the employment rate by 0.77 of a percentage point, a huge effect. For the most vulnerable workers — young men who don’t complete high school — the employment rate drops by 1.44 points.
Mr. Davis and Mr. Haltiwanger attribute some of this decline to the aging of the work force; as people get older, they tend to change jobs less frequently. The decline in the creation of new companies is also playing a role. In effect, companies are getting older, too. This has been particularly pronounced in the retail sector, where giants like Walmart and McDonald’s offer relatively stable employment.
The paper argues that economic policy also plays an important role. The cost of training workers has increased, partly because the share of all workers who require government licenses has grown by one estimate from about 5 percent in the 1950s to 29 percent in 2008. This discourages hiring. So do legal changes that have made it more difficult to fire employees, the paper says. It also mentions health insurance as a reason that employees may stay put.
In the view of Mr. Davis and Mr. Haltiwanger, the recession just made a bad situation worse.
The economy clearly had problems before the crisis. Indeed, those problems contributed to the crisis.
But economists and policy makers will have to reconcile the assertion that these trends were the dominant factors with the reality that the employment rate rose in the years before the recession, then dropped sharply during the recession.
The new paper, like others of its genre, basically requires belief in a big coincidence: that a short-term catastrophe happened to coincide with the intensification of long-term trends — that the economy crashed at the moment that it was already beginning a gradual descent.”