Transcript Slide 1

Turbulence in the
U.S. Labor Market:
Boon or Bane?
Erica L. Groshen
Federal 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?)
2005 - Q3
2003 - Q4
2002 - Q1
2000 - Q2
1998 - Q3
1996 - Q4
1995 - Q1
1993 - Q2
1991 - Q3
1989 - Q4
1988 - Q1
1986 - Q2
1984 - Q3
1982 - Q4
1981 - Q1
1979 - Q2
1977 - Q3
1975 - Q4
1974 - Q1
1972 - Q2
1970 - Q3
1968 - Q4
1967 - Q1
1965 - Q2
1963 - Q3
1961 - Q4
1960 - Q1
1958 - Q2
1956 - Q3
1954 - Q4
1953 - Q1
Volatility of real GDP growth has declined
1984
13
8
3
-2
-7
-12
19
53
19 - Q
54 1
19 - Q
55 1
19 - Q
56 1
19 - Q
57 1
19 - Q
58 1
19 - Q
59 1
19 - Q
60 1
19 - Q
61 1
19 - Q
62 1
19 - Q
63 1
19 - Q
64 1
19 - Q
65 1
19 - Q
66 1
19 - Q
67 1
19 - Q
68 1
19 - Q
69 1
19 - Q
70 1
19 - Q
71 1
19 - Q
72 1
19 - Q
73 1
19 - Q
74 1
19 - Q
75 1
19 - Q
76 1
19 - Q
77 1
19 - Q
78 1
19 - Q
79 1
19 - Q
80 1
19 - Q
81 1
19 - Q
82 1
19 - Q
83 1
-Q
1
Real GDP growth 1963 - 1983
(Std. dev.: 4.7)
13
8
1 sd3
-2
-7
-12
19
84
19 - Q
84 1
19 - Q
85 4
19 - Q
86 3
19 - Q
87 2
19 - Q
87 1
19 - Q
88 4
19 - Q
89 3
19 - Q
90 2
19 - Q
90 1
19 - Q
91 4
19 - Q
92 3
19 - Q
93 2
19 - Q
93 1
19 - Q
94 4
19 - Q
95 3
19 - Q
96 2
19 - Q
96 1
19 - Q
97 4
19 - Q
98 3
19 - Q
99 2
19 - Q
99 1
20 - Q
00 4
20 - Q
01 3
20 - Q
02 2
20 - Q
02 1
20 - Q
03 4
20 - Q
04 3
20 - Q
05 2
20 - Q
05 1
20 - Q
06 4
-Q
3
Real GDP growth 1984 - 2006
(Std dev.: 2.1)
13
old
8
1 sd, post 84
1 sd3
-2
-7
-12
Not limited to GDP
• Other volatilities have fallen
– Inflation
– Employment
– Interest rates
1
0.9
0.8
0.7
0.6
• Std. dev. (1990-2001) /
Std. dev. (1960-2001)
• Less than 1  less volatility
0.5
0.4
0.3
0.2
Source: Stock and Watson 2002
0.1
0
Nonagricultural
employment
GDP deflator
(price inflation)
90-day
Treasury bill
rate
10-year
Treasury bond
rate
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 nonprofits 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
0.2
Profit rate
0.16
Real sales
0.12
0.08
Employment
0.04
Real average wage
0
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
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
– 1998
9.2 years
8.6 years
• Expected remaining tenure for male workers:
22% decline
– 1983
– 1998
18 years
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
0.18
0.18
0.16
0.16
0.14
0.14
All heads
0.12
0.12
White males
0.1
0.1
0.08
0.08
0.06
0.06
0.04
All job stayers
White male job stayers
0.02
0.04
0.02
0
0
70
71
72 73
74
75
76 77
78
79 80
81
82
83 84
85
86 87
88
89
90 91
92
93
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
Higher turnover sectors sort between
very high and low productivity firms
Labor Productivity - Pooled Manufacturing
Five-Year Differencing, Real Gross Output
Country and Industry Time Averages
1.5
Correlation Coefficient: 0.2780***
1.0
0.5
0.0
-1.0
-0.5
0.0
0.5
Firm Turnover Rate (f)
1.0
1.5
Note: Excluding Brazil and Venezuela. Outliers Excluded.
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
(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 recession
Reasons for separation--2005
Reasons for separation--2003
layoffs and discharges
7%
quits
8%
other separations
37%
41%
51%
Monthly rate per thousand employees
56%
45
40
35
30
25
20
15
10
5
0
2001
2002
2003
Source: Bureau of Labor Statistics JOLTS
2004
2005
Quits dominate layoffs unless an establishment is shrinking rapidly
Source: Davis, Faberman and Haltiwanger June 2005 (using JOLTS).
Benefits and challenges of mobility
Benefits
Challenges
Possible lost or lower
More chances for
wages,
stress
of
Individual a good match, to
change; insecurity;
earn more, be an
retraining/relocation
entrepreneur
costs
Unemployment
Higher
insurance and
Social
productivity,
retraining costs, social
higher
discord and reactive
employment
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
– 1970s
– 1980s
– 1990s
2.0
2.7
2.6
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
Experiments by first-movers
Learn 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
Wealth created
Dust settles in that sector
Workers and consumers gain lower
prices, higher real wages
Profits return to normal
Possible growth
Growth induced
elsewhere
Client firms or producers of other
goods grow
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.
Displaced workers have long spells of joblessness
Percent of all
displaced workers
45
Percent of re-employed displaced workers.
45
Average time out of work for
re-employed displaced workers: 8 weeks
40
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
0
1-5
6-10
11-15
16-20
21-25
Weeks without a job after displacement
Source: BLS Displaced Worker Survey (covering 1999-2001), author’s calculations.
26+
% still not
employed
4