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Monday, November 20, 2006

Has Job Security Declined? (Update)

[Updates at the end]

The Economist blog, Free Exchange, says outsourcing and technological change have not impacted job security - it's all a myth:

Unstable?, Free Exchange: Last month, unemployment hit 4.1% in America, the lowest ... in thirty years. Yet at the same time, Democrats are vowing to protect American jobs from foreign competition... If globalisation is sending jobs abroad, how is it that unemployment is so low?

Anti-globalists often argue that the unemployment statistic hides a shrinking labour force and a job market that isn't what it used to be. Job security has been outsourced..., and those who have given most of their working lives to manufacturing jobs now find themselves surplus to requirements. Even if they find another job, it is likely to be part time, without the benefits and security they once enjoyed.

However, this does not necessarily comport with what labour economists are finding.

There is a big difference between job stability and job security. Job stability refers to how long a worker expects to be on a job; it does not distinguish between those who are sacked, and those who leave for a better opportunity elsewhere. Job security describes the likelihood that a worker will lose his job by either being fired or laid off.

Thus far, there is little evidence that job security has declined in the last twenty-five years... [According to] Princeton economist Henry Farber... [t]he likelihood of being in part time work after losing a full-time job ... varies with the business cycle, but there is no evidence that it has become more common overall. ...

Whether or not a worker has to take a pay cut in order to get a new job is similarly cyclical. Workers, particularly those with a college education, became more likely in the 2001 to 2003 period to be in a job that paid less than the job they lost, but this may be simply be a reversion to the mean after the abnormally high wages paid to educated workers during the tech boom.

Overall, globalisation doesn't seem to have had much effect on job security... [W]orkers have not fared any worse in the last ten years. But though many labor economists dismiss media reports of precarious employment as anecdotal, that doesn't make the anecdotes any less scary. Even the biggest supporters of globalisation agree that more can be done to ease workers' transition from redundancy into new employment.

I disagree with this. Recall what Janet Yellen said recently as she contradicts the assertions above with a comprehensive look at the evidence on these issues:

Economic Inequality in the United States, by Janet Yellen, SF Fed President: ...It's important to note first that our economy is always subject to large amounts of job turnover. Indeed, this is one hallmark of a dynamic, flexible economy, and it is not necessarily a bad thing on net. Data on worker flows ... indicate that ...[o]ver half of this job churning is voluntary in nature, reflecting worker desires to find a job with higher wages, better working conditions, or a different location. ...

However, involuntary displacement from permanent jobs, due to layoffs or downsizing, is important and has been on the rise over the past two decades. In particular, rates of worker displacement are up relative to measures of overall labor market conditions, such as the unemployment rate. ...

In addition, the distribution of displacement has shifted towards the highly educated: workers holding a college degree saw nearly a 50 percent increase in their displacement rates between the early 1980s recession and the most recent one in 2001.... So, more educated workers are seeing erosion of their job security relative to their less-educated counterparts. Of course, job displacement still remains a ... significant issue for low-paid workers...

Involuntary job loss frequently inflicts dire consequences, which have grown more severe over time. Involuntary job losers typically are unemployed for at least four months, about 70 percent longer than individuals who enter unemployment voluntarily. ... The picture looks even gloomier when you recognize that some job losers withdraw from the labor force... Put these factors together and it's clear that periods without earnings can be quite lengthy and costly for job losers. Moreover, when displaced workers do find new jobs, they're taking a pay cut of about 17 percent on average. The size of this wage loss in the early 2000s was the highest in at least 20 years.

Job displacement also has adverse consequences for health insurance coverage. Research shows that job loss substantially reduces access to health insurance over extended time periods...

Given the increase in job displacement and earnings losses that I described above, it is not surprising that yearly fluctuations in individual earnings and family incomes have increased sharply since the 1970s.... [B]etween the 1970s and the early 2000s, the gaps between the highs and lows in a typical family's yearly income have risen substantially. ... [T]he chances that an American family will see at least a 50 percent drop in its yearly income has more than doubled since the early 1970s, rising to about one in six families in recent years.

The increased risk associated with these income fluctuations is likely to reduce perceived well-being quite substantially, even if family incomes on average are growing over time. As with the risk of job loss, these income risks are most severe for less-educated Americans. However, during the 1990s, income instability rose relatively more for families with high educational achievement, consistent with the spread of involuntary job loss to highly educated individuals.

And, in keeping with The Economist's international perspective, here's New Economist with results for Germany:

Germany: Outsourcing and job security, by New Economist: Another paper from last week's conference on The Impact of International Competition on Firms and Workers was by Ingo Geishecker from Freie Universität, Berlin. Using a large panel of individual monthly employment spell data from German manufacturing, he finds that international outsourcing, when narrowly defined, has "a marked impact on individual employment security". Here is the abstract for The Impact of International Outsourcing on Individual Employment Security: A Micro-Level Analysis (PDF):

The paper analyzes how international outsourcing affected individual employment security in German manufacturing industries between 1991 and 2000. ... The main finding is that international outsourcing significantly lowers individual employment security. Interestingly, the effect does not differ between high-, medium-, and low-skilled workers. ...

I also support open markets, but there's no reason to downplay the negative consequences it has for some workers. The argument above attempts to convince workers that what they are feeling has no basis in reality, it is only due to anecdotal media reports. Doing so does not help the cause; it will not help to turn the populist political tide that is developing against globalization.

People are displaced by globalization and technology and, as the research shows, they end up worse off because of it. These workers deserve our help, not a denial that they face increased hardships. It's not just scary stories in the media that are making workers feel insecure, the consequences are very real.

To maintain support for globalization we need to stop denying there are problems, and then convince the vast number of workers reporting increased feelings of insecurity that their economic welfare is just as important as the profits of the firms they work for.

Update: By email, from a highly respected colleague at another university, a point I should have made:

As soon as I looked at your entry, my eyes bugged out. "LAST month, unemployment hit 4.1% in America, the lowest level the nation has seen in thirty years." Um, what? It was 4.4 percent, and the lowest in only 5 years. Wishful thinking? It may seem like a trivial thing, but anyone who pays the least bit of attention to economic numbers knows that unemployment, even aside from the caveats, still hasn't quite returned to late-Clinton levels. So whoever wrote this is either deeply ignorant, has a powerful desire to believe in the "Bush boom" that overwhelms their ability to think straight, or both. And this person presumes to lecture us about the facts of the labor market?

Update: The original post has been updated:

Update due to a typo, the unemployment figure was originally listed as 4.1. We've corrected above.

The correction is to 4.4%. Though it's not noted in their update, they also backed off the claim that the unemployment rate is the best in thirty years. It now reads:

Last month, unemployment hit 4.4% in America, the lowest level the nation has seen since 2001.

Given the preponderance of spelling errors in the original post (I corrected them above, e.g. see "gobalisation" twice in the opening paragraph), the typo seems quite possible, but where did the "lowest level the nation has seen in thirty years" claim come from?

    Posted by on Monday, November 20, 2006 at 11:34 AM in Economics, International Trade, Technology, Unemployment | Permalink  TrackBack (2)  Comments (85)


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