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Wednesday, September 02, 2009

"The Decline of Job Loss and Why it Matters"

In the post Job Losses are Not the Problem, I noted that the graph from Andy Harless shows that both the rates of job creation and job destruction have declined over time, and I invited speculation as to why that has happened. Steven Davis of the University of Chicago Graduate School of Business sends an email with more than just speculation, there are links to two of his papers on these issues. The first looks at the declining rate of job loss and why it matters:

The Decline of Job Loss and Why It Matters, by Steven J. Davis, University of Chicago, Graduate School of Business, American Economic Review: Papers & Proceedings 2008, 98:2, 263–267: [AEA Papers & Proceedings]: There is considerable evidence that American workers face lower risks of job loss in recent years than 10, 20, or 30 years earlier. I summarize some of the evidence for this claim and explain why the decline of job loss matters. My attention centers on “unwelcome” job loss: employer-initiated separations that lead to unemployment, temporary or persistent drops in earnings, and other significant costs for job losers. Since there is no fully satisfactory statistic for the incidence of job loss, I consider several measures and data sources.
I. The Decline of Job Loss The Federal-State Unemployment Insurance Program provides cash benefits to experienced workers who become unemployed “through no fault of their own” and who meet other requirements that vary somewhat by state. Administrative data on new claims for unemployment benefits under this program provide a useful indicator for cyclical and longer-term movements in job loss rates. Drawing on these data, Figure 1 shows a dramatic decline in new claims for unemployment benefits since the 1970s and early 1980s. New claims average 0.24 percent of employment per week from January 2004 to November 2007, slightly below the 0.26 percent average from January 1996 to December 1999, and well below any earlier period covered by the data.
The new claims rate responds to changes over time in eligibility requirements and takeup rates, as well as in the incidence of job loss. Thus, it is important to ask how other job loss indicators compare to Figure 1. Davis et al. (2007) consider the longer-term evolution of monthly unemployment inflow rates, as measured from Current Population Survey (CPS) data on unemployment by duration. They report that unemployment inflows fell from about 4 percent of employment per month in the early 1980s to 2 percent or less by the mid-1990s and thereafter. Robert Shimer (2007, Figure 4) and Michael Elsby, Ryan Michaels, and Gary Solon (2007, Figure 2) report a similar result. The downward drift in monthly unemployment inflows is more gradual than the post-1982 drop in new claims in Figure 1, but the basic pattern is otherwise similar.
Shigeru Fujita and Garey Ramey (2006) estimate employment-to-unemployment flows using data on labor force status in short CPS panels, rather than data on unemployment by duration in CPS cross sections. They also find dramatic declines in employment-to-unemployment flow rates since the early 1980s. Jay Stewart (2002) calculates transitions from employment to unemployment using March CPS data from 1976 to 2001. ... Stewart’s approach also yields dramatic declines in employment-to-unemployment flows since the early 1980s. The declines are concentrated in the 1990s for men and are relatively uniform throughout the 1980s and 1990s for women.
The Displaced Worker Survey (DWS) provides yet another source of information about the incidence of job loss. The DWS has been conducted every two years since 1984 as a supplement to the CPS. It asks about job loss in the previous three years (five years before 1996) due to plant closure, layoffs, and other reasons unrelated to the worker’s individual performance. ... Figure 10 in Farber (2007) shows that the three-year job loss rate in the 2003–2005 period is at or near its lowest level since the inception of the DWS, about one-third below the 1981–1983 period, and nearly identical to the corresponding rate for the 1987–1989 and 1997–1999 periods.
Measures of (gross) job destruction by employers also point to declining risks of job loss for US workers. The job destruction rate is calculated by summing employment declines over all employer units that shrink or exit during a given time interval and then dividing by the overall level of employment to obtain a rate. This measure captures the rate at which employers eliminate employment positions rather than the rate at which workers lose jobs, but, not surprisingly, the two are closely linked... See Davis, R. Jason Faberman, and John Haltiwanger (2006) for evidence.
The Bureau of Labor Statistics (BLS) produces quarterly job destruction statistics in its program on Business Employment Dynamics (BED). These data show sizable declines in the rate of private sector job destruction after the 1990–1991 recession and again after the 2001 recession (Faberman 2006 and BLS data). Private sector job destruction averages about 6.5 percent of employment per quarter from the first quarter of 2005 to the first quarter of 2007 (BLS data), lower than any other period back to 1990 (Faberman 2006). Job destruction measures constructed from the Longitudinal Business Database at the Bureau of the Census also show a decline in private sector destruction rates after the early to mid-1980s (Davis et al. 2007). Quarterly data for the manufacturing sector pieced together from multiple sources suggest that job destruction rates have trended downward since the early 1960s (Davis, Faberman, and Haltiwanger 2006).
Summing up, a variety of indicators based on household surveys, establishment surveys, and administrative records show a long-term decline in the risk of job loss facing US workers. New claims for unemployment benefits and CPS based measures of employment-to-unemployment flows imply dramatic declines in the risk of job loss since the 1970s and early 1980s. Job destruction measures from various sources also point to large declines in the risk of job loss. The DWS is something of an outlier in suggesting that essentially the entire long-term decline in the risk of job loss reflects a recovery from the deep recession of the early 1980s.
This body of evidence is sharply at odds with populist rhetoric about declining job security for American workers, a view some economists have also espoused. I refer the reader to Davis (2007) for a detailed critique of claims that American workers have suffered a long-term decline in job security. Here, I pause only to highlight a basic, but crucial, distinction between the risk of job loss and the durability of employment relationships.
Many observers interpret declines in the durability of employment relationships (e.g., declines in median job tenure) as evidence of an increased risk of unwelcome job loss and a decline in job security. This interpretation is unwarranted. Job tenure statistics do not inform us about job security or the risk of job loss for the simple reason that most employment relationships do not end with an employer-initiated separation. Indeed, data from the BLS Job Openings and Labor Turnover Survey imply that layoffs and discharges for cause account for only 36 percent of worker-employer separations in the 2001 to 2006 period, much lower than the percentage accounted for by workers who quit a job (Davis 2007). The 36 percent figure may be an understatement, but even if employers initiate 70 percent of all separations—an extremely dubious proposition—one cannot form reliable inferences about job security and the risk of unwelcome job loss from statistics on the durability of employment relationships.
Moreover, workers are more prone to quit when labor market conditions are tight and job opportunities are plentiful. In light of this well-documented pattern and the high share of worker-initiated separations, one might just as well interpret declines in job tenure as evidence that workers now enjoy a greater abundance of attractive job opportunities. This interpretation merits just as much weight—and just as little— as the claim that shorter job tenures imply an erosion of job security for American workers.

Two points. First, Jacob Hacker has been one of the people leading the effort to highlight The Great Risk Shift, and I would guess he'd argue, based upon past remarks, that job loss and income volatility is only one part of his argument:

[F]amily income volatility is scarcely the only measure of economic insecurity or the “risk shift” that I and others have discussed. Only one chapter in my book is about family income instability. The rest are about pensions, health care, the decline in traditional job security, the increasing debt burdens reflected in families’ financial balance sheets—in short, about the whole range of economic risks that Americans face. Many of these risks, such as health costs, retirement insecurity, bankruptcy, and mortgage foreclosure, either do not show up in the incomes of working-age people or show up only weakly.

As I put it in The Great Risk Shift, “The up-and-down movement of income among working-age families is a powerful indicator of the economic risks faced by Americans today. Yet economic insecurity is also driven by the rising threat to families’ financial well-being posed by budget-busting expenses like catastrophic medical costs, as well as by the massively increased risk that retirement has come to represent, as more and more of the responsibility of planning for the post-work years has shifted onto Americans and their families. When we take in this larger picture, we see an economy not merely changed by a matter of degrees, but fundamentally transformed—from an all-in-the-same boat world of shared risk toward a go-it-alone world of personal responsibility.”

Second, the graph from Andy Harless in this post shows that the rate of job creation is falling at the same rate as the rate of job destruction. An evaluation of the risks faced by workers must also take account of the declining probability of finding a job after a job loss. If the paper covers this point (and it may have, I read it quickly), I missed it.

Moving on, the second paper examines "the empirical relationship between the decline in business variability and job destruction and the decline in unemployment flows." In essence, this paper associates the changes in the rate of job loss with The Great Moderation. If business volatility is higher after the recession than before, as many expect it will be, it will be interesting to see if the change in the rate of job loss and unemployment flows accords with the predictions of this model (I should note that one of the co-authors is a former graduate student):

Business Volatility, Job Destruction, and Unemployment, by Steven J. Davis, R. Jason Faberman, John Haltiwanger, Ron Jarmin, and Javier Miranda, 9 August 2009: Trends in the volatility of economic activity attract considerable attention. Many recent studies examine the "great moderation" episode in aggregate U.S. fluctuations.[1] Another recent line of research finds a secular decline in the variability of business-level changes. In this regard, R. Jason Faberman (2008) documents a decline in the rate at which jobs are reallocated across establishments. Steven J. Davis, John Haltiwanger, Ron S. Jarmin and Javier Miranda (2006; hereafter DHJM) document a decline in the cross-sectional dispersion of business growth rates and in the time-series volatility of business growth rates.[2] The secular decline in business-level variability measures roughly coincides with a marked decline in the magnitude of unemployment flows. Inflows, for example, fell from 4 percent of employment per month in the early 1980s to about 2 percent per month by the mid 1990s.
In this paper, we quantify the empirical relationship between the decline in business variability and job destruction and the decline in unemployment flows. To do so, we relate industry-level movements in the incidence and duration of unemployment to industry-level movements in several indicators of variability and job destruction. ...
The industry-level data provide strong evidence that changes in business volatility, dispersion, job reallocation and job destruction account for big changes in the incidence of unemployment. This key result holds in the annual and the quarterly data. We estimate, for example, that a decline of 100 basis points in an industry’s quarterly job destruction rate lowers its monthly unemployment inflow rate by 28 basis points with a standard error of 4 basis points. ...
To put the estimate in perspective, the quarterly job destruction rate for the U.S. private sector fell by 174 basis points from 1990 to 2005. Multiplying this drop by its estimated effect yields a decline of 48 basis points in the unemployment inflow rate, which amounts to 55 percent of the drop in the unemployment inflow rate from 1990 to 2005 and 22 percent of its average value. Analogous calculations based on our estimates with annual data imply that falling job destruction rates account for 28 percent of the larger drop in unemployment inflow rates from 1982 to 2005. ...
An interesting question raised by our results is what drives the secular declines in business variability, job destruction and unemployment inflows. Our study does not provide a definitive answer to this question, but we show that the basic pattern holds across major industries in the U.S. economy. We interpret this pattern as reflecting a secular decline in the intensity of idiosyncratic labor demand shocks. ... Other interpretations of the same basic patterns are also possible, as we briefly discuss.
We also develop some implications of our findings for the unemployment rate and its cyclical behavior. Simple approximations and decompositions along the lines of those used by Robert Shimer (2007), Michael Elsby, Ryan Michaels and Gary Solon (2009) and Shigeru Fujita and Garey Ramey (2009) establish three results. First, the steady state unemployment rate fell by 43 log points from 1976-1985 to 1996-2005. Second, nearly the entirety of this decline reflects a drop in the unemployment inflow rate. This result, when combined with our estimates, implies that the secular fall in job destruction accounts for about a quarter to a half of the long-term decline in the unemployment rate.
Third, while we focus on low frequency behavior, our findings also have implications for cyclical dynamics. In particular, the big secular decline in unemployment inflows implies a fall by half in the sensitivity of the unemployment rate to cyclical movements in the job-finding rate. More generally, our results highlight the dependence of short run unemployment dynamics on the background level of business volatility and job destruction. ...

In closing, we return to the question of what our findings say about changes in the underlying structural characteristics of the economy. Secular declines in unemployment flows, job destruction rates, and business volatility and dispersion measures are consistent with the predictions of standard search and matching models when perturbed by a persistent fall in the intensity of idiosyncratic labor demand shocks. We think this interpretation is a natural one. However, our empirical evidence does not preclude a major role for other long-term structural developments with important effects on business variability, job destruction and unemployment flows. For example, one might interpret our findings in terms of greater compensation flexibility over time or increased adjustment costs. Changes of either sort lead to smaller employment responses to labor demand shocks of given size. A careful assessment of these alternative interpretations is an important topic for future research.

    Posted by on Wednesday, September 2, 2009 at 12:25 PM Permalink  Comments (49)


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