Annual Report 2010| Federal Reserve Bank of St. Louis

4. Labor Market Transitions

The categories of employment, unemployment and nonparticipation represent snapshots of labor market activity at a point in time. But workers belonging to a given category will not necessarily remain in that category for long. Over a given interval of time, a number of workers will make transitions from one labor market category to another. These transitions are called "worker flows."

An analogy may be of some use here. Imagine a bathtub of water, with its drain unstopped, and the faucet turned on. The level of water at a point in time corresponds to the level of employment. The water draining from the tub corresponds to the flow of workers losing or leaving their jobs. The water pouring in from the faucet corresponds to the flow of workers finding jobs. Whether the water level rises or falls depends on the relative size of the inflow and outflow. And so it is with the level of employment, unemployment and nonparticipation.

It is of some interest to measure worker flows because their magnitude reveals something about the fluidity of the labor market. Do labor market categories such as unemployment, for example, represent stagnant pools of workers who exhibit little mobility? Or is there a flurry of economic activity hidden below the surface? As it turns out, data from the Current Population Survey (CPS) can be used to answer this question.



Average Worker Flows 1996-2003

mpm = millions per month

figure 5

SOURCE: Adapted from Davis, Faberman and Haltiwanger (2006) Figure 1.


Figure 5 examines CPS data over the period 1996-2003.4 The figure divides the adult U.S. population into three familiar categories. The average level of employment was 122 million workers, and the average level of unemployment was 6.2 million workers. The average number of adults out of the labor force was 59.3 million.

The numbers associated with the arrows in Figure 5 represent average worker flows per month. These monthly flows are huge in relation to population size. For example, 9 million workers moved into and out of employment every month on average from 1996-2003. That's over 100 million transitions into and out of employment over the course of a year, a number that is almost as large as the average number of people employed at any given time.

Several other interesting facts are evident from Figure 5. Although about 4.4 million workers left employment every month, fewer than half of these workers became unemployed—most left the labor force. Similarly, about 3.2 million workers left unemployment every month. But only 1.8 million of these workers found jobs; the rest left the labor force.

Economists Steven Davis, R. Jason Faberman and John Haltiwanger suggested in a 2006 paper that the economic forces behind these worker flows can be grouped into "supply" side and "demand" side. On the demand side, employers continuously create new jobs and destroy old ones, a process that evidently accounts for much of the observed job mobility and many of the jobless spells experienced by workers. On the supply side, workers frequently switch jobs and change their labor market status for any number of reasons, including retirement, family relocation, schooling and so on. Also on the supply side, new workers are entering the labor force.



U.S. Labor Market Flows

2006:Q1 - 2010:Q4

figure 6

SOURCE: Current Population Survey, Bureau of Labor Statistics/Haver Analytics.
NOTE: Shaded areas represent recessions as determined by the National Bureau of Economic Research.


As one might expect, there is considerable cyclical (as well as seasonal) variation in these flows. Figure 6 plots the average monthly flow of workers for the United States from 2006:Q1 to 2010:Q4 . The shaded region represents the most recent recession (officially dated by the National Bureau of Economic Research).

The top-left panel plots the flow of workers into and out of employment (nonemployment is the sum of unemployment and nonparticipation). Not surprisingly, there is a sharp spike in the flow of workers leaving employment during the recession. There is also a moderate decline in the flow of workers into employment. It is interesting to note that an average of 5.6 million workers per month found jobs even in the depths of the recession. The flow of workers losing or leaving their jobs, however, was much higher. The difference in these two flows accounts for the sharp recent decline in employment recorded in Figure 1.

The top-right panel shows a large increase in the flow of workers moving from employment to unemployment during the recession. This is what one would expect when the economy sours. But there is also a significant, though less pronounced, increase in the number of unemployed workers finding jobs. This latter increase is due, in part, to the fact that there are now more unemployed workers. But as unemployed workers have the option of leaving the labor force, the fact that more unemployed workers are finding jobs must to some extent also reflect a growing availability of job opportunities.

The bottom-left panel depicts the flow of workers between employment and nonparticipation. Both of these flows are declining throughout the recent recession. It is evidently not as easy to find a job while out of the labor force. And likewise, workers appear less inclined to leave the labor force as the economy worsens.

The bottom-right panel depicts the flow of workers between unemployment and nonparticipation. The unemployment to nonparticipation flow is rising throughout the recession; this might, in large part, be due to a "discouraged worker" effect, whereby unemployed workers facing bleak prospects stop looking for jobs. There also appears to be an "encouraged worker" effect; at least, this is one interpretation for the corresponding rise in the flow of nonparticipants choosing to enter the workforce.

Taken together, the data exhibited in Figure 6 reveal that the pattern of labor market activity over the course of booms and recessions is considerably more complicated than is generally recognized. As more and better data have become available, economists have been led to reassess existing labor market theories. In conventional theory, for example, unemployment is frequently portrayed as a stagnant pool of idle workers, waiting on the sidelines until market conditions improve.

In fact, the microdata show that for most workers, the length of their unemployment spells is relatively short; see the left-hand panel in Figure 7. This panel shows a fairly typical pattern: 83 percent of all unemployed workers in May 2007 had been unemployed for 26 weeks or less. However, while most unemployment spells are short, most of the time spent in unemployment is accounted for by a relatively small fraction of workers—the "long-term unemployed."



Unemployment Duration

figure 7

SOURCE: Bureau of Labor Statistics/Haver Analytics.


The right-hand panel in Figure 7 depicts the distribution of unemployment spells in August 2010. It still remains true that the majority of unemployment spells are of short duration, but the fraction is now much lower than it was prior to the recession. The fraction of unemployed workers who have been out of work longer than 26 weeks has risen to 42 percent. For policymakers, this post-recessionary increase in the fraction of long-term unemployment is disconcerting. If unemployment durations are short, at least the pain of unemployment is short-lived. But long-duration unemployment is more of a concern. This will certainly be the case if, as some fear, long unemployment spells lead to a deterioration of skills, rendering workers unemployable when the job market recovers.


4. Fallick and Fleischman (2004), cited in Davis, Faberman and Haltiwanger (2006).

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