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Interview with Giuseppe Moscarini

Giuseppe Moscarini, Professor of Economics, Yale University

Paper: “Did the Job Ladder Fail after the Great Recession?” (with Fabien Postel-Vinay)

The paper’s main takeaways, according to Moscarini:

  • The behavior of firms of different sizes is very important to understand what’s going on. We don’t want to look only at aggregate employment. We want to look at which kind of firms are hiring.
  • It is not always small firms that suffer in recession.
  • This last time was unusual. Small firms did suffer more, and I think we have been paying the price all along in the last five years because it made it harder for people to get back into employment. Hopefully, we are now at the turning point where large firms will hire and wages will rise.

The Federal Reserve Bank of St. Louis hosted its 39th Annual Fall Conference on Oct. 9-10, 2014. David Andolfatto, a vice president and economist with the St. Louis Fed’s Research division, sat down with each of the conference presenters and discussed their work in plain English. The content below is from those interviews. All interviews have been edited for clarity and length, so the content below should not be considered a transcript. To read the papers presented at the conference, visit


Describe for us what exactly a job ladder is and what it means for it to fail.


I think everybody understands that there are high-paying jobs and low-paying jobs, and, in life, people slowly climb what we call a job ladder, meaning they slowly and by luck, by and large, find these higher paying jobs and occasionally fall off the ladder. They get fired, and this has long-lasting consequences for their earnings for a long time.

What we do in this research project, with my co-author Fabien Postel-Vinay from University College London, is look at what this job ladder implies for business cycles, why so many people lose jobs in recessions, why it takes so long to regain employment out of recessions and why the job recovery has been so slow. In past work, we actually looked at many recessions and many business cycles in many countries. In this work, we actually focus on the Great Recession, on the last cyclical episode, and we do find something different.

Let me tell you a little story for basically what we distilled out of the research project and why the Great Recession is differ­ent. When unemployment is high, it’s actually easy for firms to hire. There are plenty of people knocking on the door. It’s actually particularly easy for small firms, which are low-pay­ing firms, to hire. They don’t lose workers to other firms, there is no poaching, there are no quits, everybody is desper­ate for a job, and so small firms are relatively unconstrained.

When unemployment is low—as hopefully it will be in the U.S. in a year or so, as it’s already falling—it gets much harder for firms to hire. So large firms start poaching people from small firms and the job ladder really picks up. This is what we see in the data. Small firms, as a consequence, actu­ally do relatively well relative to large firms in recessions and early recoveries. So small firms actually are the engine of job creation, as many people say, but only when unemployment is high, which is probably when jobs are needed. And when the economy tightens, large firms are actually leading the charge, and that’s where wages really rise.

Now, the Great Recession has been different. Something happened, something we don’t actually dig into, that made small firms suffer more than in previous episodes. Overall, they still did just as badly as large firms, but usually they do better in recessions. This all sounds counterintuitive, because most people have in mind that small firms are the ones who suffer more in recessions. Their credit is tighter, but the data speak quite strongly in favor of the pattern that I described.

In this particular recession, small firms did suffer. What happened was that there was no room created at the bottom of the job ladder because the small firms were suffering. They were not hiring, large firms were not poaching, the job lad­der stopped working, and so these jobs at the small firms—which are the typical gate of entry for unemployed into employment or re-entry for the unemployed into employ­ment—didn’t open. These jobs at the bottom were not there.

Now, why is that? Why did this happen? We have different conjectures about why these quits declined. People maybe were scared about quitting their job and taking a gamble without a job because unemployment was so bad. But that’s essentially what happened.

Then we looked at a host of data to corroborate this story, and we actually find that the movement of people up the job ladder is probably the one indicator of the labor market that has still not recovered. Unemployment has come down, employment has gone up, hiring rates are healthy again, but the job-to-job quit rate is still almost as low as it was five or six years ago.


So it’s the large firms that are still not hiring and that are stopping the job ladder from working? They’re not poaching?


They are not poaching until recently, mostly because unem­ployment was still high, so it was relatively easy to hire. You know, poaching is costly. You have to hire somebody out of another firm. You have to pay them more. As long as there are unemployed out there, firms tend not to do that and essentially poaching increases both when there are lots of people to be poached because they work at low-paying jobs and when you run out of the unemployed.


The Great Recession was not just a scaled-up version of what happens in previous recessions. Something different happened. Could you reiterate what was different?


That’s exactly the point of the paper. What was different was that small firms suffered more. They suffered more relative to previous recessions and relative to large firms. So the experience of small firms was unusually painful. Large firms still did pretty badly, but usually they do worse. This time it was really across the board.


I guess you speculate on why that may be, that small firms may have been disproportionately hit this time relative to history. Does it matter why, for the story you’re telling?


To some extent, it doesn’t. Our story is not about what caused all this. It’s why employment is not recovering fast. So this idea that there is a ceiling, there’s something keeping employ­ment from climbing this ladder. Now, if we want to speak about the causes, which I think is important, we know this has been a financial-crisis-caused recession. There are plenty of reasons why small firms have a harder time having access to credit. And so this time, they may have been particularly affected by the recession, more so than in previous ones.

What was not, I think, understood previously is that this was set in motion, this chain of events where these allegedly low-paying bad jobs disappeared. But these are actually important jobs because they, again, allow the unemployed to restart the process of regaining their earnings, and this time it didn’t happen. We believe it’s no coincidence that wages have not responded. So the one thing that’s still flat is wages, and we have seen in previous recessions that wages will recover when large firms will start poaching. Until that happens, wages are going to just stay flat.


A lot of theories have this property that unemployment will spike and then show a gradual decline just because it’s very easy to destroy relationships and costly to build them back up. This is a part of your story, but you get into deeper details of exactly how this is working, I presume. Does this imply anything specifically about the way policymakers might want to design policies relative to kind of a more naïve view of how this process is working?


I’m glad you asked, because we have some strong claims about policy. Actually we think there are ramifications for policy on two dimensions. First, there are well-known policies that cater to small businesses. The Small Business Administration is one example. They provide loan guarantees and subsidized loans to small firms.

Now, we think we should also consider the hiring con­straints the small firms face, and that those actually tighten in expansions, in booms, not in recessions. This idea that small firms need help in recessions because they can’t have access to credit is only part of the story. Facing this hiring constraint actually seems to be, on average, stronger and more important. They have a hard time hiring and a much harder time retaining talent in expansions. So in a broad sense we may want to rethink some policies that are designed in terms of firm size.

Now, more specifically, and that’s another policy implica­tion, like I said, we think that wage growth is intimately related to this pattern of growth of large and small firms. Large firms pay much more, and a lot of wage growth that people experience comes through changing jobs and being hired by better firms.

We actually have a conjecture that the monetary authority should stop looking only at unemployment as an indicator of slack for wage growth and should actually start considering and looking carefully at the job-to-job quit rate, because the two are not perfectly related. There are situations like the current one in which unemployment is reasonably low by now, but this quit rate, this job ladder is not working yet. In these cases, we should not expect wage growth, so we should not tighten monetary policy if that’s what the Fed believes should be done. We think that this job-to-job quit rate should be a central indicator to monetary policy because it predicts wage growth better than employment itself.


The job ladder mechanism that you describe and model in your paper, does it work well? Is it performing a social function? Is there any reason to believe that it’s not performing as it might in an ideal situation?


There are several different reasons why the pace of realloca­tion may not be ideal. Again, on average, people gain from upgrading. They’re moving to more productive firms, so it’s socially desirable to promote the job ladder. In that sense, it’s probably not a good idea to prevent large firms from poach­ing workers from small firms. What we might want to think about is helping small firms hire the unemployed because high-paying jobs are in high demand by the unemployed and employed. It’s hard for an unemployed to get a high-wage job, because the employed are competing for that. There’s a lot of congestion.

And so although these low-paying jobs are not as high pay­ing as the other ones, they do let the unemployed back into the labor force. And so it may be a good idea not to interfere with the upgrading, with the quits, but if there’s any reason why the job flows are too slow and the job recovery is slow, there may be reasons to subsidize hiring of the unemployed by small firms and that creates the opportunity for workers to upgrade.