Many Negative Labor Market Trends Started before the Great Recession

Thinkstock/shironosov

Today’s post is the first in a two-part series examining long-term trends in the U.S. labor market.

While some indicators show that the labor market has significantly recovered from the Great Recession, other indicators are causing concerns. In turn, policymakers and researchers continue to debate whether a full recovery is under way. An article in The Regional Economist examined some of these indicators and suggested that some of the downward trends started long before the recession.

Juan Sanchez, a research officer and economist with the St. Louis Fed, and Marianna Kudlyak, an economist with the Richmond Fed, argued that the current apparent weakness in the labor market may be related to long-term negative trends in labor force participation, real wage growth, job reallocation and business creation. They noted: “In this context, many labor indicators are actually stronger today than they have been in years, and even many of the ‘weak’ ones have rebounded from Great Recession levels.”

Some Indicators Are Lagging, Others Improving

Sanchez and Kudlyak wrote that potential concerns pertain to two areas: quantities and prices. Concerns about the quantity of labor stem from the decline in the labor force participation rate, which started in 2000 and accelerated after 2007. While some of the decline is due to an aging population, it’s also possible that individuals currently out of the labor force may jump back in, slowing down improvement in the unemployment rate.

Regarding prices, real wage growth has slowed recently. From 1995 to 2005, average yearly growth was 1.77 percent. From 2010 to 2015, however, it was 0.14 percent.

These indicators seemingly contradict others developments in the labor market. Specifically:

• The unemployment rate has rapidly declined.
• The number of unemployed per vacancy is back to prerecession levels.
• Many firms claim to have difficulty finding workers to fill open positions.

The authors noted that the magnitude of the Great Recession may have caused some “structural” changes in the economy, which cannot be easily changed back with monetary policy tools. However, they argued that many of the concerning indicators are indeed connected and are part of a less-known group of secular trends that predate the recession. They wrote: “Together, our findings indicate that there may be a new normal in the U.S. labor market.”

Job Reallocation

Sanchez and Kudlyak first examined job reallocation, or job creation plus job destruction. Job reallocation has declined from about 15.5 percent in the early 1990s to about 12 percent in 2014. They wrote: “In addition, evidence shows similar trends in other measures of business dynamism, such as worker reallocation, worker churn, worker turnover and an increase in job tenure.”

Job Ladder

Sanchez and Kudlyak also discussed the “collapse” of the job ladder. One aspect of the ladder is that large employers poach workers from smaller employers during advanced stages of the recovery. They noted: “The decline in labor turnover after the recession affected this transition of workers from smaller to larger employers, which, in turn, slowed down hiring from the nonemployment sector.”

The Startup Deficit

The authors also cited work from economists Benjamin Pugsley and Aysegul Sahin, who documented two trends in the demographics of U.S. firms:¹

• The creation of firms has declined, which has been referred to as the “startup deficit.”
• Employment has gradually shifted toward older firms.

The startup deficit seems to affect most of the sectors in the economy and started in the early 1990s. Pugsley and Sahin have suggested that the startup deficit has two opposite effects during contractions:

• The decline in startups amplifies the decline of employment.
• The larger share of employment in more-mature firms dampens the contraction of employment.

In recoveries, however, both effects act in the same direction: Both the decline in firm entry and the larger share of employment in more-mature firms dampen employment growth, as large firms are less likely than small firms to hire people. Sanchez and Kudlyak wrote: “The result is the emergence of jobless recoveries.”

The authors noted: “All of these facts indicate that the U.S. labor market is less dynamic than it once was.” But what’s more, some of these negative trends have accelerated. The second and final post in this series will examine the acceleration of these trends.

Notes and References

¹ Pugsley, Benjamin W.; and Sahin, Aysegul. “Grown-up Business Cycles.” In 2015 Meeting Papers, No. 655. Society for Economic Dynamics, 2015.

Additional Resources

• Regional Economist: Labor Indicators: Some of Today’s Trends Pre-Date the Great Recession
• On the Economy: Nearly Half of Job Switchers Earn Less in Their New Roles
• On the Economy: Jobs Involving Routine Tasks Aren’t Growing