The Great Reallocation During the COVID-19 Recession

Serdar Birinci: The data shows that most of the individuals during the COVID-19 episode, among those who quit, they quit to take another job, not into unemployment or out of labor force.

Maria Hasenstab: Welcome to The St. Louis Fed's Timely Topics podcast series where we interview research economists about their work. I'm Maria Hasenstab, your host. In this episode, we'll be discussing job transitions with Serdar Birinci, an economist at the Federal Reserve Bank of St. Louis. Serdar, thanks for joining me.

Serdar Birinci: Thanks a lot for having me.

Hasenstab: Serdar, we heard a lot during the COVID recession about what some people called "the great resignation," but you've done really interesting work on what you call "the great reallocation." So, I'd like to learn more about the great reallocation including what these job transitions look like historically and then also what you're seeing in the future. Tell us, what is the great reallocation?

Birinci: Sure. I also heard a lot of discussions regarding the idea that employed individuals quit their jobs and become unemployed or go out of the labor force, and often researchers and some policymakers blame the pandemic-related unemployment insurance transfers as they thought that these are the main causes behind why people are quitting into unemployment or out of labor force.

Hasenstab: Because of the benefits that were increased during that time--

Birinci: Yes, exactly.

Hasenstab: --some people thought "People are quitting to collect these benefits"?

Birinci: That's what they thought. Well, we can actually check whether that's the case in the data. What I find in the data by just looking at the reasons of these individuals quitting their jobs is that these individuals are actually quitting to take another job. The rise in the total number of quits we saw during this episode was mainly driven by the increase in the job-to-job transitions, not transitions from employment to unemployment or employment to out of labor force, meaning individuals were quitting from their jobs to take another job, not into unemployment. And I call this as reallocation because individuals often quit to take another job if they feel that a particular job is more a better fit for their own particular set of skills or this particular job offers a better compensation package or better amenities, so that's why I call this a reallocation rather than immediate resignation, which often implies that individuals are quitting into unemployment, which is not the case in this episode.

Hasenstab: So your research found that people who quit their jobs were moving to another job?

Birinci: Correct.

Hasenstab: So, how does the great reallocation during the COVID-19 recession compare to previous recessions?

Birinci: That's an excellent question. So, actually, the COVID-19 recession was a very different recession when compared to let's say the great recession. So, the great recession was a unique downturn that affected pretty much everybody in the economy: low-income workers, high-income workers, those in high-paying industries like finance, and so on. And now the difference between the COVID-19 recession and the great recession was that recovery from the great recession was also very slow, so the unemployment rate reached to its pre-great recession levels only by the end of 2017, meaning the recovery in the labor markets took around seven years after the great recession.

In terms of the job-to-job transition rates, the behavior of the job-to-job transition rates between the two recessions and the recovery episodes were also very different. During the recovery from the great recession, the job-to-job transition rate remained flat, especially in the episode of 2016 and 2019, which is unusual because the job-to-job transition rate, the rate at which employed workers changes jobs in a particular month, is actually negatively correlated with the unemployment rate, meaning when unemployment rate declines, when the economy is doing well, there are lots of available jobs. Firms are opening up, they are posting more vacancies, the job-to-job transition rate goes up as well, but this is something that we did not observe during the recovery from great recession. Between 2016 and 2019, the job-to-job transition rate was flat.

Hasenstab: So, during that time, people were holding onto their jobs? They were not moving jobs as much as they normally would?

Birinci: Exactly. And this is actually another interesting episode because in that 2016-2019 episode, the Fed and the policymakers were also puzzled by the observation that inflation wasn't picking up. So, annually, on average, inflation was around 1.7%, which is below 2% of the target for the Fed, so we had a better problem at that time that inflation was actually lower than the Fed's target, but we have to understand why this was the case. And in a recent research paper titled "Labor Market Shocks and Monetary Policy," me and my coauthors, Fatih Karahan, Yusuf Mercan, and Kurt See, we actually linked the unusual behavior of the job-to-job transition rate during this episode to the unusual behavior of inflation, so-called "missing inflation puzzle." And we actually find that if the job-to-job transition rate increased following the historical correlation between unemployment rate and job-to-job transition rate during this episode, then we would actually observe an increase in the inflation, and inflation would have been around 2% instead of 1.7%.

The main idea behind this is that when individuals are changing jobs, they often move to jobs that are paying them higher salaries. Or even if they stay in their current job, they are able to negotiate their existing salaries with their current employers because employers are willing to pay them a little bit higher salaries to retain them during an episode of high job-to-job transition rate. This may have consequences for the prices they charge and overall leave some increase in inflation as well. So, part of the reason why inflation was muted during that episode was the missing job-to-job transition rate.

Hasenstab: So, your current work focuses on that and why things looked different during that great recession recovery?

Birinci: Yes.

Hasenstab: Are there certain groups of workers or industries that saw more transition during this most recent recovery?

Birinci: Yeah. During the recovery from the COVID-19 recession, especially the service sector jobs experienced the highest increase in the job-to-job transition rates, and an implication of this is that they were the only group of workers who experienced real positive wage growth. All other works, especially those with middle- to high-income groups, they experienced a negative real wage growth meaning normally, their wages might have increased, but that was below the inflation. But for the workers that are especially low-income workers and especially in the service-sector jobs, they experienced the highest increase in their real wages, and this was also driven by the increase in the job-to-job transition rate in that sector and for that group of workers.

Hasenstab: So, you were saying in the service area and leisure and hospitality, we saw the most movement in lower paid workers moving within still likely those sectors or to a new job and ideally for a higher salary?

Birinci: Correct.

Hasenstab: And that might've been why we saw some fluctuations at a local coffeehouse. Maybe they were having staffing shortages or hours changed as a result.

Birinci: Yeah. If they were unwilling to raise the existing workers' salaries, that might have been those workers were quitting from their job in that coffeeshop to move to another job with higher salaries or better hours, and this particular coffee shop might have experienced labor shortages, and they have to reduce business hours.

Hasenstab: That is so interesting. Serdar, before we look to the future of your research, I want to take a quick break.

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Serdar, let's get back to your research, and let's look into the future. As the economy continues to evolve post-lockdown, where do you see the great reallocation headed? Is this a trend that may continue?

Birinci: So, the peak of the job-to-job transition rate was already recorded during the summer of 2022, and now job-to-job transition rate is actually coming down, so we will soon reach the historical trend or historical average of the job-to-job transition rate.

Hasenstab: So, we're in spring 2023 and you're saying this job transition likely peaked May-June 2022, so things are already on a downward trend there?

Birinci: Yes.

Hasenstab: What's the main takeaway about your work on the great reallocation?

Birinci: Don't jump into conclusions too quickly before looking at the data. And some of these conclusions may be wrong, which was in my opinion the case when we mentioned this great resignation idea that individuals were I think too quickly jumping into the conclusion that employed workers are quitting from their jobs and they become unemployed. And this has an implication on how we think about policy because they were also blaming the pandemic-related unemployment insurance transfers as the main cause of the quitting behavior of works into unemployment, but this was not the case. The data shows us that individuals weren't actually quitting most of the time to unemployment or out of labor force. They were actually quitting to take another job.

Hasenstab: So, that's such a good point. Before jumping to any conclusions, look at the data. And tell us again, what did that micro-data show?

Birinci: The data shows that most of the individuals during the COVID-19 episode, among those who quit, they quit to take another job, not into unemployment or out of labor force.

Hasenstab: Wow, okay. Thanks so much for that, Serdar. You've given us a lot to think about today.

Birinci: Thank you so much for having me.

Hasenstab: To read more about Serdar's research, visit StLouisFed.org. That's where you can find all our Timely Topics podcast episodes. You can also find Timely Topics on Apple Podcast, Spotify, or wherever you like to listen to your podcasts.