A Powerless Recovery

Paul Krugman notes that persistent unemployment hurts the employed as well by decreasing their bargaining power, citing the low (voluntary) quit rate as evidence. This is an interesting claim with compelling evidence – wages grow a lot faster for everyone when unemployment is low.   But there’s something peculiar about the the recent recovery – it’s relatively powerless. Let me explain. Both the early and late 2000s recessions have been followed by so called “jobless recoveries” where output rises a lot quicker than employment. One would expect that this would be correlated with slower increase in bargaining power (using quit rate as a proxy) though there is no way to be sure, the JOLTS dataset we use to measure these things only goes as far back as the turn of the century.

But one would at least guess that a recovery in power would be in line with a recovery of the labor market. Using quits and unemployment as the relevant proxies, this would be incorrect:


The above is a simple graph of unemployment and quit level since 2000. Economic theory predicts that sharp falls in output and employment should be followed by proportionally rapid recoveries (the so-called “v-shaped” recession). It is a well-known fact that the late 2000s recession hardly followed this pattern. But the way quits and unemployment differ in their respective dynamics is interesting. Even though the decline in unemployment after 2007 was hardly proportional to the crash, at least it was quicker – that is a higher absolute slope – than the early 2000s. Conversely, not only did quits fall much faster in 2007, they also recovered – in absolute and relative terms – much more slowly!

If you crunch the numbers you’ll see that after 2001 unemployment fell 30% as quickly as it picked up. The same figure for 2007 is 20%. So it’s slower, but at least comparable. On the other hand, in 2001 quits recovered 64% as quickly as they fell whereas for 2007 that figure stands at an anemic 28%. Quits after 2001 picked up at 0.61 points (indexed to 2007) every month, but only 0.43 points in 2007, despite the much sharper crash.

Some of this is not surprising. While a deeper recession would normally be followed by a deeper recovery, there are limitations on the extent to which this relationship can hold, especially noting second order effects of hysteresis and market inflexibility. But some of this is definitely surprising. Using the figures above, unemployment recovered almost 70% as quickly in 2007 as it did in 2001. Without some important structural changes, that figure would be in the same ballpark for relative quit recovery, which only stands around 40%.

Qualitatively this means the willingness of workers to quit their jobs is far less than the unemployment rate would indicate, even using the standards of the 2000s, which weren’t by any measure amazing years for labor. If JOLTS went as far back as the Clinton years we would probably see an even stronger relationship between quits and unemployment, something that’s falling apart.

So now I should answer the proverbial “what does this mean”. There are a number of candidate explanations. Loyal readers know that I’m not hostile to a partially structural read, but even that can’t explain everything, because structural arguments generally accept that unemployment rate (as opposed to employment level or participation rate) is a broadly accurate read of the economy, and that much of labor force exit is due to an aging population (or technology, or whatever). I haven’t looked at the numbers, but if we looked at the above data using employment-population ratio instead of unemployment, the late and early 2000s may not look so different.

Ultimately if we are to believe that the structural power relationship in the labor market has not changed noticeably since 2000, unemployment rate grossly overstates the pace of labor market recovery, and the Fed should not even be thinking about tightening of any type. On the other hand, to the extent that unemployment rate is a good gauge of overall labor market health, workers have seen a pretty substantial fall in their bargaining power since 2000 (and remember this is independent of employment levels, unless there are some severe nonlinearities in the data).

Another explanation comes to mind, though given the magnitude it is unlikely. Tyler Cowen notes that future inequality will likely be tolerated without Occupy-esque discontent as an aging country likes stability and calm. It may similarly be the case that older workers are less likely to quit their job as that implies an abrupt shift and uncertainty. Job changes may also require intrastate relocations, something else that has declined over the last few decades (though there’s a bit of chicken and egg, here).

All are pretty harrowing tales for American workers, though in the long-run the former is preferable. The growing unwillingness of workers to quit places strong disinflationary headwinds in the economy as the ability to hit a wage-price spiral becomes much more difficult. Edward Lazear and James Spletzer also estimated that low churn (of which quits are a big component) cost the US economy $208 billion dollars this recovery. More generally – and in this arena I have no expertise; I turn to leftists like Matt Bruenig – this has social consequences by placing a subservience of labor to capital. I’m generally wary of such distinctions, and it’s unclear that any of the proposed solutions like higher minimum wages and stronger unions would make much of a difference – but the possibility exists and it is important.

The powerless recovery is freaky. We are possibly seeing a greater dependence on employment when tight labor markets are a thing of the past.

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  2. Bryan Willman said:

    Set aside trying to explain this while thinking of one labor market, rather than many labor markets in close proximity. The BLS has a chart for 2012 that shows unemployment among those with professional degrees as being 6x lower than among those who did not finish high school. We’re talking 2% (not exactly a social crises) versus 12+% (clearly a disaster.) [That may have changed in 2013]

    I suggest that a fruitful thing to do (which I don’t know how to find the data for) is to ask “does the ‘power’ relation hold on a group by group basis?” where a ‘group’ is defined by education/professional status, or perhaps that status mixed with age?

    A different thought that came to me looking at your graphs – what part of the labor force (or what parts of each group in the labor force) are “very stable” in their jobs – meaning they are very unlikely to quit regardless of labor market circumstances, and what percentage are “not so stable” – meaning that quiting one job to go to a better job is an option they are likely to pursue when circumstances allow it?

    Was it the case in the recent Horrible Recession that job losses were concentrated among the “not so stable” members of the labor force? That is, people set in good jobs that remained in good jobs are a larger than normal segment of the currently employed, and many of them aren’t going to change jobs regardless. While the rate of unemployment among those in commodity or just plain not very good jobs is in fact still very high.

    • These are important questions, and Id suggest the answers are not as clear as they may seem. While churn is usually considered efficient, there is a paper from Bleakley and Lin (http://ideas.repec.org/p/fip/fedpwp/07-23.html) which suggests that interindustry job changes are rarer in thick and efficient markets. When workers are forced to change occupations there is some waste of human capital and potential inefficient allocation, in desperation of jobs.

      This is relevant because many educated workers are working in rather menial positions which may not be reflective of a greater bargaining power despite healthier employment rates. On the other hand, educated workers, by virtue of being married to more educated workers, can hold out voluntarily unemployed longer, so there is no captive supply of labor.

      I cant answer the question of job stability without more research. As the era of defined benefit draws to a close, though, expect to see young, middle-class workers be much more willing to change jobs other things equal (though the point of this post is that other things are not equal).

      • Bryan Willman said:

        “the answers are not as clear as they may seem.” and “other things are not equal)”

        True. And, I think, in economies with 10’s of millions to 100’s of millions of labor participants, any realitistic description of the forces at work will be more rather than less complex.

    • g said:

      Unemployment may be higher in less-educated groups, but the relative change in employment was about the same across all groups: each group’s unemployment rate roughly doubled from 2007 to 2012. That doesn’t sound like a concentration of job losses. (See figure B “Unemployment rates by educational attainment, 2007 and 2012 ” at http://www.epi.org/publication/bp355-five-years-after-start-of-great-recession/ )

  3. I think you meant interstate and not intrastate

  4. Another factor not mentioned, afaict, is the drop in labour participation. That could explain both the recovery in employment and the reluctance of people to quit/bargain.

    • Yes it could and I think I actually mentioned this pretty explicitly towards the end (see the fifth graf from the end). More generally from the drop in participation, the point here would be that unemployment rates overestimate the health of the labor market and less conventional reads using participation or general employment levels are important.

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