The Decline of Job Loss and Why It Matters

Steven J. DavisUniversity of Chicago, NBER, AEI

AEA Session on“Labor Market Flows”

New Orleans, 3 January 2008

Steve.Davis@ChicagoGSB.edu

Chief ClaimAmerican workers face lower risks of job loss in recent years than 10, 20 or 30 years earlier.

Why the Decline of Job Loss Matters

1. Lower (frictional) unemployment2. Reduced costs of worker

displacement3. A rising tide of economic

insecurity?

Weekly New Claims for Unemployment Insurance BenefitsRelative to Nonfarm Payroll Employment, Monthly Averages, 1967-2007

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Jan-67 Jan-72 Jan-77 Jan-82 Jan-87 Jan-92 Jan-97 Jan-02 Jan-07

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1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002

Percent of Employment

HP Trend - Creation

HP Trend - Destruction

Quarterly Job Flows, Manufacturing Sector,1947-2005

DWS Job-Loss Rate, Farber (2007)

On Job Tenure Statistics• Job tenure statistics inform us about the

durability of employment relationships, not the risk of job loss.– According to JOLTS data for 2001-2006, 36%

of employment spells end because the worker is laid off or discharged for cause.

– Most jobs end because the worker quits.• Historically, workers are more prone to

quit when job opportunities are plentiful.– Should we interpret declines in job tenure as

evidence that workers enjoy a greater abundance of attractive job options?

Unemployment, 1• Basic mechanism in search models along the

lines of Mortensen and Pissarides (1994): Less job destruction fewer job-losing workers smaller unemployment inflows lower unemployment rates

• Question: Does this mechanism explain the large drop in U.S. unemployment inflows and unemployment rates since the early 1980s?

Job Destruction and Unemployment Inflows by Major Industry, 3-Year Averages, 1990-2005,

Controls for Period and Industry Effects

Job Destruction and Unemployment Inflows by Major Industry, 3-Year Averages, 1977-2001,

Controls for Period and Industry Effects

Unemployment, 2• Consider the estimated effect of job destruction

on unemployment inflows in the industry-level data (using low-frequency covariation)

• Multiply estimated effect by aggregate drop in job destruction rate from 1990 to 2005 Implied decline in unemployment inflow rate amounts to 48% of actual decline (20% of average value)

Conclusion: Basic MP mechanism accounts for nearly half the decline in unemployment inflow rates.

Unemployment, 3• In an accounting sense, lower unemployment

rates since 1970s and early 1980s are largely/almost entirely explained by a secular decline in unemployment inflow rates.

• Job-finding rate fluctuates a lot with business cycle but has little trend.

• For evidence, see the time series charts in Fujita and Ramey (2006), Davis et al. (2007), Elsby et al. (2007) and Shimer (2007).

Costly Worker Displacement, 1• Much evidence that job loss can lead to harmful

consequence for workers and their families.• Jacobson, Lalonde and Sullivan (1993) and

Sullivan and von Wachter (2007) consider high-seniority workers displaced from larger employers in mass-layoff events between 1980 and 1986 – Large and persistent earnings losses, e.g., 25%

below pre-displacement levels 5 years later– 15-20% increase in death rates over 20 years

life expectancy reduction of about 1.5 years

Costly Worker Displacement, 2

Good-News Corollary:

American workers are much less likely to suffer from costly worker displacement events in recent years than in the 1970s and early 1980s.

A Rising Tide of Economic Insecurity?

• The risk of job loss is usually seen as one of the major economic risks facing individuals.

• At a minimum, the long term decline in job loss rates calls for some revision to alarmist views about rising economic insecurity for American workers and families. – At least one major element of economic security

has improved in recent decades.

Why the Mistaken Claims of Declining Job Security?

• Unwarranted interpretation of job tenure stats• Globalization and competition have undercut

job security for certain jobs and occupations. • College degree is no longer a ticket to a

secure job• Rising volatility at publicly traded firms was

seen as a broader rise in business volatility.– But volatility fell for privately held firms, and they

dominate the overall trend.

Volatility of Firm-Level Employment Growth Rates (Davis et al, 2006)