Saturday, June 4, 2011

Less dynamism in the U.S. job market

Last week the Washington Post's Steve Pearlstein had an interesting column on the decline in dynamism in the U.S. job market. The column describes the research of John Haltiwanger from the University of Maryland and his colleagues on job flows. By coincidence, I had an opportunity to see one of Haltiwanger's co-authors, Javier Miranda from the U.S. Census Bureau, present some of their research while I was in Denmark.

"Job flows" are technique for breaking net employment growth down into four components:
  • Jobs added by brand new employers (establishment births),
  • Jobs added by existing employers (establishment expansions),
  • Jobs lost because of employers shutting down (establishment deaths), and
  • Jobs lost because of employers contracting (establishment contractions).
By simple arithmetic, if you add the jobs created by new and expanding employers and subtract the jobs by "dying" and contracting employers, you get the net change in the number of jobs. While much attention is paid to the net employment change (e.g., the paltry 54,000 jobs added last month), we actually learn quite a bit by examining changes in the separate components. The latest figures from the U.S. Bureau of Labor Statistics, which extend through the third quarter of 2010, are shown below.

The figures show that there is tremendous dynamism in the labor market. While the overall number of jobs might change by a few hundred thousand in a given quarter, there are actually several million jobs being created and lost. Also, though we tend to think about jobs changing from businesses opening or shutting down, far and away the lion's share of job changes occur among continuing employers.

The decrease in dynamism that Pearlstein and Haltiwanger refer to is the overall downward trend in all four job flow components. The downward trend is even more pronounced when you consider that the U.S. population has grown and when the flows are expressed in per capita terms.

Employer "births" and "deaths" have trended steadily downward. However, employer expansions and contractions have also trended downward.

Some of this is a new phenomenon. Prior to the Great Recession, expansions were not viewed as being especially cyclically sensitive. However, during the Great Recession, employment growth associated with expansions fell by more than one million and has yet to recover. The credit crisis offers one explanation for the plunge and the incomplete recovery. Many firms have had a difficult time borrowing and issuing commercial paper, and firms that have had funds have either built up cash reserves or used their funds to buy back stock and to buy out competitors.

More interesting, though, is that the downward trend in dynamism pre-dated the recession. During the 2000s, taxes were cut, and the government followed an unabashed pro-business policy. These advantages for businesses and entrepreneurs, however, did not translate into increased job creation.

Haltiwanger offers a novel "too big to grow" explanation. His research shows that "young" firms contribute disproportionately to job growth. As older behemoths, like Walmart, come to dominate local markets, they take the air out of other newer but potentially faster-growing firms. More generally, the abandonment of anti-trust policy may be keeping new entrepreneurs from entering markets and may be robbing the economy of a prime source of job creators.

If Haltiwanger's hypothesis is correct, you can add "too big to grow" to a host of other problems associated with businesses being "too big," including moral hazard ("too big to fail"), undue political influence ("too big to play nice in elections"), and undue influence in markets ("too big to pay fair wages or prices").