Emerging US Labor Market Challenges?

America’s flexible, responsive, and resilient labor markets have long been among the least well-understood “secrets” of U.S. economic competitiveness.   In contrast to many European or Asian economies, America’s labor markets are quite open.  It is relatively easy and low cost to both hire and fire workers, and this labor market churn helps spur career progressions and ensure that workers are available for new and growing industries.   Unfortunately, some recent reports and data releases suggest that we cannot assume that these labor market strengths will continue indefinitely.   In a paper prepared for the Kansas City Fed’s recent gathering in Jackson Hole, Wyoming, economists Steven Davis and John Haltiwanger describe how U.S. labor markets are becoming much less dynamic.

Workforce turnover rates, which occur via job reallocation (when firms close and workers lose jobs) or cyclical churn (the normal process of hiring and firing workers) have dropped in recent decades.  In 1999, worker turnover per quarter was 33.5 percent; in 2010, the turnover rate was 24.1 percent.  This stiffening of labor markets is having outsized impacts on the young and less well-educated, who find it harder to change jobs, change careers, or obtain better pay and work conditions.

A recent Governing magazine analysis of labor market trends offers further evidence of these trends. The analysis examines how displaced workers are faring in today’s economy.   The story leads with some good news—in January 2014, 61% of displaced workers found new employment—a big jump from recent trends.  However, roughly half of these re-employed workers were forced to take pay cuts.  Fifty-two percent of re-employed workers reported that their new jobs paid the same or more than their previous positions.   These trends vary greatly across industries.  In strong sectors like IT, education and professional services, large shares of workers are able to obtain new jobs with comparable pay.   However, many other sectors face big challenges.  For example, manufacturing workers are especially pressed to obtain new quality jobs.   While 59.3% of workers succeeded in obtaining new employment, only 43% of these reemployed workers found jobs with comparable pay.  Even worse, a large share of re-employed workers (29%) faced pay cuts of more than twenty percent in their new jobs.

What explains these labor market trends?   Some of these changes result from structural changes in the economy, such as an aging workforce, a decline in new business starts (see more here), and the replacement of Mom-and-Pop firms with large corporations like Walmart, CVS, of Best Buy.   Davis and Haltiwanger also point to the spread of occupational licensing rules which block new entrants in sectors like hair styling, food, and other retail services.  (You can access a 2012 Kauffman Foundation study on licensing here).

What can be done to address these problems?   While we can’t (and shouldn’t) seek to increase churn and turnover for its own sake, we can try to remove unneeded barriers (such as some arcane licensing rules) and take other steps to enhance worker flexibility.   The Affordable Care Act should help on this front, as workers can now rely on having health insurance in event of a job or career change.  Enhancing access to training, retraining, and education resources will also help.   Finally, efforts to reinvigorate the American business start-up machine must also continue.

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