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U.S. labor market less flexible than in 1990, economists warn

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[August 22, 2014]  By Howard Schneider

JACKSON HOLE Wyo. (Reuters) - The U.S. labor market has become steadily less dynamic since 1990, with workers seemingly locked into particular jobs and a more sluggish process of job creation and destruction in the private sector, according to research to be presented to global central bankers on Friday.

The research by two top labor economists portrayed the United States as potentially losing one of its notable economic strengths - the robust flow of workers between jobs, and the churn of employment as companies succeed and fail.

They said the apparent trend had been caused by several factors: dominant large retailers driving less labor-efficient firms out of business; an aging workforce less likely to change jobs; and the accumulation of regulations and more intense training requirements that have made it harder to join some professions as well as fire workers.
 


Those and other forces have driven down measures of labor market "fluidity" by as much as 25 percent since 1990, a trend that could translate into lower employment levels, productivity and wages, economists Steven Davis of the University of Chicago and John Haltiwanger of the University of Maryland wrote in a research paper prepared for the annual central banking conference in Jackson Hole, Wyoming.

This year's conference, sponsored by the Kansas City Federal Reserve Bank, focuses on labor market issues, highlighting how employment and wages have become central to the Fed's debate on the health of the U.S. economy and when to raise interest rates.

Fed Chair Janet Yellen has argued some top-line economic indicators including the unemployment rate, which has been falling faster than expected, don't capture the full story of an economy where stagnant wages and the concentration of new jobs at the lower end of the pay scale weigh on the prospects of the middle class.

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The paper by Davis and Haltiwanger, which will be the first presented at the two-day conference, suggests broad reasons for concern.

The churn of workers and jobs between positions and among companies is considered important to improving productivity, wages and employment in general - reallocating labor to more efficient uses, and opening up positions for younger workers or the unemployed when existing jobholders move on.

Looking at data across industries, states and demographic categories, the research examined the rates at which jobs were added and eliminated between 1990 and 2013. It documented a steady "secular decline" of about 25 percent.

That change could have particularly serious implications for less-skilled Americans, lengthening periods of unemployment because new jobs don't open as fast, and making it harder to progress in a company or change employers.

"The loss of labor market fluidity suggests the U.S. economy became less dynamic and responsive in recent decades," the two economists conclude. "There are good reasons for concern ... Sustained high employment is unlikely to return without restoring labor market fluidity."

(Reporting by Howard Schneider; Editing by Paul Simao)

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