Friday, September 19, 2014

Declining Labor Market Dynamics

Carrie Mayne, Chief Economist

A recent academic article published in the IZA Journal of Labor Economics (Henry R Hyatt and James R Spletzer, 2013, 2:5, explores the trend of declining employment dynamics over the last two recessions. What are labor market dynamics and why are they important? Simply put, dynamics occur in the labor market as businesses and workers begin and end their relationships, i.e. hiring and separation activity. This movement is generally associated with economic improvement; workers and employers finding more productive matches. Businesses find the most productive workers and workers find higher wages and more preferred working conditions. Hyatt and Spletzer found that at the national level the last two recessions brought declines in labor force dynamics but the recoveries did not bring with them increases in hiring and separations. The resulting status is a lower overall level of labor market dynamics today than the levels prior to the recessions and along with it concern as to whether the nation is missing out on the benefits of labor market movement.

Reading these results made me wonder whether Utah was experiencing the same trend. As a state whose economy is touted as one of the top five in the nation, with job growth rates far exceeding national averages, could it be that Utah also has stronger labor market dynamics? Is Utah experiencing the same decline in hiring and separations as the nation, or is our strong economy a result of productive labor market matches?

Click graph to enlarge

Surprisingly, Utah does NOT buck the national trend. Quarterly hires and separations rates in Utah mirror the nation with stepwise decreases occurring in recessionary periods. Instead of labeling our state as the exception (as we often have the luxury of doing) we are following the rule and therefore should ask the same questions Hyatt and Spletzer pose in their research. 
  • Is this a result of changing demographics, such as an aging workforce or differences in labor force participation between men and women?
  • Could the trend perhaps be driven by changes in industry structure in our state?
  • Should we rethink our theories on labor market dynamics? Maybe lower dynamics is a sign of high adjustment costs, worker uncertainty, the housing lock, or changes in the production process.
Here I challenge my fellow economists at DWS to explore these possible explanations. Is Utah also missing out on higher wages and increased productivity, or is it time to rethink how we understand labor market dynamics?

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