Wednesday, October 22, 2014

My Response to Carrie's Blog

Mark Knold, Supervising Economist

In a previous blog post dated September 19, our Chief Economist Carrie Mayne drew attention to Utah’s declining labor market dynamics. By saying dynamics we mean “movement within,” and movement within is people moving into and out of jobs. We also call this labor market “churn.” Carrie observed that there is not as much churning within the labor market as was seen 15 years ago. This is visualized in the first graph below. Carrie’s challenge to her fellow economist’s: why? I’ll give that challenge a shot.

Higher churn levels generally signal a strong economy. People feel confident enough about the overall economy and its long-term prospects to let go of their current job and look toward something better. Making the leap to a new job means you trade tenure at your old job for a better overall advancement in your new job. But, you are exposed to being the low man on the totem pole if the economy turns soft and business releases workers. If workers feel confident about the economy’s staying power, then more people are willing to take this risk and make this jump. It’s a psychological decision.

People are continuously looking to do this, as movement up the career ladder (and with it movement up the pay ladder) is a natural motivation among working adults. A strong economy creates jobs, and as more jobs are created, more opportunities develop for people to advance into better jobs—and thus more churning. Conversely, a slowing economy creates fewer job-movement opportunities resulting in less churning.

Click to enlarge
On the graph to the left, we see the natural declines in job churning during the recession periods. We also see a rebound in the strong economic period between the recessions. But the overall flow of this job churning is a series of steps downward and thus Carrie's questions—why?

The data available to create the above graph only begins in 1999. We don’t have a window prior to that to evaluate. I mention this because the high point on the graph is 1999. What we don’t know is if that was the long-term normal, or an anomaly.

If you remember the go-go 1990s, it was a long period of above-average employment growth in Utah. As I mentioned above, strong economies produce the most job churning. We don’t know if we are coming down from some historical high—but I strongly suspect we are.

The historical flow of Utah job growth is depicted in the graph below. Long-term average job growth is represented by the red line. The down arrow points to the time frame that corresponds with the 1999 period of the prior graph. We see that by 1999, Utah was just ending a 12-year period of almost continual above-average growth—and in many years noticeably above-average growth.
If an economy runs for nearly 12 years at such high rates of growth, and we operate under the assumption that high job growth produces more job churning, then I would speculate that the highest percentage of job churning we may ever see would probably be during this late 1990s period. (That is the timeframe we are comparing against in the first graph).

Click to enlarge

To paraphrase, Carrie’s challenge was, “what has changed in the current economy?” My answer is: not enough job growth for not a long enough period of time. The job-churning trends coming out of each recession are upward. The problem is they just aren’t reaching the level seen in 1999. It looks like the mid-2000s churning wanted to rise higher, but it ran out of steam. The current recovery period following the most recent recession still hasn’t played itself out and thus still has its story to unfold. The current recovery would have a long way to go to reach the churn levels of the late 1990s.

In her blog post, Carrie offered some options to explore as to why this lowering in churn is occurring. The common theme across her suggestions is that what we are seeing is a structural change. The alternative to that would be a cyclical change (i.e., it’s just the business cycle and give it enough time and it will eventually bounce back). My comments up to this point as to what I speculate is going on may lead one to think that I lean to this cyclical view. I generally do not.

I believe there is a structural change that has occurred, and the change that has occurred is psychology. Those of us who are old enough to have had grandparents who lived through the Great Depression probably observed them living out their lives in frugality. Even in the prosperous 50s, 60s, and 70s, my grandparents would stock up on products when they went on sale. They didn’t throw many things out. They drove cars into the ground. They bought with cash. They told me to save and take care of my stuff. Their economic psychology was molded by that depression and it dictated to them the rest of their lives.

I believe a bit of the same psychology is at work in relation to job churning. If you look at the second graph, you will see that prior to the recession of the early 2000s, there really weren’t any Utah recessions that seriously slowed employment expansion. Things were pretty good in Utah for multiple decades, and even the few setbacks weren’t very long. But the—and particularly the recent Great Recession—put the realities of tight job markets into the working population’s psychology. I believe this predominantly true for the Millennial Generation—those currently 10—35 years of age. The working portion of that Generation is currently the largest working segment in Utah’s labor force.

The Millennial’s were coming of working age during those recessions. The young generally have the roughest ride in recessions. They have the hardest time getting jobs and are the most vulnerable to layoffs. Therefore, they probably have the most structural, psychological “damage” to deal with from the Great Recession in terms of their confidence in the economy. And that may linger in affecting their decisions on how confident they are to move from one job to another. This may be a major factor as to why the amount of job churning now is not at the level that generations prior felt comfortable enough to generate.

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