Academic journal article Federal Reserve Bank of St. Louis Review

The Cyclicality of Hires, Separations, and Job-to-Job Transitions

Academic journal article Federal Reserve Bank of St. Louis Review

The Cyclicality of Hires, Separations, and Job-to-Job Transitions

Article excerpt

This paper measures the job-finding, separation, and job-to-job transition rates in the United States from 1948 to 2004. The job-finding and job-to-job transition rates are strongly procyclical and the separation rate is nearly acyclical, especially since 1985. The author develops a simple model in which unemployed workers search for jobs and employed workers search for better jobs. The model predicts that an increase in either the job-finding rate or the separation rate raises the job-to-job transition rate, which is qualitatively and quantitatively consistent with the available evidence. In contrast, if the job-finding rate were acyclical and the separation rate counter-cyclical, as is the conventional wisdom, the model predicts that the job-to-job transition rate would be counterfactually countercyclical.

**********

I measure the job-finding and separation rates in the United States from 1948 to 2004 and find that there are substantial fluctuations in the job-finding probability--the monthly probability that a typical unemployed worker finds a job--at business cycle frequencies, whereas the separation probability--the monthly probability that a typical employed worker becomes unemployed--is comparatively acyclical (Figure 1). This finding is particularly true in the past two decades, a period in which the separation probability has steadily declined despite two spikes in the unemployment rate.

[FIGURE 1 OMITTED]

I then put these measures of the job-finding and separation probabilities into a simple model of job-to-job transitions. I assume employed workers continuously search for better employment opportunities: They experience a measured job-to-job transition either when they find a better job or when they are forced to leave their previous job but manage to find a new one before they are counted as unemployed. I show that an increase in the job-finding rate or an increase in the separation rate raises the job-to-job transition rate. Therefore, when I feed the measured time series for the job-finding and separation rates into this simple model, I predict that the job-to-job transition rate should be procyclical (Figure 4). This is quantitatively consistent with two direct measures of the job-to-job transition rate (Figures 5 and 6). In contrast, if separations were countercyclical and the job-finding rate acyclical, the basic model would predict a countercyclical job-to-job transition rate.

[FIGURES 4-6 OMITTED]

My findings that the job-finding rate is strongly procyclical and the separation rate is nearly acyclical oppose the conventional wisdom that recessions are primarily characterized by a high separation rate. In their 1996 book, Davis, Haltiwanger, and Schuh, building on evidence developed by Davis and Haltiwanger (1990 and 1992), conclude that evidence from the U.S. manufacturing sector indicates that "job destruction rises dramatically during recessions, whereas job creation initially declines by a relatively modest amount" (p. 34). Blanchard and Diamond (1990, p. 87) reach a similar conclusion from their analysis of both worker and job flows: "The amplitude of fluctuations in the flow out of employment is larger than that of the flow into employment. This, in turn, implies a much larger amplitude of the underlying fluctuations in job destruction than of job creation." (1)

The development of macroeconomic models of the labor market has been profoundly affected by the conventional wisdom, (2) but a series of recent papers by Hall (2004; 2005a,b) and Shimer (2005a,b) examine a variety of new data sets and question the prevailing view. For example, Hall (2004) writes that, "in the modern U.S. economy, recessions are not times of unusual job loss. New data on separations show them to be remarkably constant from peak to trough. Bursts of job loss had some role in earlier recessions, but are still mostly a side issue for the reason just mentioned--a burst is quickly reabsorbed because of high job-finding rates. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.