Academic journal article Economic Perspectives

New Evidence on Labor Market Dynamics over the Business Cycle

Academic journal article Economic Perspectives

New Evidence on Labor Market Dynamics over the Business Cycle

Article excerpt

Introduction and summary

Does unemployment rise in a recession mainly because workers lose their jobs at a higher rate or because already unemployed workers are less likely to be hired during a downturn? The answer to this question has important implications for how one thinks about cyclical fluctuations in the economy and policies to address unemployment. For example, one prominent view of the business cycle posits that economic downturns are periods where there has been an adverse shock to productivity that makes the match between employers and workers less profitable. This, in turn, leads firms to increase layoffs. Under this view, we would expect to see much greater cyclicality in the rate of job separation (movements from employment to unemployment) compared with the rate of job finding (movements from unemployment to employment). An alternative view is that there might be reasons why firms prefer to create vacancies during economic upswings, in which case we would expect to see more variability in the job hiring rate over the business cycle. Clearly, documenting the cyclical patterns in job finding and job separation ought to provide important empirical evidence to help distinguish between competing views of unemployment fluctuations and perhaps help guide the development of new theories of the business cycle.

I attempt to shed light on this issue by using a new data source, the U.S. Census Bureau's Survey of Income and Program Participation (SIPP), to investigate how much of the cyclicality in unemployment is due to variation in the job finding rate versus the job separation rate. I estimate the job finding rate (or the hiring rate) by calculating the fraction of workers who transition from unemployment to employment in adjacent months. Similarly, the job separation rate is estimated by calculating the fraction of workers who transition from employment to unemployment in adjacent months. The SIPP is particularly well suited for this analysis because it tracks the same individuals over time and asks about their labor market activities during each week of the month. In addition, the SIPP collects information on more than one employer for each worker, enabling the calculation of a long time series on the rate of job-to-job transitions. Job-to-job movements over the business cycle will vary depending on the cyclical properties of the job separation rate and the hiring rate, so new descriptive data on this phenomenon should also help inform our understanding of unemployment dynamics.

The results of this analysis suggest that the hiring rate is highly procyclical and is an important component of the variation in the unemployment rate in recent business cycles. This is in accordance with the findings of some other recent studies in the literature that have utilized other data sources. However, in contrast with these other studies, I also find that there has been a notable degree of countercyclicality in the job separation rate during the two most recent recessions (in 1990-91 and 2001), which has also contributed to the cyclical patterns in unemployment. In other words, the rate of job separation did in fact rise during these recessions. One original contribution of my work is direct evidence that the job-to-job transition rate has been procyclical over the past 20 years. Overall, these results suggest that greater attention should be given to macroeconomic models that emphasize movements in hiring rates as important contributing factors to business cycle fluctuations.

In addition to exploring the broad macroeconomic patterns, I also utilize the SIPP to assess the extent to which employment dynamics have differed by sex and education level. Exploring heterogeneity in employment dynamics may be useful in understanding whether the cyclical patterns are driven in part by compositional changes. I find that while the transition rates between the labor market states (employment and unemployment) differ by education level, the cyclical patterns are actually not very different. …

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