Thursday, May 12, 2016

Lost Jobs in Recessions


The WSJ has a nice article showing just how hard it has been for many people who lost jobs in the recession to get back to work. Their profile is typical of what I have read and not the typical picture of unemployment: Middle age middle managers. The paper by Steve Davis and Till von Wachter is here. They present the fact largely as a puzzle, which it is:  "losses in the model vary little with aggregate conditions at the time of displacement, unlike the pattern in the data."

As the story makes clear, the problem is really not unemployment. There are lots of jobs available. The jobs just don't pay much, and don't use the specialized skills that the workers have to offer. The problem is wages at the jobs they can get.

This is a very interesting fact, with many less than obvious interpretations. It strikes me as a good teaching moment for economics classes.

The natural interpretation of all correlations is causal: There are  two identical workers in two identical jobs at two identical companies. One worker happened to lose his or her job in a recession, and so faces a harder climb back. We learn about the difference in job markets over time.

Maybe, but the job of being an economist is to recognize lots of other possibilities for a correlation. So the proposed discussion question: what else might this mean? How does taking averages reflect selection rather than cause?

Perhaps not all workers are the same. The conventional view of recessions is that companies fire people from lack of "aggregate demand," or shocks external to the firm.  In good times, companies fire people when those people aren't very good. Then, you would think, being laid off in a recession is better than being laid off in good times. If you're laid off in good times that is a signal you're not a great worker. In a recession, everybody got laid off, so there is not any particular stigma in it.  Well, so much for that story.

A contrary story is that it's easier to get rid of people in a recession. The head of a large business once told me how useful the last recession was, as he could plead financial problems and finally get rid of the army of unionized workers that were playing solitaire all day. Guido Menzio  and Mikhail Golosov have a model that (I think!) formalizes this story. (Menzio was recently in the news, as an idiot fellow passenger thought he was a terrorist because he was doing algebra on a plane, a different sad commentary on contemporary America.)

Perhaps not all businesses are the same. Businesses and occupations that get hit in recessions are different from those that get hit in booms...

Perhaps times are not the same. Recessions are pretty much by definition a time when different sorts of shocks hit the economy. If recession shocks require bigger changes in specialized human capital than normal-times (more idosyncratic shocks), or people to move industries and cities more, then you'll see this pattern.

And so on. Interesting facts, not so obvious interpretations, averages that don't always mean what you think they mean, that's why economics is so fun.

Update:  Steve Davis writes to explain that job losses in recessions are concentrated in specific industries:
You write: "...If recession shocks require bigger changes in specialized human capital than normal-times (more idiosyncratic shocks), or people to move industries and cities more, then you'll see this pattern.” 
Here’s a modified version of this story that has more promise in my view.  First, an under appreciated empirical observation: The cross-industry (cross-firm, cross-establishment) distribution of employment growth rates becomes more negatively skewed in recessionary periods.  Job loss is also concentrated in industries (firms, establishments) that experience relatively large net and gross job destruction rates.  Taken together, these two observations tell us that, in recessions, a larger share of job losers hail from industries (firms, establishments) that get hit by especially large negative shocks (even compared to the average), reducing the value of skills utilized by workers in those industries (firms, establishments).  I conjecture that negative skewness in the cross-occupation distribution of employment growth rates is also counter cyclical, but I don’t recall any direct and convincing evidence on that score. 
Restating, the setting in which job loss occurs worsens for the average job loser in recessions, because (1) overall economic conditions worsen in recessions, AND (2) conditions worsen especially for industries (occupations, etc.) with a disproportionate share of job loss. Many models consider the effects of (1), but there is little work on (2).  Testing hypotheses and building theories related to (2) requires good measures of the individual-specific “setting” in which individual job losses occur.  One of my PhD students, Claudia Macaluso, is making good progress on that front in her dissertation.

William Carrington and Bruce Fallick have a review paper on why earnings fall with job displacement.

15 comments:

  1. I think the data presented in the article are consistent with the claim in Jaimovich and Siu (2012) that job polarization, e.g. the replacement of middle-income jobs with high-end and low-end jobs due to technological innovation, takes place mostly during recessions. This could be because it is easier to fire people during a recession, or because the disruptions associated with changing the method of production (process innovation) are less costly when demand for the firm's product is low. In any case, if job-losses during recessions are more likely to reflect changes in the skill-composition of jobs than job-losses that happen during expansions, it is perhaps not surprising that people who lose their jobs during recessions have a harder time in finding new jobs that pay as much as the ones lost. But yes, economics is fun but apparently risky if done on an airplane.

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  2. I think that too many people are laid off from work without warning. You should be given a chance to find a new job

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  3. This graph looks like I would have expected. From what I've seen firms get rid of perceived dead weight. Often the least productive employees. Its similar to oil companies shutting down less productive wells when prices drop. Losing a job in a recession gives you fewer options and a bad supply/demand position for starting salary negotiation. I would expect it to be pretty demotivating to take thatvpay cut and go back a few spaces. That could impact salary growth over the next few years as well.

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    1. But when a firm is shedding labor in a "non recession" surely the same deadwood point applies?

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    2. Possibly, but I haven't seen it occur very often. Wouldn't growth be a bigger driver than efficiency in "non recession" times? I'm just going off what I've seen in the corporations I've worked for.

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  4. Corporations who lay off workers during recessions usually stream line the process but those workers keep looking for that type work at the old salary

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  5. So what does this mean when we note the fact that recessions are becoming less common? Does this actually make the economy worse in some ways?

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  6. Everything possible should be done to make it easier for people to start up their own businesses, without much capital. Eliminating property zoning and decriminalizing push-cvart vending are very good ideas in that direction.

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  7. Arnold Kling (out of GMU) has been pushing this phenomenon for a while now under the heading of Patterns of Sustainable Specialization and Trade

    see http://econlog.econlib.org/archives/2011/01/psst_vs_the_agg.html

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  8. I'm not really fluent on labour market literature (shame on me!), but I would assume that there are papers analysing the impact of recessions on new entrants to the labour market. What do these papers say? None of the selection biases you mention should be a factor there. If anything, I would expect that only the best ones manage to get a job in a recession.

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    1. I remember seeing some evidence that college graduates that leave school during a recession suffer similar types of permanent earnings losses relative to those who graduate during expansions. But I cannot seem to find the citation right now. But this would suggest that this phenomenon is not specific to middle aged workers or blue collar workers.

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  9. From what I understand, the actual mechanism in the paper is that you lay off workers in a recession because you want to punish workers more harshly for shirking. As a mechanism, this seems most implausible. However, the strategic complementarities across companies in firing could of course still be there with the help of your (much more plausible) mechanism.

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  10. These facts bring to mind the earlier literature on the "Cleansing Effects of Recessions", with important contributions from Ricardo Caballero and co-authors. Such models emphasize how "supply-side" adjustments in capital or employment interact with "aggregate demand" in ways that make identification of the underlying supply/demand factors challenging -- because, for example, supply-side adjustments are triggered by demand considerations in the presence of fixed costs.

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  11. What about this as an argument against deposit insurance, and thus against funding banks which lend with deposits?

    If you lend direct to corporations A,B,C, etc, there’s no government run insurance for you. But if you lend to a bank (via a deposit) and the bank lends to A,B,C, etc, then you’re automatically insured.

    That makes no sense because there is no inherent merit in lending to A,B,C, etc via some third party as compared to lending direct.

    Ergo if government should do EITHER abandon deposit insurance, OR offer insurance for all those with bonds in non-bank corporations.

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  12. This could be because it is easier to fire people during a recession, or because the disruptions associated with changing the method of production (process innovation) are less costly when demand for the firm's product is low. In any case, if job-losses during recessions are more likely to reflect changes in the skill-composition of jobs than job-losses that happen during expansions, I liked your blog, Take the time to visit the me and say that the change in design and meniu?

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