U.S. labor market fluidity in decline since 1980s, study shows

U.S. Needs Fluid Labor Markets to Promote Employment

American labor markets became much less fluid in recent decades, according to a new study by Steven J. Davis of the University of Chicago Booth School of Business and John Haltiwanger of the University of Maryland. They measure fluidity by the pace of worker reallocation (hires plus separations) across employers, and by the pace at which new job positions are created and old ones destroyed.

In their paper, "Labor Market Fluidity and Economic Performance," the authors trace the long-term decline of fluidity to several factors, including a shift away from younger businesses, a loss of entrepreneurial dynamism, an aging workforce, and policy developments that discourage worker and job reallocation. These policy factors include an erosion of the employment-at-will doctrine over time and the spread of government-mandated occupational licensing and certification requirements.

Fluidity promotes high employment, according to the authors, by making it easier and less risky for employers to hire workers. From the worker perspective, fluid labor markets offer greater opportunities to find a job, prospect for the "right" job, move up a job ladder, satisfy locational constraints, and re-enter the labor market. The result is better opportunities and stronger incentives to acquire market-relevant skills, increasing earnings capacity and strengthening attachment to the labor force.

"Our evidence supports the hypothesis that reduced fluidity lowers employment rates, especially for younger and less educated workers," the researchers say.

Davis and Haltiwanger also take note of beneficial aspects of reduced fluidity. For example, large retail chains with big-box outlets and sophisticated supply chains transformed the U.S. retail sector in recent decades. That transformation raised productivity and brought important consumer gains in the form of lower prices and wider product selection. At the same time, however, it slowed the churning of workers and jobs in the retail sector.

Davis and Haltiwanger presented their paper at the August Economic Symposium of the Federal Reserve Bank of Kansas City at Jackson Hole.

"If our assessment is correct," they conclude, "the United States is unlikely to return to sustained high employment rates without restoring labor market fluidity."

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Contact: Steven J. Davis is available for comment and can be reached at 1-773-702-7312 steve.davis@chicagobooth.edu.