Cyclicality

MORE WORKERS LOSE THEIR JOBS IN BOOMS THAN IN RECESSIONS

More workers are hired and fired during a boom than during a recession – but during a recession, far fewer workers are hired than are fired, which is what leads to the usual rise in unemployment. That is the central finding of research in Germany carried out by Rüdiger Bachmann, Christian Bayer, Stefan Seth and Felix Wellschmied, presented at the Royal Economic Society’s 2013 annual conference.

The study seeks to understand exactly why employment rises during booms and falls during recessions. Looking at data on virtually all private sector jobs in Germany between 1976 and 2006, the study focuses on hiring and firing.

The main finding is that during booms, more workers are hired but more workers are also fired. Around 20% more workers are hired but 13% more workers are fired, leading to an overall rise in employment but for surprising reasons. During recessions, the rate of hiring drops but so does the rate of firing. Overall employment falls during recessions because hiring drops more than firing.

A traditional view of job flows over the business cycle is that firms simply increase and decrease their employment. The authors note that their finding shows that things are not so straightforward:

‘We find that plants increase their worker turnover substantially during booms. We interpret this as evidence that creative destruction of jobs is high during booms’.

The authors argue that the search for jobs can exaggerate the business cycle. During boom times, the higher turnover of workers means that more firms and workers are able to make a ‘good match’, with firms offering the right opportunities finding workers who can really fit the job description.

During recessions, there is a lower turnover, and there is a lower chance that firms find the right workers, which lowers output even further.

More…

Why does employment expand during booms and fall during recessions? Standard labour market theory emphasises either the importance of labour demand or labour supply to explain cyclical changes in employment.

Labour demand theory (the Diamond-Mortensen-Pissarides framework) stresses that firms’ production possibilities, and thus profits, rise during booms, which leads to additional aggregate labour demand by firms. Consequently, unemployed workers find jobs faster, which increases the aggregate employment level.

Labour supply theory emphasises the role of workers’ labour market entry, career decisions and retirement and reallocation decisions.

This study shows that it is fruitful to merge both views. The analysis is based on a novel dataset containing the universe of German plants and virtually all private employment between 1976 and 2006 on a quarterly frequency.

The researchers study changes in aggregate labour demand by changes in plants’ job flows – that is, job creation and job destruction. Additional to job flows, they also measure the total amount of worker flows – that is, accessions to plants and separations from plants, which makes it possible to quantify the amount of worker reallocation not explained by demand reasons.

They find that plant growth, that is, labour demand, shows significant cyclical patterns. Booms are characterised by a relative large fraction of plants expanding their employment. In contrast, recessions are characterised by relatively large amount of plants taking a wait and see approach, or fully exiting the market. The amount of plants decreasing their employment is almost acyclical, suggesting an important role played by idiosyncratic shocks as opposed to aggregate shocks in explaining decreases in plants’ employment.

Worker accessions to plants and worker separations from plants increase during booms and fall during recessions. The rate at which workers join plants is up to 20% higher during booms than during ‘normal times’. Also separations are 13% higher during booms. During recessions, the accession rate and the separation rate drop. Employment drops during recessions because accessions drop more than separations.

A traditional view for varying accessions and separations over the business cycle is that plants expand and decrease their employment. This study shows that such behaviour can explain surprisingly little of the cyclical behaviour in worker flows. Cyclical changes in employment at plants can explain only about a third of cyclical changes in accessions and separations.

Instead, plants increase their worker turnover substantially during booms. Plants increasing their employment during booms, separate from more workers than when carrying out the same increase during a recession. Similarly, plants that decrease employment during booms do so with more accessions than during recessions.

Why do firms have higher worker turnover in booms than in recessions, to obtain the same adjustment in their employment? The researchers interpret this as evidence that creative destruction of jobs is high during booms. Booms are the prime times when workers and plants find more suitable pairs for production.

Put differently, when times are good, they become even better because workers and plants find better work matches. In contrast, when production and employment are low, few workers transit to more productive matches, which depresses output even further.

ENDS


Contact:

Felix Wellschmied: +49 157 752 64 029 (s3fewell@uni-bonn.de)

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

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