How does people switching jobs affect overall wage growth?

The recent increase in workers quitting their jobs sparked hope that the labor market is healing, with strong wage growth around the corner. But how exactly does the willingness, and perhaps more importantly, the ability to switch jobs result in wage growth? A new National Bureau of Economic Research working paper examines the dynamics of these individual movements in the U.S. labor force—referred to as the jobs ladder by economists—and how it varies over economic expansions and recessions amid fluctuations in business cycles.

The paper, by economists John Haltiwanger of the University of Maryland and Henry Hyatt and Erika McEntarfer, both of the U.S. Census Bureau, looks at how these transitions vary by type of employers. They find that firms react to changes in the business cycle by adding or losing workers depending on whether they generally pay their workers low wages or high wages.

During economic expansions both kinds of employers, unsurprisingly, add employees. But they come from different sources. Low-wage employers hire workers who previously had no jobs, whereas better-paying firms poach workers from lower-paying firms. This upward movement, from non-employment to low-wage employer to high-wage employer, results in all types of workers climbing the rungs of the job ladder.

But during recessions, the rungs of the jobs ladder become spots where workers grip just to stay where they are, or instead find themselves seeking to hang onto jobs on lower rungs. Low-wage employers pull back from hiring unemployed workers and high-wage employers stop poaching workers. For those that lose their jobs, they’re less likely to find new work as low-wage employers are hiring less. And workers with jobs are less likely to move to a new, higher-pay job. Looking at the Great Recession in particular, Haltiwanger, Hyatt, and McEntarfer find that the job ladder collapsed during that period. Clearly, this result has implications for the long-run earnings potential of workersin the labor force during the Great Recession

But this research also has something to say about a long-term labor market trend. Since the 1980s, the movement of workers from job to job—also known as job churn—has been on the decline—which the data in this paper shows. And, demand for workers in the U.S. labor market appears to have also been waning over the past two decades or so.

The two trends could be linked. A labor market with such structural slackness would mean fewer workers hired by low-wage employers, which means that a smaller number of workers get poached into higher-paying jobs. In other words, the effects that Haltiwanger, Hyatt, and McEntarfer highlight during recessions might be true over the long-term as well, during lackluster expansions as well as in recessions.

If so, then making sure the U.S. labor market is running at full capacity as much as possible is important for spurring employers to poach workers and induce movement up the jobs ladder. Full employment, in other words, might strengthen the job ladder.

This article is published in collaboration with Washington Center for Equitable Growth. Publication does not imply endorsement of views by the World Economic Forum.

To keep up with the Agenda subscribe to our weekly newsletter.

Author: Nick Bunker is a Policy Analyst with the Washington Center for Equitable Growth.

Image: Workers on the assembly line replace the back covers of 32-inch television sets at Element Electronics in Winnsboro, South Carolina. REUTERS/Chris Keane