What does the job-loss rate tell us about the economy?

The official unemployment rate has been on the decline for several years now—surely a good sign, right? Yet the current near 5-percent rate masks lingering damage in the labor market from the Great Recession. Nor does a jump in the unemployment rate during a recession give us a full picture of labor market dynamics at the time. A new working paper by Princeton University economist Henry S. Farber highlights one important dynamic at play during stressful economic times: the job-loss rate.

When the U.S. Bureau of Labor Statistics’ monthly Employment Situation report shows a decline in employment  that figure merely shows that employment at firms has declined on net, measuring new jobs as well as discontinued ones. But the number of jobs actually shed before accounting for new jobs isn’t in that top-line unemployment number. If we are interested in what happens to workers after they are laid off then we’d need a data set that figures out which workers left their employers involuntarily. That’s what the Displaced Workers Survey, a supplement to the BLS’s Current Population Survey, does.

Why should we care about the job-loss rate? Well, it tells us important information about the dynamics of a labor market that the basic unemployment rate does not catch. In his paper, Farber compares two periods when the U.S. economy went into deep recessions: the periods of roughly 1981-83 and 2002-09, with lasting trauma for the labor market. The unemployment rate during the two periods were roughly the same (9.6 percent for 1983 and 9.3 percent for 2007). Yet there’s a significant difference in the job loss rate. During 1981 to 1983, the job loss rate was 12.8 percent. In 2007 to 2009, it was 16 percent, a 25-percent increase in the rate.

Put another way, during the early 1980s, about 1 in 8 workers lost a job, but during the Great Recession 1 in 6 workers were laid off.

Looking to the unemployment rate alone would miss out on this difference—that is why we must look to lay-offs to better understand the health of the labor market. And as Farber points out, this means there’s more of a need now to understand the effects, both short-term and long-term, on workers after they lose jobs during a recession.

The current evidence of these effects isn’t good. Discussing a paper on the effects of lay-offs, economist Justin Wolfers summed it up quite succinctly: “losing your job sucks.” Figuring out just how much it sucks over time is an important research question moving forward.

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

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

Image: Job offers are seen in this illustration in Milan. REUTERS/Alessandro Garofalo.