The Labor Market “Churn Rate”: The Seen and the Unseen.

“Job churning—the voluntary movement of workers from one job to another similar job—is an important but seldom noted factor in the labor market. Churning creates badly needed job opportunities when growth slows and unemployment rises.” (1)

In labor economics the observation above is referred to as the “churn rate”.  The churn rate is the measurement of the voluntary termination by the worker/employee (resignation) and re-employment of the same worker/employee by an alternate firm at a higher level of compensation. The higher level of compensation is considered to be an indicator of a better allocation of labor resources.

Why examine the labor market “churn rate”? One must endeavor to go beyond the seen, to the unseen. Recent improvements in the headline unemployment figures (the U3 measurement) and the decline in jobless claims are put forth by many pundits, talking heads, and media types as an indicator of a much improved economy and hence a much improved employment picture. However, another school of thought is that jobless claims is an overrated indicator especially with historically low labor participation rates, 5.4 million discouraged worker, and an SGS alternative unemployment rate standing at 22.5%. (2) (3) (4) (5)

　

FIGURES on employment tend to encourage a black-or-white view of an economy. Either conditions are worsening and firms are shedding workers, as they did by the hundreds of thousands in 2008 and 2009, or times are improving and businesses are creating new jobs. Spirits leapt on February 3rd on news that America’s private businesses boosted their payrolls by 257,000 jobs in January, capping the country’s best 12-month employment performance in the private sector for over five years. But the headline figures represent just the tip of a large labour-market iceberg. Data provided by the relatively new Jobs Openings and Labour Turnover Survey (JOLTS) illuminate these depths.

Even in the darkest of days, labour markets remain busy. Growing firms hire to expand and even shrinking businesses seek out workers to fill important vacant positions. In December 2008, for instance, overall American employment dropped by nearly 700,000 jobs. Yet in that month more workers—over 4.1m in total—were hired into new positions than in December of last year, when net payrolls grew by 203,000. During a relatively placid economic period like the mid-2000s, about 65% of all hiring is associated with what economists have dubbed “churn”—the job-to-job movement of workers through the labour force, which neither adds to nor subtracts from total employment. Of the 12m or so hires that occurred in a typical pre-recession quarter, some 8m came from firms luring workers away from other firms.

Churn is a mechanism by which labour markets reallocate workers towards more efficient ends. In the typical job-to-job move (that is, without any intervening stint of unemployment) an American worker can expect a rise in wages of over 8%. This gain represents, at least in part, an improvement in productivity. As workers obtain skills and find better job matches, their output and earnings rise. And as firms obtain ever more suitable labour, they can afford to pay higher wages. In this way, the churning of the labour market contributes to growth in the potential output of the economy. - The Economist, Go for the Churn, 02/11/2012


Link to the entire article appears below:

http://www.economist.com/node/21547224


Notes:

(1) http://www.incontext.indiana.edu/2009/jan-feb/article1.asp

(2) http://www.econlib.org/library/Bastiat/basEss1.html

(3) http://economics.about.com/od/unemploymentrate/f/labor_force.htm

(4) http://www.zerohedge.com/news/labor-force-participation-rate-drops-639-lowest-january-1984

(5) http://www.shadowstats.com/alternate_data/unemployment-charts