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

Jobless Claims Decline But 5.4 Million Discourage Workers Remain

Regarding recent jobless claim declines in the US economy, and this as an indicator by some of an improvement of the aggregate economy…..what about the 5.4 million total discouraged workers (short-term discouraged and long-term discouraged = total discouraged)?

U6 unemployment measurement includes the short-term discouraged worker as well as other categories of workers and currently stands at 15%. Lets dust off the SGS alternate unemployment rate and bring it off the shelf (reflecting total discouraged) and one notes that it stands at 22.5%. (1)

Focusing on jobless claims and considering a three year trend regarding a declining-to-stagnant economy, jobless claims trended up, peaked, then trended down as firms removed marginal workers at the margin, then marginal workers more toward the core, ending with a firm made up of core workers. Hence with the firm running on core workers and the firm producing few new jobs:

(1) the now “core employment” doesn’t shrink,

(2) few new jobs created means fewer new jobs to be possibly eliminated,

(3) hence fewer jobless claims.

Keep this in mind for a moment.

　

During the same phenomena described directly above, the discouraged worker pool increased at an increasing rate. That is, some sub-set of jobless, having been a prior jobless claim statistic in month MM in year YY becomes long-term unemployed and eventually falls into the discourage worker pool.

We end with a core firm economy, and the core firm within this economy finds it can do more with less. The core firm economy, and its core firm employed, match the demand gap and hence a dynamic equilibrium. The end result is that at this point on the trend line the firm hires few and fires few.

One must consider that the  5.4 million discouraged are attracted back to the labor pool (become active job seekers) once the economy shows signs of improvement (flooding the denominator of the unemployment formula hence sending unemployment upward in a improving economy). Moreover, these 5.4 million can not make a jobless claim, all they can do is show up in the denominator. However, the denominator keeps suffering from statistical revisions [guesses/political guesses?] e.g. 1.2 million statistically eliminated January 2012.

The next observation is: are we at the core or are we at a false core? If government is still spending more than the revenue taken in, is the core false? For example, if government moved toward a balanced budget, government would need to shed workers. If government moved toward a balanced budget, some expenditures would end associated with the private sector, meaning the core economy to some degree shrinks in the short-run.

One must also consider there has to be a cost associated with the 5.4 million discouraged workers. Welfare, food stamps, Medicaid, state level social welfare programs, etc. certainly are costs associated with maintaining the standing army of 5.4 million discouraged. However, considering 5.4 million discouraged workers, where are the soup lines, where are the tent cities, where are the masses sleeping in the street? That means the costs enumerated above must come with some addition cost. That is, since we see no soup line/tent cities there must be some expenditure/cost by some exogenous provider that creates a buffer between what one sees and what one would expect to see with an army of 5.4 million discouraged workers.

One might conjecture that these costs come in the form of items such as living in mom’s basement; the return to the extended family; income diverted from the core employed to the discourage relative; grandparents liquidating wealth and giving the funds to the discourage extended family member, etc.. Consider this, how long or at what rate can this exogenous cost continue? The cost can not be absorbed infinitely. Does the ability to absorb the cost deteriorate and deteriorate at an increasing rate suddenly exposing soup lines/tent cities?

Hence is the media, talking heads and pundits overrating jobless claim declines as a positive indicator?

Notes:

(1)  
http://www.shadowstats.com/alternate_data/unemployment-charts


　

　

　

　

　

　

SGS Alternate Unemployment Rate (the measurement you rarely see)

The headline unemployment rate is the U3 measurement which current stands between 8-9%. U3 is argued by many as a political unemployment rate in that the measurement has become an unreliable measurement due to arbitrary adjustments.

U6, also known as the real unemployment rate, stands at 15%. Many people suggest that U6 is a better measurement of unemployment as it includes short-term discouraged workers, marginally-attached workers, and those workers which work part-time as full-time employment is unavailable.

However, in the current economic situation, if one is faced with 5.4 million discouraged workers, an army of discouraged workers, made up of short-term and long-term discouraged, one surely has to consider this standing army of discouraged workers. (1)

Enter the SGS alternate unemployment rate which adds in the long-term discouraged worker. We then find a measured rate of roughly 22.5%. (2)

　

Notes:

(1) http://www.headlightllc.com/avalanchebrief1/

(2)
http://www.shadowstats.com/alternate_data/unemployment-charts