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Commentary By Charles Hughes

Economy Regaining Dynamism After Drought

Economics Employment

Friday’s employment report for May will provide another clue as to whether economic dynamism is returning after a long period of lower rates of creative destruction of businesses and their related jobs. In April the unemployment rate fell to 4.4 percent, the lowest level in almost ten years. Most forecasters expect it to remain around that level throughout the rest of the year. 

A 2016 Census Bureau report by Henry Hyatt and James Spletzer found that the share of workers with five or more years of tenure on their main job increased from 44 percent to 51 percent from 1998 to 2014.  In a post at AEI, Jim Pethokoukis said that this rise in job tenure was “another sign of America’s declining dynamism.”

The trends through 2014 are indeed troubling, as they are indicative of a less dynamic economy where too many workers are rooted in place, pessimistic about their prospects of moving to a better, potentially more productive job.

However, the most recent data from the Department of Labor finds a pickup in labor turnover after 2014. Median tenure for all workers has fallen from 4.6 in 2014 to 4.2 in 2016. For younger workers aged 25-34, median tenure fell from a high of 3.2 in 2012 to 2.8 in 2016.

Source: Department of Labor, “Employee Tenure in 2016.

The share of workers with tenure of five years or more has fallen back to under 48 percent, to some extent reversing the recent surge documented by the Census report.

Incorporating another monthly data series sheds more light on these trends. More people are quitting their jobs according to the Job Openings and Labor Turnover Survey (JOLTS) data from the Department of Labor, a sign that workers are more optimistic about the labor market. After falling as low as 1.3 percent in some months of 2009 and 2010, the quits rate has recovered and remained above 2.0 percent since June 2015. Over the past year it has inched even higher, at or above 2.1 percent in every month.

Source: Department of Labor, JOLTS.

After increasing for almost a decade, job tenure has declined in recent years. More people being willing to leave their current jobs could help the economy if they shift to more productive sectors or occupations. Job switching is related to the churn rate of new firms, and the recent reduction in median job tenure could some of the first tentative signs that a measure of dynamism could be returning to the economy as it finally gets out from the long shadow of last decade’s recession.

The slowdown in turnover found by the Census report was due to a variety of factors. The aging of the workforce explained between 25 to 50 percent of the increase in jobs with tenure of five years or longer depending on which data source they use.

Firm age was the other major explanatory factor identified in the report, explaining between 37 and 50 percent of the increase in job tenure of five years or more.

These findings suggest that weaker labor demand, due to the 2001 and 2007-2009 recessions, caused lower rates of job-switching. The reversal of that trend is a sign that dynamism and the labor market are recovering.

Better jobs numbers for May would encourage workers to leave their positions in search of greener pastures. If the trends of the past few years continue, median job tenure returning to pre-recession levels would be a sign of reduced complacency and an increased appetite for risk-taking.

This dynamism is to be cheered.  

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes

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