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Labor Market Fluidity and Economic Performance

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  • Steven J. Davis
  • John Haltiwanger

Abstract

U.S. labor markets became much less fluid in recent decades. Job reallocation rates fell more than a quarter after 1990, and worker reallocation rates fell more than a quarter after 2000. The declines cut across states, industries and demographic groups defined by age, gender and education. Younger and less educated workers had especially large declines, as did the retail sector. A shift to older businesses, an aging workforce, and policy developments that suppress reallocation all contributed to fluidity declines. Drawing on previous work, we argue that reduced fluidity has harmful consequences for productivity, real wages and employment. To quantify the effects of reallocation intensity on employment, we estimate regression models that exploit low frequency variation over time within states, using state-level changes in population composition and other variables as instruments. We find large positive effects of worker reallocation rates on employment, especially for young workers and the less educated. Similar estimates obtain when dropping data from the Great Recession and its aftermath. These results suggest the U.S. economy faced serious impediments to high employment rates well before the Great Recession, and that sustained high employment is unlikely to return without restoring labor market fluidity.

Suggested Citation

  • Steven J. Davis & John Haltiwanger, 2014. "Labor Market Fluidity and Economic Performance," NBER Working Papers 20479, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20479
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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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