Job Angst: It’s the Churn, Stupid

The beat goes on in the job market (see the previous posting).  The June payroll report showed an increase of 132,000 jobs with upward revisions to April and May totaling 75,000.  The household survey, as usual, was better still, showing a June increase of 197,000 jobs, sufficient to keep the unemployment rate flat at a low 4.5 percent.  Earnings and the work week both increased, with earnings in June up 3.9 percent over the past year.

So, with the job market doing so well over an extended period of time, why all the worker angst and insecurity we keep hearing about?  Why the gloom?

Part of the answer is that the monthly employment numbers are small net numbers that mask gross job losses and job gains many times larger.  Job losses at shrinking or closing firms make the headlines even if job gains elsewhere in the economy are rising even faster. Most workers have friends or relatives that have lost jobs in this supposedly "good" economy.  Many jobs are always lost in a good economy, which causes anxiety even when more new jobs are being created.  Economists and pundits follow the net change in the numbers; the rest of us live in a gross world.  

In the 3^rd quarter of 2006-the latest numbers available-only 19,000 net new private jobs were created nationally.  But that small number was the net of 7, 364,000 jobs created and 7, 345,000 jobs lost. The previous quarter was better:  7,761,000 jobs were created and 7,295,000 were lost, for a net private job gain of 466,000. The quarter before that was better still:  job gains of 7,556, 000, losses of 6,772, 000, yielding 784,000 net new jobs.  In this best quarter of the three, almost ten jobs were lost (and gained) for each net job gained.  Nobody knows who the 784,000 are, but we all know some of the 6,772,000 job losers.  Nobody pays much attention to the 7,556,000 new job holders since they aren't complaining. Of course, over time these tend to be the same people, plus new entrants into the labor force.

My hunch is that this rapid job churn accounts for much of the job angst despite the fact that the constant turnover in jobs keeps our economy responsive to change and up to date. Joseph Schumpeter called this churning phenomenon, creative destruction.  Allowing creative destruction to take place-that is, allowing the old jobs to go away to free up workers for the new jobs-is better job protection in the long run than trying to keep the old jobs from going away.  This is reflected in the lower unemployment rate in the United States than in Old Europe, where nanny states try harder to "protect" their workers.  It turns out that a dynamic economy is better protection than legal and regulatory restrictions.  As I put it in a poem once,

          "Laws against firing
           Discourage hiring  
           And too high a safety net 
           Is sure to snare and abet 
           Those dead set 
           On avoiding sweat"  
                      (See www.bobmcteer.com/rhyme/growth.html)           

The employment dynamic numbers cited above contain other interesting information. (See www.bls.gov/bdm/home.htm.) For example, of the gross job gains of 7,364,000 in the third quarter of 2006, 1,537,000, or almost 21 percent, were goods-producing jobs while 5,827,000, or 89 percent, were service jobs. This is roughly the same proportion as in the job losses, although, over time, there have obviously been more job gains in services than goods.

Another interesting breakdown of the numbers is between gains and losses resulting from expanding and contracting firms and from new firms and disappearing firms.  81 percent of the gains come from expanding firms while 19 percent come from new establishments  The same round numbers apply to job losses-81 percent from shrinking firms and 19 percent from closing firms.

Pareto rides again.