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Americans' Distrust May Be Hurting Job Market, Fed Paper Says

  • 10-15 percent drop in job market fluidity since early 1980s
  • Social capital decline is raising cost of job search, hiring

The declining level of trust among Americans may have contributed to reduced flexibility in the U.S. labor market over the last several decades, according to a Federal Reserve working paper.

In the paper, Fed economists Raven Molloy, Christopher Smith and Riccardo Trezzi, along with University of Notre Dame professor Abigail Wozniak, identify a 10 percent to 15 percent decline in U.S. labor market fluidity -- a measure that encompasses workers switching jobs and moving states as well as employers creating or cutting positions -- since the early 1980s.

In U.S. states where the share of people who said their trust in strangers fell more steeply, labor mobility registered greater declines, according to the paper. The drop in social trust “may have increased the cost of job search or made both parties in the hiring process more risk averse,” it said.

“Regardless of the cause, less fluidity in the labor market leads to fewer opportunities for workers to renegotiate their current employment arrangements using outside options as leverage or to change jobs," the authors wrote. That means less scope for wage growth, and that U.S. workers may be more reluctant to quit their jobs, "leading to ‘precautionary’ job holding and again an increase in the likelihood that the unemployed are there involuntarily."

While the labor market is showing signs of improving, wage growth has remained stagnant. The jobless rate is at an eight-year low of 4.9 percent -- about the level the Fed considers consistent with full employment -- while the quits rate, which indicates the willingness of workers to leave their jobs, rose in December to 2.1 percent, the highest since April 2008. The government’s February jobs report is due on Friday.

The researchers found that "demographic changes can only explain a limited portion of the general decline in fluidity."

While the relationship between social trust and labor market fluidity at the state level was found to be relatively weak, it was the only notable standout in explaining the rest of the decline from a variety of causes for which they tested. The correlation raises an interesting question that should be explored further, they wrote.

"Declines in social capital -- particularly the extent and strength of social networks -- may raise the cost of job search by forcing workers to rely on more formal channels with less detailed information on the types of jobs available and the associated firm environments," they wrote. "In addition, or alternatively, reduced social capital may increase the cost of new hires as managers have to choose from workers about whom they have less personal information."

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