U.S. Companies Grow Older and Hire Less

Employees sew custom flags at Humphrys Flag Co. in Pottstown, Pa.

Photographer: Paul Taggart/Bloomberg

Why has the labor market been so slow to recover? The answer may lie in the relatively low levels of churn in the workforce. One of the historic strengths of the U.S. economy has been the ease with which American workers move into and out of jobs. This fluidity, as economists call it, can lead to higher wages: People often get higher pay when they switch jobs, while the risk of losing quality workers to a rival can entice employers to pay more. Yet, post-recession, this “lose a job, get another” pattern seems to be taking much longer to work its magic.

Steven Davis, an economist at the University of Chicago Booth School of Business, has been tracking job churn for more than 20 years. He calculates fluidity by adding up the number of new hires, layoffs, and people who voluntarily quit their jobs before comparing that number with the total workforce. By this measure, job fluidity has fallen more than 25 percent since 2000. Most of the decline happened as a result of the recession: He calculates that fluidity dropped 18 percent from 2007 to 2010.

Davis’s latest paper, published in December and co-written with University of Maryland economist John Haltiwanger, argues that a more rigid labor market explains, at least partly, why it’s taken so long to recoup the 8.7 million jobs lost in the recession. As the unemployment rate rose, it became harder and harder for out-of-work Americans to get back into a job market that had seized up. It wasn’t until last July that the number of jobs finally surpassed the previous highs of 2007. And even though fluidity finally began to rise again in 2014, it’s not nearly back to the levels the U.S. economy enjoyed in the 1990s.


Some of this drop in fluidity has to do with the changing nature of the workforce. The median age of a U.S. worker is 42, up from 37.8 two decades ago. Older workers tend to change jobs less often. But Davis says it’s not so much the aging of the workforce that’s behind the drop in fluidity as it is the aging of the companies hiring them. Older firms tend to hang on to workers longer than younger ones, and right now, older firms are dominating the U.S. economy in a way they haven’t before. In 1992 companies more than 16 years old accounted for 23 percent of private-sector firms and employed 60 percent of workers. By 2011 they represented 34 percent of companies and 72 percent of employment.

That’s not entirely bad. Stable employment gives workers more time to learn skills on the job. But the aging of U.S. companies is a sign that startups are having trouble. Economist Robert Litan of the Brookings Institution estimates that the number of new companies, as a share of the total number of companies in the private sector, dropped by half between 1978 and 2011. “Firms aged because fewer people started businesses, and those who did were more likely to fail,” says Litan. The first-year failure rate for startups rose to 25 percent from 20 percent during that time.

Michael Madowitz, an economist with the Center for American Progress, points out that fluidity is only one way to measure job turnover. He says a recent increase in nonstandard employment, such as independent contracting, isn’t included in Davis’s estimates. That could mean there’s more fluidity in the job market than Davis found. Madowitz also isn’t convinced changing jobs more often is good for growth. “It undermines the relationship between employers and employees,” he says, which means they invest less in each other.

Neil Dutta, head of U.S. economics at Renaissance Macro Research, is optimistic the recovery is finally raising rates of entrepreneurship, which should boost job fluidity, because young firms account for a large share of job creation and destruction. “People don’t quit during a recession,” he says, “but the number of quits has started to increase again.” Dutta says a stronger housing market will spur new startups, since entrepreneurs often use their house as collateral to secure a business loan. Policymakers are trying to help: Both the 2012 Jumpstart Our Business Startups Act and the Startup Act, under debate in Congress, ease regulations and improve young firms’ access to capital. It’s too soon to tell if this will be enough to restore the labor market’s dynamism.

The bottom line: Americans are changing jobs less frequently, and that could be hampering an already weak recovery.

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