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Commentary By Charles Hughes

Economic Expansions Move Workers up the Job Ladder

Economics Employment

How workers navigate the transition to more productive, higher-paying jobs is still not well-understood. A recent National Bureau of Economic Research Working Paper finds that movement from low-wage to high-wage firms is strongly pro-cyclical, more robust during economic expansions and slowing to a trickle during recessions. The adverse effects of lower worker mobility could be felt for years to come.

Previous studies analyzed the dynamics of firm ladder movements indirectly, finding that large firms are more affected by business cycles than smaller ones.  This implies that in expansionary periods these larger firms have higher employment growth because they can “poach” workers from other firms by offering more money. Poaching matters more when labor markets are tight.

Professors John Haltiwanger of the University of Maryland, Lisa B. Kahn of Yale University, and Census Bureau researchers Henry Hyatt and Erika McEntarfer use matched employer-employee data from the Longitudinal Employer Household Dynamics from 1998 to 2011 to analyze job-to-job transitions across firm wage and firm size ladders over the business cycle. To understand what drives these moves, they decompose the overall effect into job transitions from other firms and from non-employment.

Contrary to expectations, the authors fail to find any evidence of a job ladder based on firm size. No discernible trend can be found of workers moving from small firms to larger firms through “poaching flows,” or job-to-job transitions. Net poaching flows are small in magnitude, 0.23 percent of average employment for small firms and -0.16 percent for large firms, and do not seem to be affected by the business cycles.

The authors suggest the lack of a firm-size ladder is in part because workers flow to startups and small, new firms. Lower-wage firms can also offset employment losses to higher-wage firms during expansions by hiring more people who were not already working. Studies looking only at overall employment changes instead of analyzing job-to-job and non-employed transitions separately would not be able to identify this offsetting effect, leading to a misleading picture of a firm size ladder.

While the authors failed to identify a pattern in job transitions by firm size, they find some evidence a firm wage ladder.  Workers make job-to-job moves from low wage companies to those that pay more. Over this period, low-wage firms lost 1.2 percent of employment per quarter, while high-wage firms grew 0.7 percent.  

Unlike the firm size ladder, net poaching rates in the firm wage ladder are strongly affected by the business cycle. High-wage firms gained almost 1 percent in employment on average per quarter while low-wage firms lost 1.5 to 2.0 percent during the boom period from 2000 to 2005. Net poaching flows in both directions fell during periods of a weaker economic environment, and were almost zero during the Great Recession.

Net Poaching for Large vs. Small Firms and High vs. Low Wage Firms

Source: Haltiwanger et al., “Cyclical Job Ladders by Firm Size and Firm Wage,” National Bureau of Economic Research Working Paper 23485, June 2017.

When movement up the ladder is disrupted as it was during the recession, some employees become stuck in the lower-paying firms for longer, with adverse effects for their career trajectories. In the Great Recession, the rate of workers climbing out of the bottom rung of the firm ladder plunged by 85 percent, and relatedly earnings growth fell 40 percent.

Worker mobility overall might have fallen, as the decline in the voluntary quits rate might suggest. The authors decompose the decline in workers climbing from the bottom rung into changes in changes in the nature of the firm ladder and overall declines in worker mobility. Overall job-to-job mobility only explains about 30 percent of the variation in net poaching flows, while changes in the nature of those transitions explain the majority of that variation.

Economic downturns could hinder upward mobility for workers through mechanisms that are only now starting to be understood. This paper sheds new light on this dynamic, but the data only go through 2011. How upward mobility of job transitions has changed since then remains an important open question, and should be studied further.  

The “stuck workers” from the Great Recession are still feeling the effects.  Removing regulatory barriers, reducing compliance costs, keeping the minimum wage low, and reforming taxes that deter investment could make it easier for young, small firms to enter the market and hire more people could lead to more workers climbing the firm ladder. Recessions might be even more harmful for long-term career outcomes than previously thought, and creating an adaptive policy framework that mitigates the risk of economic downturn is even more vital.  

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

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