Thursday, November 30, 2006

The effect of the churn 

Tyler Cowen reviews a new book on the effects of what they see to be increased job turnover.
Three in five jobs for 22- to 55-year-old workers last three years or less. In a typical quarter of the year, about one in 13 jobs ends. For certain obvious reasons, labor-market turbulence has a reputation as a wrecker of lives, families and pocketbooks.

But is it really? Economists Clair Brown, John Haltiwanger and Julia Lane have their doubts. On closer inspection, they note, job turnover and firm disappearance have positive effects, in the aggregate. A clerk's job at a retail warehouse is replaced by a computer, but the warehouse firm can use the savings to hire a better and better-paid office manager. As workers lose jobs in one niche or sector, they gain in another, moving on to better jobs and higher pay. In the software sector, new businesses are more productive, over a five-year period, than the firms they replace. This new-business productivity gain, the authors show, is true generally across sectors--generating efficiency, products and, most important, jobs. And new businesses tend to pay more.

In short, America is not becoming a nation of part-time Wal-Mart cashiers or burger flippers. In four of the five sectors studied by the authors--semiconductors, software, financial services, retail food and trucking--the growth rate for full-time jobs exceeds the growth rate for jobs in general. (Retail food is the exception.)

So while volatility of job experiences -- increased turnover in the aggregate, if not at the individual level -- causes problems for particular families, it is in the aggregate desirable. This is more evidence of "the churn", a term popularized by researchers at the Dallas Federal Reserve:
"The paradox that innovation is both central to economic progress and, at the same time, the cause of many economic difficulties..." It's also happening in China.