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Volatility isn't rising
So says the excellent David Leonhardt. Excerpt:
“There have always been a lot of mass layoffs,” said Lawrence F. Katz, a labor economist at Harvard. “We didn’t count them before.” In fact, research by Henry S. Farber, an economist at Princeton, has found that job loss rates have followed a cyclical pattern since the early 80s, peaking around the same highs during recessions and falling to similar lows during expansions. (The rate has risen for workers who went to college and fallen a bit who those who didn’t.)
Americans, looking at their own jobs, realize that there hasn’t been a big change: in a recent Gallup Poll, 12 percent of respondents said it was very or fairly likely they would be laid off in the coming year. In the 1970s, 80s and 90s, at similar points in the business cycle, the percentage was virtually identical.
Read the whole thing; Leonhardt agrees with my view that the recent CBO report effectively counters Jacob Hacker on "the great risk shift." Until we see further evidence to the contrary, that thesis belongs in the "simply isn't true" pile.
Posted by Tyler Cowen on April 24, 2007 at 09:17 PM in Economics | Permalink
Comments
Hmmm.... I have one of those piles out behind my barn.
Posted by: Russell Nelson at Apr 25, 2007 2:08:27 AM
I'd be very interested to know what you would find if you took the same measures of volatility for professionals, middle-managers, and "knowledge workers" of similar social class of those who write books or articles about increasing income insecurity. Might it be that while overall volatility has not increased, the volatility for the upper middle class has?
Another couple of points: To what extent (if any) has the *effect* of a layoff been aggravated by the decline in union membership and the resulting loss of benefits provided during layoffs? To what extent has the increase in the number of two-earner households changed (in either direction) the effects of a job loss by the primary earner on a household?
Posted by: Alex R at Apr 25, 2007 8:30:15 AM
One more comment: In Hacker's book, he chooses the "early 1970s" as his basis for comparison. The CBO report begins its data in the early 1980s, and specifically notes that their results are "consistent with the results of existing studies, which tend to show more variability in earnings in the 1980s and 1990s (on a percentage basis) than in the 1970s but relatively stable trends in earnings variability since about 1980."
Posted by: Alex R at Apr 25, 2007 8:41:52 AM
The point isn't that getting laid off is more frequent. Its the lenght of time before these laid off workers are rehired and the pay rate at which they are rehired. People are losing their jobs at about the same rate. They ware just going much longer between the next job than they used to.
Posted by: mickslam at Apr 25, 2007 9:32:35 AM
The term "laid off" does not have the same meaning since 1980 that it had
before 1980. Before 1980 the typical laid off worker was a blue collar
manufacturing employee who expected it to be temporary. After a short time
the laid off worker would be recalled to the same job at the same firm with
his seniority and other fringe benefits intact. Now, a laid off worker actually loses the job and has to find another job with a different firm and does not
expect to return to the old job in a short time.
Because the research you cite ignores this structural difference it is extremely biased.
Posted by: spencer at Apr 25, 2007 10:04:36 AM
Just an example of how this change in the meaning of laid off works.
In the monthly employment report the individual is asked, did you look for
work in this time period. If the individual did not seek work they are not
included in the labor force or unemployed data. The reason this question was designed this way was to exclude individuals who had been temporarily laid off
from the data. If an individual expected to soon return to their old job they would not seek other work. This adjustment prevented the unemployment data from giving a misleading picture of the degree of slack in the labor market.
The monthly employment survey still asked this question, but now the results are very different.
Posted by: spencer at Apr 25, 2007 10:12:32 AM
http://www2.washingtonmonthly.com/archives/individual/2007_02/010663.php
You can see from this simple chart that the income volatility isn't coming from increased unemployment. It is coming from the fact that once you are unemployed, the consequences are dire. The odds of being unemployed for significant amounts of time.
Until I see any evidence to the contrary, we have to assume that income volatility is getting greater. Leonhardt is looking at the wrong data and over too short of a time frame. The highest peak prior to 1980 is the same as the lowest peak since then. The lowest valley since 1980 is higher than the highest valley prior to 1980. Your odds of being one of the long term unemployed are about 50% higher today, at the end part of an economic cycle, are about 4 time larger than they were are the end of the 60s business cycle, and the absolute number of long term unemployed of about 22% of the total unemployed is huge.
Posted by: mickslam at Apr 25, 2007 10:16:35 AM
What the "long-term unemployment" scenario means is that volatility isn't really the right measure, at least if you measure it in the conventional way.
Suppose that in case A people are 10% likely to lose half their income in any year, but 100% likely to regain it the following year, and that in case B people are only 5% likely to lose half their income in any year, but their income will very likely remain steady after that. Clearly people are much worse off under case B, despite the fact that ordinary measures of volatility will be higher for case A.
I don't know the right measurement indicator, but there is more to "risk" than volatility alone.
Posted by: Alex R at Apr 25, 2007 11:35:03 AM
Alex and others are on point. Volatility is one element of risk but only one. We need to look at the possibility of permanent displacement over periods of time. Permanent displacement appears to be accompanied by remployment but at considerably lower wages. How has that changed in the last 35 or 40 years. Pensions and health insurance are additional issues. A subset of workers expected to have employer health insurance and pensions for life. This subset appears to be a dwindling set except perhaps in the public sector.
Posted by: Sonia at Apr 25, 2007 12:55:01 PM
Exactly Sonia,
Measuring and reporting on how likely you are to lose your job is only part of the story. The far more important part is how long it takes you to find a job that is at least comparable with the one you just lost. It looks like in decades prior, it was far less likely to be unemployed for over 2 years after losing your job. In prior to 1980 recoveries, it looks like about 5% of the unemloyed looked for more than 2 years. The data shows that about 22% of the unemployed, or about 1% of working Americans, have been looking for a job for over 2 years and have been unable to find one during this recovery.
By not addressing this in the NYT story, you could say the story has a large bias. I would say it has a large bias, simply because its the job of the reporter and editor to think about what should be important to the issue, and then report on those important facts. They didn't include very important facts, for one reason or another.
Most people will just read this story and conclude that "There is no difference now to 30 years ago.", when this is not true.
Posted by: mickslam at Apr 25, 2007 1:22:08 PM
Thought I'd let you know that I posted Jacob Hacker's response to the CBO report, including why the CBO results do not counter "The Great Risk Shift," at:
Mark
Posted by: Mark Thoma at Apr 27, 2007 10:58:34 PM
Interested readers can find a closely related paper entitled "the ins and outs of cyclical employment" by my bright young colleague Mike Elsby, my bright, not so young and soon-to-be-former colleague Gary Solon and a student, Ryan Michaels, here:
http://www-personal.umich.edu/~elsby/
Jeff
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