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BPEA Article

Job switching and job satisfaction in the U.S. labor market

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Abstract

SUCCESSFUL MACROECONOMIC THEORIES must explain important empirical regularities. One indisputable regularity is the highly procyclic nature of quits: many more people voluntarily leave their jobs when unemployment is low than when it is high. In this paper, we demonstrate that theories based on the assumption that unemployment is involuntary can easily explain procyclic quits. We construct and empirically validate a simple model of labor turnover; the model is Keynesian in that the labor market is nonclearing: jobs are rationed. Market-clearing theories such as search theory and real business cycle theory cannot account for the procyclic behavior of quits.

Authors

George A. Akerlof

Daniel E. Koshland, Sr. Distinguished Professor Emeritus of Economics - University of California, Berkeley

Successful macroeconomic theories must explain important empirical regularities. One indisputable regularity is the highly procyclic nature of quits: many more people voluntarily leave their jobs when unemployment is low than when it is high.

In “Job switching and job satisfaction in the U.S. labor market” (PDF), George A. Akerlof, Andrew Rose, and Janet Yellen demonstrate that theories based on the assumption that unemployment is involuntary can easily explain procyclic quits. The authors construct and empirically validate a simple model of labor turnover; the model is Keynesian in that the labor market is nonclearing: jobs are rationed.

Market-clearing theories such as search theory and real business cycle theory cannot account for the procyclic behavior of quits. Despite its simplicity, the authors’ model has a rich set of implications consistent with the U.S. labor market. They find that:
A large proportion of quits are due to job switches that involve no spell of unemployment;

  • Quits are procyclic despite the fact that wages are acyclic;
  • Quits are concentrated in low-wage jobs;
  • Quit rates decline as tenure increases;
  • There is an inverse relationship between vacancies and unemployment;
  • Many quits involve low or negative wage changes.

The authors describe the concept of vacancy chains, which are triggered by the creation of autonomous vacancies. The latter occur because of new job creation, withdrawal of workers from the labor force, and voluntary quits into unemployment. Vacancy chains end only when a vacancy is filled by an individual who is either unemployed or out of the labor force.

Commenters

In the authors’ model, quits are procyclic because vacancy chains are longer when unemployment is low. The expected length of a vacancy chain in a simple model of turnover varies inversely with the unemployment rate. Vacancy chains are short when unemployment is high because the number of jobseekers who are unemployed or out of the labor force is large relative to the number of employed jobseekers. In this case, the probability of recruiting an unemployed individual to any given vacancy, thus ending the chain, is high. In a high-pressure, low-unemployment economy, there are fewer unemployed or out-of-the-labor-force jobseekers relative to employed jobseekers; thus vacancy chains are longer.

At low unemployment rates, high turnover enables workers unhappy with their jobs to trade places more easily, resulting in higher average job satisfaction. The low-unemployment economy is an economy of opportunity, in which workers who are dissatisfied with their jobs have a high degree of mobility. Heretofore, economists have tended to emphasize the costs of turnover. The authors emphasize the gains. The costs of mobility are already taken into account by Okun’s Law, since they are reflected in the level of output.

Read the full paper here.

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