The Breakdown

Explaining Southern California's economy

Why 'churn' is essential for the economy

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34981 full

Great post from Ben Casselman at the Wall Street Journal's Real Time Economics blog. It's all about "churn," the phenomenon of people leaving jobs for new jobs, and new hires coming in to fill the jobs that were left behind. A healthy level of churn is a sign of a healthy economy. And obviously, for the past few years, churn in our sickly economy has been unhealthy.

That appears to be slowly changing, which is a positive indication:

Churn is a big deal. A new paper by Edward Lazear of Stanford and James Spletzer of the Bureau of Labor Statistics finds that during the recent recession, 80% of the drop in hiring was due to low levels of churn, rather than reduced job creation. The authors estimate reduced churn shaved two-fifths of a percentage point off GDP for the duration of the recession.

Quitting, of course, makes up just one half of churn. [My emphasis] Companies also have to be willing to fill those open positions. That’s happening too, but slowly. Companies hired a seasonally adjusted 4.4 million workers in February, up 3.4% from January and 7.2% from a year earlier, according to the Department of Labor....Job openings are rising faster than actual hires, which could suggest companies are dragging their feet on filling open positions.

The critical factor here is that churn must be accelerated by confidence. And confidence is one of those things that's tough to quantify or even truly isolate in an economy. You can poll consumers and get a consumer confidence number. And you can survey businesspeople and determine whether they're optimistic of pessimistic about the future prospects of the their firms. 

A number of factors, from the ongoing debate over Obamacare to the presidential campaign (and related campaigns in Congress and at the state and local level) are preventing us from building an obvious runway for a confidence takeoff. 

Something else is going on as well: skills mismatches. Employers who want to hire, maybe because a worker has quit for another job, can't find the replacement workers with the skills they require. This makes sense; a recession will often dislocate workers with skills that are of declining value and not restore the lost jobs when the economy recovers. The best example from the Great Recession is of course construction workers. No demand for houses equals no demand for people to build houses. The solution is retraining, but that can take a while and demand government support, given that unemployed workers see their finances destroyed.

One final thought on churn: it could be pretty industry-specific at this juncture. For healthy churn to resume across the economy, more unemployed workers — and particularly long-term unemployed workers who may have dropped out of the labor force — need to be absorbed. More robust growth will help this happen. So for the next few months, all eyes should focus on whether the U.S. can deliver GDP growth in the 2.5-3 percent (or better) range.

Follow Matthew DeBord and the DeBord Report on Twitter.

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