Tuesday, February 14, 2012

Pity the Young Americans Starting Off in the Great Recession!

The Economist has an article which considers relatively little understood aspects of the current job market. The fundamental point is that the rate at which people are changing from one job to another (the churn) is way down.

Churn is a mechanism by which labour markets reallocate workers towards more efficient ends. In the typical job-to-job move (that is, without any intervening stint of unemployment) an American worker can expect a rise in wages of over 8%. This gain represents, at least in part, an improvement in productivity. As workers obtain skills and find better job matches, their output and earnings rise. And as firms obtain ever more suitable labour, they can afford to pay higher wages. In this way, the churning of the labour market contributes to growth in the potential output of the economy.
Individuals who graduate from college and enter the labour force during a typical recession can expect an initial earnings loss of about 9% (compared with what they might expect in normal circumstances). 
In the past, young Americans could expect to change jobs often and to see their earnings increase rapidly in those early years. Moreover, every new job a person gets during his/her lifetime is likely to have a rate of pay based on the person's then current rate of pay. Thus, if due to low starting pay and slower rates of changes of jobs, at the end of this recession people have a significantly lower rate of pay than they otherwise would have had, they can expect to have lower pay for the rest of their lives.

And of course, the unemployment rate is very high among the young in this Great Recession!

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