Worker Flows Over the Business Cycle: the Role of Firm Quality

Lisa Kahn and Erika McEntarfer have an interesting paper on worker flows, firm quality, and the business cycle. They define firm quality as average pay (and their findings are robust to using other sensible definitions).

Here’s one of their key graphs:

This graph shows that while all firm types shrink the size of their workforce in recessions (i.e. growth is negative), net job growth declines more for good (high paying) firms. This is because they have more separations in recessions than low-quality firms. High wage firm hiring doesn’t fall by as much as it does for low wage firms, but this difference in hiring is not large enough to overcome the difference in separations.

Here’s how they conclude:

In this paper, we use employer-employee matched U.S. data to study net and gross worker flows over the business cycle as a function of firm quality. We find that low-quality firms fare relatively better in the recession; their growth rates shrink by less. This is because separation rates at low-wage firms fall by more. It looks as though high-quality firms are more likely to make layoffs in an economic downturn, while still keeping up a modest amount of hiring. This set of results is consistent with the need for low-quality firms to continually replenish their stock of workers in boomtimes when they lose their workforce to high-quality firms, while in busts they can grow, relative to high-quality firms. In contrast, high-quality firms grow relatively faster in boomtimes and experience relatively more separation in busts. As we have said, these findings are consistent with the Moscarini Postel-Vinay poaching model described above, while we provide ancillary evidence that labor demand explanations cannot be driving our results.

Furthermore, this set of facts is suggestive of two important implications for workers matching in recessions. First, low-quality firms may have an easier time attracting and retaining high-quality workers in a recession. We might therefore see that among workers matching in recessions, workers will be overqualified, relative to the firms that hire them. Second, relatively speaking, low-quality firms have an easier time retaining workers in recessions, since, as we have shown, they shrink less quickly. Therefore a worker matching to a low-quality firm in a recession is likely to stay there for longer; he or she will have less of an opportunity to make a job-to-job transition to a high-quality firm. In our data, we can look at both of these effects directly and we do so in Kahn and McEntarfer (2013).

While previous research has emphasized match quality may decline in recessions due to a lack of workforce reallocation (Barlevy 2002), our evidence here suggests an additional sullying effect. The types of jobs workers get stuck in are more likely to be low-quality. This is evident in our finding that, relatively speaking, low-quality firms have an easier time growing in the bust, while high-quality firms want to reduce the size of their workforce. One interpretation of our results is that the reduced ability to move on to better matches caused by a recession has a greater impact on workers in low-quality firms compared to those in high-quality firms. These results have implications then for the costs of recessions, both in the short- and long-run. These results also have important implications for the literatures on the differential impact of recessions of workers. For example, that entering the labor market in a recession (Kahn 2010, Oreopoulos, von Wachter and Heisz 2010) or being displaced from a long-term job in a recession (Davis and von Wachter 2010) has particularly long-lasting, negative wage impacts, could potentially be explained by these workers spending more time in low-quality firms.