Wednesday, December 23, 2009

Are Layoffs "The Problem"?

Copyright, The New York Times Company

Job hires have been low in recent months, but that does not necessarily mean that spurring hiring at small businesses is the best way out of this recession.

It is sometimes said that helping large employers can prevent mass layoffs, whereas helping small employers can stimulate new hires. If so, it might be important to know whether the job losses during this recession have come from a surge in layoffs or a collapse of new hires.

The chart below displays monthly new hires and job separations from January 2007 to the latest month available, October. New hires indicate the number of people newly employed with their employers; promotions and transfers are not included. Job separations indicate quits, layoffs, retirements and deaths.

The monthly flows into and out of employment are large: Millions of people find a job every month, and millions lose a job. The fact that separations have consistently exceeded hires for over a year explains why total employment has fallen by seven million since the recession began.

Job separations have been lower during this recession than they were before the recession began, as was the case in the 2001 recession. Employment has dropped because new hires have fallen even more. For this reason, some have argued that the key step to raising total employment is to spur job creation by small business, because layoffs are not the problem.

But if you look at the individual components of separations, you will see that a couple of other conclusions are also credible.

The chart below displays two of the major components of “total separations:” quits and layoffs. Layoffs have surged during this recession, but this surge is not visible in total separations because it is more than offset by a reduction in quits:

Thus, a surge of layoffs — rather than a collapse in hiring — could well have made this recession as bad as it ultimately was.

Moreover, the collapse of hires need not have been the driving force over the last year or two.

The chart above shows how quits collapsed. To the extent that many new hires occur in order to replace workers who had quit, the collapse of new hires shown in the first chart could well be a response to the collapse in quits shown in the second.

The fact is that the various job flows are all interdependent on one another: Quits create hires and prevent layoffs, the prospect of new hires can motivate people to quit, and prior quits and layoffs can create new hires as more labor becomes available for firms aspiring to grow.

Although public policies that support small business may help end this recession, the case for such policies cannot be made from the job flows data alone.

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