Professionals leaving office after layoff.
Job security in the U.S. economy is not in crisis. That’s news to my favorite artificial intelligence app, which confidently repeated the usual story about a long-term decline in job security. But the hard data show little change in average length of time on the job. And over decades, the probability of layoff has fallen significantly. Business leaders pitching jobs to prospective employees can use this information to their advantage.
The common narrative sees the 1950s and 1960s as an era when people would spend many years at the same company. I wanted to check the data because my father had seven different jobs from 1950 through 1970. Some separations were his choice, some due to the employer downsizing. And my friends’ dads, in those years, faced temporary layoffs whenever business was light at nearby factories.
The data paint a picture of relatively stable average length of service at a company; reduced incidence of temporary layoffs; and net economic benefits from companies terminating employment, although some individuals may end up significantly worse off.
Job Tenure Worsened Then Recovered
Average years on the job.
The government periodically asks people how long they have been with their current employer. Two Census Bureau economists looked at the data from the Current Population Survey (CPS), which show we are not worse than in the 1950s. There seems to have been a fairly small decline through about 1980, then a rebound. Like much economic data, this isn’t perfect because of some technical issues as well as changing demographics. But their chart shows no real crisis.
A different approach asked men of retirement age how long they had worked at their longest job. Again, no large trend showed up in the data.
Layoff Risk Has Trended Down
Unemployment insurance claims as % total employment.
People changing jobs when they find a better opportunity sounds fine, but being laid off sounds bad. (Before becoming an independent consultant, I was downsized twice, and I confirm it’s frightening and stressful.) But the risk of layoff has fallen.
The risk is measured by looking at a year’s total claims for unemployment insurance divided by average employment that year. (A claim that lasts many weeks counts as a single claim.) Two aberrations show up in the chart. First, risk of layoff fell dramatically during World War II. And risk rose sharply in the pandemic. Aside from those two episodes, the trend is downward. In the 1950s, roughly 27% of the workforce were laid off at some point in the year. The same measure was down to 12% in the 2010s. (Some people have two separate spells of unemployment, so the actual number of people impacted is somewhat lower.)
Some of the improvement was due to general stability in the economy, as measured by the incidence of recessions and variation in GDP. Part of this change was the shift from manufacturing to services, with services employment being more stable.
The Tradeoff Between Job Security And Economic Growth
Economics is all about tradeoffs. If a country wants to maximize job security, it must give up something: economic growth. Alex Taborrok summarizes it simply: No Exit, No Entry. If a company won’t be able to exit an employment relationship, then it will hesitate to enter the relationship.
European countries tend to have many regulations that limit dismissals. Tabarrok reports that unemployment is higher and economic dynamism is lower in Europe than in the U.S.
India makes dismissing an employee very difficult for firms with more than 100 employees. So companies try to stay below 100. The results is many companies that choose not to grow. And because so many companies cannot capture economies of scale, prices charged to consumers are higher than they otherwise would be.
Japan’s lost decade occurred partly because the government ensured that capital would continue to flow to money-losing companies. This was done to protect employment, though it starved the promising young companies that could have grown. Money lent to an old, unprofitable business cannot be lent to a young, profitable company.
Employee Recruitment Strategy
Given the widespread impression of job insecurity, companies can use this to their advantage. A business certainly should not make promises it cannot keep, but it can emphasize the positive. It may want to tell prospective employees how many years it has been since they had to lay off employees for lack of work. It may want to emphasize its profitability. If the company has outside investors, it may want to emphasize their commitment to the enterprise.
A dynamic economy always has some firms failing, even in a boom. And some firms will thrive, even in a recession. This creates churn in the labor force. It’s not always easy for workers, but in the long run it leads to more job opportunities, at higher wages, for goods that will be sold to consumers at lower cost.
