Cyclical Worker Flows: Cleansing vs. Sullying

Haltiwanger you wanted added.

New Haltiwanger finds that during recession the churn of the workforce changes, the flow of workers moving from low productivity firms to higher productivity firms downticks and there is an uptick in exits from the labor force from workers employed in low productivity firms.

Core finding, “…We find that in expansions high-productivity firms grow faster primarily by hiring workers away from lower-productivity firms. The rate at which job-to-job flows move workers up the productivity ladder is highly procyclical. Productivity growth slows during recessions when this job ladder collapses. In contrast, flows into nonemployment from low productivity firms disproportionately increase in recessions, which leads to an increase in productivity growth. We thus find evidence of both sullying and cleansing effects of recessions, but the timing of these effects differs. The cleansing effect dominates early in downturns but the sullying effect lingers well into the economic recovery…”

John Haltiwanger, Henry Hyatt, Erika McEntarfer and Matthew Staiger, "Cyclical Worker Flows: Cleansing vs. Sullying," National Bureau Of Economic Research, May 2021, https://www.nber.org/papers/w28802

Impact on productivity, “…Figure 4(a) presents the decomposition of productivity growth into components attributable to poaching and nonemployment flows and shows clear evidence of the cleansing and sullying effects of recessions. On average, worker reallocation through poaching flows contributes 0.1 log points to overall productivity growth each quarter (all statistics on productivity changes are quarterly and have not been annualized). This is a substantial contribution to the overall quarterly average rate of productivity growth of 0.33 when aggregating our micro data.30 However, during recessions there is clear evidence of a sullying effect. In 2006:1 the poaching contribution is 0.13 log points but this declines to 0.02 by 2009:2. In contrast, worker reallocation through nonemployment tends to be a drag on productivity growth, on average, decreasing productivity by 0.67 log points each quarter.31 However, during recessions there is evidence of a cleansing effect since during those times nonemployment flows yield declines in the employment share of low-productivity firms. In 2006:1, the nonemployment component is -0.1 log points but increases to 0.08 in 2009:1. The figure illustrates the staggered nature of these effects in which the cleansing occurs at the outset of the recession-when unemployment rate is rising most rapidly-and the sullying effect peaks relatively further on into the downturn-which the unemployment rate is highest. In addition, the sullying effect lingers well into the recovery…”

Key Evidence, "... The average net employment growth of high-productivity firms is 0.33 percent per quarter with net poaching (the rate at which job-to-job moves reallocate workers to high-productivity firms) averaging 0.27 percent per quarter. In other words, during the 1998-2015 period, job-to-job moves of workers from less-productive employers account for most (80 percent) of the net employment growth of high-productivity firms. The results of the decomposition are also striking for the less productive firms in the industry. In Figure 1(b), low-productivity firms grew at a rate of 0.14 percent per quarter on average from 1998-2015, which is slower than the high-productivity firms. Low-productivity firms lose -0.34 percent employment per quarter from workers “voting with their feet” and moving to firms ranked higher in firm productivity distribution. The positive growth rate for less productive firms is entirely due to strong hiring from nonemployment.In other words, in a typical quarter less productive firms recruit from the pool of unemployed individuals to replace workers moving to better firms. This is also consistent with job ladder models of the labor market. In job ladder models, it is the search and matching frictions that support the presence of low-productivity firms that primarily hire from nonemployment. The patterns of hires and separations in Figure 1 are instructive for understanding the differences in the cyclical dynamics of job-to-job and nonemployment worker flows. Poaching hires and separations both decline for high-productivity firms in contractions with the decline in poaching hires larger so that net poaching declines significantly. Hires from nonemployment decline sharply for low-productivity firms in contractions accompanied by a surge in separations so that net employment growth declines sharply for low-productivity firms. There are similar qualitative patterns for hires from and separations to nonemployment for high-productivity firms but the magnitudes are smaller...."

Bottomline, "... we find evidence of large differences in productivity across firms within the same industry. We also find that more productive firms in the same industry are more likely to grow and less productive firms more likely to contract and exit. The dispersion of productivity across firms is large in magnitude contributing to a high pace of reallocation of workers across firms. Using a decomposition of net job flows into those accounted for by job-to-job flows and those accounted for net flows from nonemployment, we find that much of the overall reallocation of employment from less productive to more productive firms is accounted for by job-to-job flows. The pace at which workers move up the productivity job ladder is highly procyclical. The collapse of the productivity job ladder is consistent with a sullying effect of recessions. In recessions, we find that the reallocation of workers away from less productive firms via nonemployment flows increases. This occurs through a spike in separations to nonemployment along with a decline in hires from nonemployment at low productivity firms. Thus, we also find evidence that this component of reallocation is consistent with a cleansing effect of recessions. The timing of the cleansing and sullying effects differs across stages of the cycle. The cleansing effect peaks relatively early in a downturn coincident with the relatively early spike in separations. The sullying effect peaks later in a downturn but lingers into the early stages of a recovery when unemployment is falling but remains well above trend. Our findings are robust to using a direct measure of productivity based on relative differences in revenue per worker across firms within the same industry and an alternative measure of firm performance based on using the AKM firm premium. Since the AKM firm premium abstracts from worker heterogeneity, this robustness suggests our results are not being driven by variation in the patterns of sorting of heterogeneous workers across heterogeneous firms over the cycle. This is not to suggest that the latter is unimportant but rather that there may be additional effects of cleansing and sullying from sorting above and beyond those we have quantified..”