Have less fluid labor markets led to lower employment?

Although the unemployment rate is near 6 percent, the employment population ratio continues to be well below where it was in 2007.  Chicago Booth economist Steve Davis and Maryland economist John Haltiwanger (DH) presented a paper yesterday at the Kansas City Fed conference in Jackson Hole WY that lays out evidence that our labor markets have become less fluid and that this has contributed to lower employment.

In a labor market context fluidity refers to the sum of the rate at which jobs are created and the rate at which they are destroyed.  DH show that fluidity has dropped by a sizable margin since 1990.  Part of this can be explained by an older labor force and a smaller number of young firms today compared to 25 years ago.  The rest of the story is harder to figure out now, but DH consider changes in business models and supply chains, increased training requirements, job lock associated with health insurance, court rulings that have limited employment at will, and occupational licensing as possible contributors.

Of course if there are fewer jobs being destroyed, that means fewer unemployed workers.  However with fewer jobs being created there are fewer opportunities for those looking for work and spells of unemployment become longer.  After crunching the numbers DH find a strong correlation between reduced fluidity and lower employment.

The study has already received press attention (NYT story here, thanks to Marginal Revolution for the link) because of its implications for economic policy.  DH argue that the labor market has faced structural issues for the last 15 years.  The numbers looked better than they should from 2001-2006 because of the housing boom and looked much worse since 2008 for obvious reasons.  Zero percent interest rates are not going to fix this problem.