Order Code RL32194
CRS Report for Congress
Received through the CRS Web
Job Loss:
Causes and Policy Implications
Updated January 10, 2006
Marc Labonte
Specialist in Macroeconomics
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
Job Loss: Causes and Policy Implications
Summary
Total nonfarm private employment fell from 111.6 million in February 2001 to
a trough of 108.4 million in July 2003. Since then, it has expanded, but not quickly
enough in the opinion of some policymakers. Job loss is one of the most important
macroeconomic problems facing policymakers, both in terms of its economic and
social cost. But what is often missing from the policy debate is a distinction between
net job loss and gross job loss. Gross job loss is the total number of jobs eliminated
by all contracting firms in a given period, whereas net job loss is the result of greater
gross job loss than gross job gains in a given period. Economists view net job loss
as a detrimental phenomenon, and most recommend that fiscal and monetary policy
be used to mitigate it. However, they view gross job loss, as long as it is offset by
gross job gains, as a healthy and normal part of a functioning market economy,
although it may have social costs and will not affect all regions or industries equally.
Data reveal that gross job loss and job gains are each, on average, 20 times
higher than net job loss (or gains) in any given quarter. This is true in both
expansions and recessions. Gross job gains increased steadily from the beginning of
the data series in 1992 until the end of 1999; at the same time, job losses increased
steadily from 1992 to 2001. Clearly, gross job loss is not incompatible with a healthy
labor market: during an expansion in which the unemployment rate was lower than
it had been in three decades, gross job losses steadily increased as the expansion
progressed. Even during the recent recession and “jobless recovery,” gross job gains
continued to average about 8 million per quarter; but these gross job gains were more
than offset by gross job losses. In addition, small businesses have both higher gross
job gains and losses than large firms, and contribute modestly more net job creation.
Many causes of job loss have been offered, including imports, trade deficits,
offshore outsourcing, direct investment abroad, and restructuring. But economic
theory suggests that all of these cause gross job loss, not net job loss. Historical
experience is supportive: neither imports, the trade deficit, nor the implementation
of trade liberalization agreements are correlated with net job loss. Theory suggests,
and empirical evidence confirms, that only recessions cause net job loss.
Policies that impede gross job loss may seem to be a desirable way to limit net
job loss at first blush. However, such policies could make firms reluctant to hire new
workers, because a firm would not be able to subsequently reduce its workforce
easily if the need for the new workers proved to be only temporary. As a result, gross
job gains could decline; if gross job gains declined by more than gross job loss
declined, net job creation would decline. International comparison confirms this
view: Germany, France, Italy, and Spain all have high barriers to job loss and
unemployment rates that are typically twice as high as low barrier countries like the
United States. Although attempts to impede gross job loss may reduce economic
efficiency, policy can (and does) assist some of those affected by gross job loss
through unemployment insurance and other parts of the social safety net. Whether
the existing social safety net is adequate as gross job loss increases is the subject of
policy debate. This report will be updated as events warrant.
Contents
The Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
What Causes Gross Job Loss and Net Job Loss? . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Trade Deficits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Offshore Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Overseas Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Economic Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Economic Downturns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Labor Market Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
List of Figures
Figure 1. Gross Job Gains, Gross Job Losses, and Net Job Gains . . . . . . . . . . . . 3
Figure 2. Gross Job Gains Attributable to Firm Openings and Gross Job
Losses Attributable to Firm Closings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Figure 3. Effects of Trade on Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 4. Effects of Recessions on Labor Markets . . . . . . . . . . . . . . . . . . . . . . . 13
List of Tables
Table 1. Historical Correlation between Trade and Employment . . . . . . . . . . . . . 9
Table 2. International Comparison of Employment Protection Policies . . . . . . . 16
Job Loss: Causes and Policy Implications
Total private nonfarm employment fell from a peak of 111.6 million in February
2001 to a trough of 108.4 million in July 2003.1 Since then, it has expanded, but not
enough to reduce the unemployment rate to the level of the previous expansion.
Opinions are divided on whether current unemployment levels are satisfactory.
Job loss — declines in employment — is one of the most important
macroeconomic problems facing policymakers, both in terms of its economic cost
and the social toll it takes on our society. But what is often missing from the policy
debate is a distinction between net job loss and gross job loss. Gross job loss is the
total number of jobs eliminated by all contracting firms in a given period, whereas
net job loss is the result of greater gross job loss than gross job gains in a given
period. In expansions, the labor market is characterized by net job creation amidst
gross job loss. This is required to maintain steady employment rates with a growing
population. It is only during recessions that the overall labor market experiences
persistent net job loss. Economists view net job loss as a detrimental phenomenon
and most recommend that policy be used to mitigate it. However, they view gross
job loss, as long as it is offset by gross job gains, as a healthy and normal part of a
functioning market economy, although it may have social costs.
The Facts
A quarterly data series from the U.S. Bureau of Labor Statistics (BLS), shown
in Figure 1, provides data that help to put the distinction between gross and net job
loss into perspective.2 These data are measured from the firm’s perspective —
changes in the size of the firm’s workforce — not the employee’s perspective. For
this reason, the data, in a sense, undercount the amount of change in the workforce
because they do not account for movements of individual workers to and from any
given firm if the firm remains the same size (e.g., a worker quits and is quickly
replaced by a new hire). The gross job loss figures, from the employee’s perspective,
could be involuntary (layoff, firing) or voluntary (quitting, retirement).3
1 Total employment is measured in two different BLS surveys, the household survey and the
establishment survey. Data on total employment cited in this report come from the
establishment survey, which queries employers about the number of jobs on their payrolls,
unless otherwise noted.
2 The new series is discussed in Timothy Pivetz, Michael Searson, and James Spletzer,
“Measuring Job and Establishment Flows with BLS Longitudinal Microdata,” Monthly
Labor Review, Apr. 2001, p. 13.
3 Data on layoffs/discharges and quits can be found in a separate, noncomparable data series
(continued...)
CRS-2
In the first quarter of 2005, gross job loss and gains equaled 7.3 and 7.6 million
per quarter, respectively, about 7% of total employment. As can be seen in Figure
1, gross job loss and job gains are each, on average, 20 times higher than net job loss
(or gains) in any given quarter. This is true in both expansions and recessions. The
rate of job gains increased steadily from the beginning of the series in 1992 until the
end of 1999; at the same the rate of time job losses increased steadily from 1992 to
2001.4 Some, but not all, of the long run increase in gross job gains and losses can
be attributed to a growing labor force. The rest of the increase indicates that the U.S.
labor force is becoming more mobile over time, but the data do not indicate whether
this is the worker’s or the firm’s decision, or both. Clearly, gross job loss is not
incompatible with a healthy labor market: during an expansion in which the
unemployment rate was lower than it had been in three decades, gross job losses
steadily increased as the expansion progressed. And even during the recent recession
and “jobless recovery,” gross job gains continued to average about 8 million per
quarter; but gross job gains in this period were more than offset by gross job losses.5
3 (...continued)
from BLS which was started in Dec. 2000. In the recessionary year of 2001,
layoffs/discharges averaged 1,705 per month and quits averaged 2,566 per month. In 2004,
layoffs/discharges averaged 1,631 per month and quits averaged 2,304 per month. These
data are collected in the Job Opening and Labor Turnover Survey.
4 Although the government does not provide official data on gross job loss and gains before
1992, private research suggests that gross job loss and gains on a large scale are not new.
Using government data, Davis, Haltiwanger, and Schuh estimated that gross job gains
averaged 5.2% and gross job loss averaged 5.5% of total employment per quarter in the
manufacturing sector from 1972 to 1988. Steven Davis, John Haltiwanger, and Scott Schuh,
Job Creation and Destruction (Cambridge, MA: MIT Press, 1996).
5 For more information, see CRS Report RL32047, The ‘Jobless Recovery’ from the 2001
Recession, by Marc Labonte and Linda Levine.
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Figure 1. Gross Job Gains, Gross Job Losses, and Net Job Gains
10000
8000
6000
4000
2000
0
-20001992 1994 1996 1998 2000 2002 2004
Gains
Losses
Net
Source: BLS
Other data from the same survey measure how much of the gross job gains and
losses are caused by firm openings or closings. (Mergers are not counted as openings
or closings.) On average, about one-fifth of gross job gains and losses are
attributable to firm openings or closings. These data are at odds with popular
perception. As shown in Figure 2, gross job losses due to firm closings steadily
increased during the employment boom of the 1990s. Gross job loss was not
significantly higher during the 2001 recession than in the late 1990s, suggesting firm
closings were not the driving force behind heightened unemployment during the
latest recession. Losses due to firm closings began to fall after the end of the
recession (the ‘jobless recovery’ period), and actually reached their lowest levels
since the mid-1990s in 2002 and 2003. Gross job gains attributable to firm openings
declined steadily from 2000 onward; nevertheless, they averaged 1.7 million during
the recession and subsequent recovery.
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Figure 2. Gross Job Gains Attributable to Firm Openings and
Gross Job Losses Attributable to Firm Closings
Source: BLS
It is often claimed that small businesses are the engine of job creation in the
U.S. economy. To an extent, this is a misconception based on the confusion between
net and gross job flows. Firms with 99 employees or fewer, which account for 38.1%
of total private employment, accounted for 61.1% of gross job gains between 1992:3
and 2005:1. But while these firms had a disproportionate share of gross job gains,
they also had a disproportionate share of gross job loss, 62.1% of the total. On net,
they accounted for 46.3% of net job gains over that time period — modestly more
than their share of total employment, but significantly less than gross flows would
indicate. Interestingly, in the 2001 recession and jobless recovery, very large firms
accounted for a disproportionate share of net job loss.6
Overall, these data provide a picture, during expansions, of a highly dynamic
U.S. labor market in which labor rapidly shifts from firm to firm to its most efficient
use. This vitality is the essence of economic growth and rising living standards for
society as a whole in a market economy.7 It is caused both by output shifting from
6 All data from Bureau of Labor Statistics, “New Quarterly Data from BLS on Business
Employment Dynamics by Size of Firm,” news release USDL 05-2277, Dec. 8, 2005.
7 To judge the benefits of gross job loss from the perspective of a nation’s economic
development, consider the counterexample: if the U.S. had experienced no gross job loss in
the 20th century. At the beginning of the 20th century, much of the U.S. population worked
in the farming sector. If gross job loss in the farming sector had not occurred, those workers
would not have been available to work in the growing manufacturing and service sector.
(continued...)
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some firms to more efficient ones within an industry and by shifts in spending from
one industry to another, due to factors such as changing consumer tastes, technology,
or comparative advantage. Of course, there will always be winners and losers in a
market economy. Although significant gross job loss is consistent with net job
creation (because it is offset by gross job gains) for the nation as a whole, gross job
loss can translate into net job loss at the local level even when national employment
is rising because the losses and gains may not occur in the same geographic area. Six
mid-western and two southern states have experienced net job loss8 from 1998 to
2003; the other 42 states experienced net job gains.
Furthermore, while steady net employment gains are unambiguously good for
society as a whole, the data do not necessarily indicate that the same individuals who
lose jobs also gain jobs. The data also do not indicate whether the job loss is
voluntary or involuntary, nor how many of the individuals who involuntarily changed
jobs were forced to take new jobs that were less desirable or paid less. A separate
(and noncomparable) data series on worker displacement from BLS can help to
answer these questions.9 BLS classifies workers as displaced if they lost their job
because their plant closed down or moved, their positions or shifts were abolished,
or there was insufficient work. From 2001 to 2003, 5.3 million workers with tenure
of three years or more were displaced (another 6.1 million short-tenured workers
were displaced during that period). Although the two data series cannot be compared
directly, gross job loss equaled 94 million over that three-year period. Displacement
is significantly lower during expansions; for example, from 1997 to 1998, 1.9 million
long-tenured workers were displaced.
Of the displaced workers, about 65% were reemployed, 20% were unemployed,
and 15% had left the labor force at the beginning of 2004. Of those reemployed full-
time, about 40% were now earning more than they had at the displaced job, and one-
third were now earning significantly lower wages (at least 20% lower). Workers 55
years of age and older had lower reemployment rates than younger workers.10
Displaced workers fared better during expansions. For example, in 1997-1998, 80%
of displaced workers were reemployed, and of those reemployed full-time, their
median wage was about the same as it had been at the displaced job and 60% were
making more than at their displaced job.
7 (...continued)
Today, farms account for about 1.5% of the total employment and 1% of the nation’s output.
If gross job loss had not occurred in the last century, much of today’s labor force would not
be available to produce the other 99% of U.S. output.
8 The states experiencing job loss are Illinois, Indiana, Iowa, Michigan, Mississippi,
Missouri, Ohio, and South Carolina.
9 BLS, “Worker Displacement, 2001-2003,” press release USDL 04-1381, July 30, 2004.
The newest available data in this series are from 2003. All of the following data refer to
workers with three years of tenure or more. See also Ryan Helwig, “Worker Displacement
in a Strong Labor Market,” Monthly Labor Review, Bureau of Labor Statistics, June 2001.
10 Farber finds that older displaced workers were more likely to suffer a significant loss of
earnings than younger workers. Henry Farber, Job Loss in the United States, 1981-2001,
National Bureau of Economic Research, Working Paper 9707, May 2003.
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Some gross job loss takes the form of mass layoffs, during both expansions and
recessions. In another noncomparable survey from BLS, 0.8 million workers lost
their jobs from extended mass layoffs from 2004:4 to 2005:3. (At this time, 2005:3
data from hurricane-affected areas are incomplete and most likely understate mass
layoffs.) This figure undercounts workers affected by mass layoffs because it does
not include mass layoffs of less than 50 workers or layoffs that lasted less than 30
days. Mass layoffs tend to be cyclical: workers separated by mass layoffs rose from
1.2 million in 2000 to 1.5 million in 2002. Since unemployment totaled 8.4 million
in 2002, mass layoffs are an important but not primary cause of unemployment. BLS
has not kept a continuous data series long enough to determine if there has been a
long-term upward trend in mass layoffs beyond the cyclical trend.11
What Causes Gross Job Loss and Net Job Loss?
Several economic phenomena have been identified in popular discussion as
purportedly causing job loss. Although all of these phenomena cause gross job loss,
most have a much smaller effect on net job loss than popularly perceived. The
exception is the business cycle: in each instance, recessions have been the cause of
persistent net job loss in the post-war period.
Trade. When trade expands, greater imports cause gross job loss, as products
that were previously produced in the United States are now produced by workers in
other countries, rendering those U.S. workers redundant. However, economic theory
states that expansions in trade have no effect on net employment. As foreign
countries increasingly exchange their goods for U.S. exports, more workers are
needed in U.S. export industries. In addition, because trade is based on comparative
advantage, trade increases the purchasing power of U.S. incomes in the aggregate.
Thus, trade allows the U.S. economy as a whole to produce and consume more
domestic goods, requiring more workers to produce them.12 It is possible that there
could be some transitional loss in net employment if workers cannot easily be
reallocated into other sectors of the economy, causing net employment to temporarily
be greater than zero. For example, workers who have lost their jobs in the import-
competing industries may not have the skills needed by export industries. But this
transitional effect would disappear once markets had adjusted.13
U.S. history offers persuasive evidence that trade liberalization has no effect on
net employment, as can be seen in Figure 3. During the post-war period, U.S. trade
11 For more information, see CRS Report RL30799, Corporate Downsizing and Other Mass
Layoffs, by Linda Levine.
12 For more information, see CRS Report RL32059, Trade, Trade Barriers, and Trade
Deficits: Implications for U.S. Economic Welfare, by Craig Elwell.
13 Even if U.S. workers could not compete with foreign workers, the floating exchange rate
system would prevent imports from leading to net job loss. Since dollars must be sold in the
foreign exchange market to purchase imports, if foreign firms became more “competitive”
at producing goods than U.S. firms such that imports rose, the dollar exchange rate would
depreciate through the purchase of imports until U.S. firms were “competitive” again.
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has become progressively liberalized, with eight rounds of world trade liberalization
negotiated between 1947 and 1993 through the General Agreements on Tariffs and
Trade (GATT, later became World Trade Organization), as well as the Canadian Free
Trade Agreement in 1989 and North American Free Trade Agreement (NAFTA) in
1994. Imports have increased steadily as a percentage of GDP throughout the post-
war period, from about 4% of GDP in the 1940s to about 14% of GDP in recent
years. If trade caused net job loss, employment would have declined and
unemployment risen throughout the post-war period. The opposite is the case:
employment has steadily increased during the post-war period, and the
unemployment rate has mirrored the business cycle, not trade patterns. Indeed, trade
liberalization does not appear to have strong effects on even transitional
unemployment. For example, NAFTA was implemented at a time when aggregate
employment was rising and unemployment was falling. GATT Rounds 1, 3, 4, 6, 7,
and 8 were completed at times when unemployment was low, and unemployment,
though high, fell subsequent to GATT Rounds 2 and 5. The most recent example the
United States has with significantly increasing the restrictions on trade was the
Smoot-Hawley tariffs, which did not stem the loss of employment during the Great
Depression.14
14 Using plant-level data, Davis et al. demonstrate that trade has little effect on gross job loss
either. Although they found that industries with the highest degree of import penetration
had the highest gross job loss rates, they had the second highest gross job gain rate, and
firms with the second highest degree of import penetration had the lowest gross job loss
rates. After controlling for wages (as a proxy for comparative advantage), the relationship
between gross job loss and import penetration became statistically insignificant. As the
authors point out, theory suggests that the effect of trade liberalization on gross job flows
is ambiguous. Liberalization could increase gross job flows by exposing the U.S. economy
to more shocks from abroad or decrease gross job flows by diversifying the economy so that
the effects of domestic shocks are reduced. Steven Davis, John Haltiwanger, and Scott
Schuh, Job Creation and Destruction (Cambridge, MA: MIT Press, 1996).
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Figure 3. Effects of Trade on Employment
Source: Bureau of Economic Analysis, Bureau of Labor Statistics
Note: Import and Trade Balance data expressed in real 2000 dollars. The first seven rounds of GATT
negotiations are labeled GATT 1-7; the eighth round is labeled the Uruguay Round. The Canadian
Free Trade Agreement is labeled CFTA.
Although regression analysis, which allows other factors to be held constant, is
beyond the scope of this report, informal quantitative evidence on the relationships
portrayed in Figure 3 can be gleaned using correlation analysis. The results are
presented in Table 1,.15which shows that between 1946 and 2002, changes in
employment are highly correlated with changes in imports. Thus, the historical
experience is the opposite of the typically claimed relationship: when imports
increased, employment typically also increased. Although this is not evidence that
higher imports cause higher employment — the two variables are correlated because
both usually increase — it is evidence that higher imports do not cause lower
employment. The table also demonstrates that the implementation of trade
liberalization agreements has virtually no relationship historically to changes in net
employment in the same or following year (in case there is a lagged effect), as
15 Correlation is measured on a scale of 1 to -1, where correlation=1 if two variables are
perfectly correlated (always move together), correlation=0 if two variables are not correlated
(do not move together), and correlation=-1 if the two variables are perfectly negatively
correlated (always move in opposite directions).
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economic theory would suggest. In sum, the results suggest that trade either has no
negative effect on employment, or the effect is swamped by other factors.
Table 1. Historical Correlation between Trade and Employment
Correlation between employment growth and...
Correlation Coefficient
...change in imports (as a % of GDP)
0.47
...major trade agreement in same or previous year
0.10
...change in trade balance (as a % of GDP)
-0.02
...GDP growth
0.53
Source: CRS calculations based on BLS, BEA data
Note: Correlation based on annual data 1946-2002; major trade agreements include GATT rounds 1
to 8, Canadian Free Trade Agreement and North American Free Trade Agreement.
Survey data from mass layoffs does not identify trade as a major source of gross
job loss either. For example, only 3,000 of the 136,000 workers laid off in the third
quarter of 2005 gave import competition as the cause of the layoff.
Trade Deficits. Some who concede that trade has no effect on net
employment when higher imports are matched by higher exports argue that trade still
reduces net employment when higher imports are matched instead by a larger trade
deficit. They reason that higher imports cause gross job loss, but are not offset by
gross job gains in the export sector if they lead to a trade deficit. While this is true,
trade deficits do lead to gross job gains in other ways. When the United States runs
a trade deficit, it exchanges foreign imports for U.S. assets. This puts downward
pressure on U.S. interest rates, stimulating spending on physical investment (plant
and equipment). Lower interest rates also stimulate spending on housing and
interest-sensitive goods, such as automobiles and appliances. As a result, the trade
deficit causes gross job gains in the sectors that produce plant, equipment, housing,
and interest-sensitive goods, all else equal. These gross job gains may not occur
instantaneously — so there could be transitional net job loss — but when they do
occur, they will offset the gross job loss caused by higher imports so that the trade
deficit causes no net job loss.
As can be seen in Figure 3, the historical experience confirms this conclusion:
the large increase in the trade deficit in the 1980s and 1990s took place at a time of
rising employment and falling unemployment. Table 1 demonstrates that there was
almost no correlation between changes in the trade balance and changes in
employment.16
16 For more information, see CRS Report RL30534, America’s Growing Current Account
Deficit: Its Cause and What It Means for the U.S. Economy, by Marc Labonte and Gail
Makinen.
CRS-10
Offshore Outsourcing. The term offshore outsourcing or offshoring is
frequently used in several different ways.17 It can refer to U.S. multinational firms
shifting production from the United States to an overseas subsidiary, U.S. firms
importing intermediate goods from foreign companies, importing services, or U.S.
firms making overseas investments. Economists view the first three phenomena
similarly to trade (the latter phenomenon will be discussed separately in the next
section). When U.S. firms outsource production to foreign firms, gross job loss
occurs because goods and services that were being produced by U.S. workers are now
being produced by workers in other nations. When outsourcing occurs, those foreign
firms must be paid using U.S. dollars. The foreign firms, in turn, can use those
dollars in three ways. First, they can buy U.S. exports, resulting in gross job gains
in the export sector. Second, they can buy U.S. assets (increase the trade deficit),
resulting in gross job gains in the interest-sensitive sectors that produce plant,
equipment, housing, and interest-sensitive goods, as explained in the previous
section. Third, they can sell their U.S. dollars for another currency, causing the dollar
to depreciate; as a result, the output of U.S. exporting firms and U.S. import-
competing firms would increase as U.S. goods become more price competitive
internationally. Thus, in all three scenarios, gross job loss is offset by gross job gains
so that there is no net job loss, although there may be for a transitional period.
Quality data on outsourcing is scarce because the term has only recently been
coined, there is not yet any consensus as to how it should be defined, and the concept
cannot easily be measured accurately. It is popularly used to mean net job loss, but
only gross job loss could be measured. For example, it would be difficult for BLS
to measure gross job gains caused by foreign firms outsourcing to the United States,
and impossible to trace the rise in employment caused by the spending on U.S. goods
of foreign firms that U.S. firms have engaged in outsourcing. Changes in imports of
services suggests that outsourcing, by that definition, is a minor phenomenon relative
to total gross job loss. The one official data source on outsourcing comes from the
BLS mass layoffs series, and this only includes one type of outsourcing, U.S. firms
relocating work abroad. In the third quarter of 2005, only 3,000 mass layoffs out of
136,000 were caused by relocation abroad.18
Overseas Investment. The argument is sometimes made that when U.S.
firms decide to undertake direct investment abroad, it reduces U.S. employment.
According to the argument, if the U.S. firm had not, say, built the new factory abroad
that employs foreign workers, it would have built a factory in the United States that
employed U.S. workers. As a result, net employment is lower than it would have
been.
17 For more information, see CRS Report RL32292, Offshoring (a.k.a. Offshore
Outsourcing) and Job Insecurity Among U.S. Workers, by Linda Levine; and CRS Report
RL32484, Foreign Outsourcing: Economic Implications and Policy Responses, by Craig
Elwell.
18 Because the survey question is new, it is difficult to judge its accuracy; for example, the
response could be biased in favor of over-reporting if outsourcing is being used as a
scapegoat for other reasons for layoffs.
CRS-11
Economic theory states that capital investment determines the wages of
employees, not the level of employment. That is because capital investment
increases the productivity of existing workers, and in a competitive market wages are
determined by productivity. If the level of employment was based on the amount of
capital available per worker, then the United States would not have been able to
achieve full employment in the past since capital per worker has increased steadily
over time. Yet throughout its history, the United States has achieved full employment
most of the time.
Even if U.S. investment abroad did lead to net job loss, the data do not suggest
that this explanation is possible since the United States is a net recipient of foreign
capital, and has been for the past few decades. In other words, any jobs lost by U.S.
investment abroad have been more than offset by the jobs created by greater foreign
investment in the United States. Although U.S. direct investment abroad exceeds
foreign direct investment in the United States, overall foreign investment in the U.S.
(direct, portfolio, and official) is greater than U.S. investment abroad.19 Ultimately,
foreign investment has the same effect on the economy regardless of the form it
takes.
Net foreign investment in the United States is, by identity, equal to the U.S.
current account deficit (trade deficit plus net transfers). That is because capital
cannot flow into the country on net (net borrowing cannot occur) unless the United
States imports more than it exports. Any time U.S. investment abroad increases, all
else equal, the trade deficit must fall. Thus, explanations of net job loss attributed
to the trade deficit and explanations of net job loss attributed to U.S. investment
abroad are mutually exclusive — both stories cannot be correct. This can be proven
by considering the foreign exchange market. If U.S. direct investment in the euro
area increased, dollars must be exchanged for euros. This causes the dollar to
depreciate against the euro, causing U.S. exports to the euro area to rise and euro
imports to the United States to fall. As a result, the trade deficit narrows.
Data on employment at U.S. multinational companies domestically and abroad
indicate that both have tended to rise over time, which belies the notion that a job
gained abroad will be offset by a job lost domestically. The newest data available in
this series is for 2002, before the popular interest in offshore outsourcing emerged.
Domestic employment at U.S. multinationals dropped between 2000 and 2002, but
so did their employment abroad.20
Economic Restructuring. Declines in aggregate employment are often
blamed on restructuring in the economy. For example, the decline in employment
since 2001 is often attributed to the collapse of the “dot-com” industry. According
to this argument, resources had been overinvested in the dot-com industry in the late
1990s. When this situation was rectified in the late 1990s, workers in that industry
were no longer needed, causing overall employment to decline.
19 Portfolio investment refers to the purchase of financial securities. Official investment
refers to the purchase of assets by government treasuries or central banks.
20 See CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy, by
James Jackson.
CRS-12
The reallocation of resources in the economy is probably the primary reason that
gross job loss occurs. Changes in tastes, technology, and comparative advantage
continually cause labor and capital to be shifted from one industry to another in a
market economy. As this report has demonstrated, sizeable reallocations of labor
across industries has been a constant in the United States for as long as data has been
collected. But in most years, the economy has not had any problem offsetting gross
job loss with a greater number of gross job gains. Thus, economic restructuring
typically is not accompanied by net job loss overall, even though it often results in
net job loss at the local level. It is possible that if restructuring were unusually large
at any given time, perhaps like the dot-com collapse, the economy could be unable
to absorb that many workers in new jobs fast enough to prevent net job loss.
Unfortunately, there is no way to systematically identify which restructuring events
are large enough and separate their effects on net job loss from other economic
phenomena occurring simultaneously. For example, the net job loss associated with
the 2001 recession could be caused by nothing more than an unrelated decline in
aggregate spending, as is typical of other historical recessions. In the absence of this
decline in aggregate spending, it is possible that the dot-com collapse would not have
had any effect on aggregate employment.
Even if restructuring does not cause net job loss, there is debate as to whether
recessions have the beneficial effect of hastening restructuring. Some argue that
when times are tough, firms are forced to innovate to survive and during booms weak
firms are propped up by prosperity.21 If correct, this points to an economic benefit
from recessions, in contrast to the mainstream economic view that recessions are
economically wasteful because they cause productive labor and capital to lay idle.
But it is difficult to evaluate this argument quantitatively.
Economic Downturns. Unlike the other factors described above, economic
downturns are the only factor that causes both gross and net job loss according to
economic theory. This theory is borne out by historical experience, as illustrated in
Figure 4 and Table 2, which show the high correlation between contemporaneous
GDP growth and employment growth. Economic downturns are characterized by
insufficient aggregate spending to support existing labor and capital resources. As
a result, capital goes idle and workers are laid off until spending revives.22 The
government can boost aggregate spending back to “full employment” through
expansionary fiscal policy (a larger government budget deficit) or monetary policy
(lower short term interest rates by the Federal Reserve). Net job loss caused by
economic downturns is temporary because insufficient aggregate spending is only a
temporary phenomenon — in the long run, markets adjust to bring spending back
into line with potential production. Since 1947, net job loss lasting more than one
quarter has only occurred during or immediately following a recession. There have
21 By contrast, Caballero and Hamour argue that recessions actually retard restructuring
because historically they have been followed by periods of lower rates of gross job loss,
rather than higher rates of gross job gains. Richard Caballero and Mohamed Hamour, The
Costs of Recessions Revisited: A Reverse-Liquidationist View, National Bureau of Economic
Research, Working Paper 7355, Sept. 1999.
22 For more information, see CRS Report RL31237, The 2001 Economic Recession, by Marc
Labonte and Gail Makinen.
CRS-13
only been two recoveries in which net job loss has continued for more than one
quarter after the recession had ended, the recoveries beginning in 1991 and 2001.23
Source: National Bureau of Economic Research; Bureau of Labor Statistics
Figure 4. Effects of Recessions on Labor Markets
10
140
120
8
100
6
80
60
4
40
2
20
0
0
1949
1955
1961
1967
1973
1979
1985
1991
1997
2003
1946
1952
1958
1964
1970
1976
1982
1988
1994
2000
Recession (Y1)
Employment (Y2)
Unemployment Rate (Y1)
Labor Market Conditions. In the long run, the effects of business cycle
changes on net job creation cancel out — net job loss in downturns is offset by net
job gains in booms. Thus, in the long run net job creation is determined by the
characteristics of the labor market. Over time, a growing population leads to rising
employment, or net job creation. In 1950, the U.S. population equaled 151.3 million
and nonfarm employment equaled 45.3 million; in 2000, the U.S. population equaled
281.4 million and employment equaled 131.8 million. (The fraction of the
population employed in 2000 was so much higher than in 1950 primarily because of
the entrance of women into the labor force.)
But the question of how much of the population is employed — both the labor
force participation rate and what economists refer to as the “natural rate” of
unemployment or NAIRU (non-accelerating inflation rate of unemployment) — is
determined in the long run by demography (e.g., younger workers have higher
unemployment rates), social norms (e.g., the large scale entrance of wives into the
23 For more information, see CRS Report RL32047, The “Jobless Recovery” from the 2001
Recession, by Marc Labonte and Linda Levine. After slightly rising for a few months in
2002, employment began falling again in 2003. It is not clear if the employment decline in
2003 should be counted as part of the post-recession decline or a separate phenomenon.
CRS-14
working force), and policy (e.g., welfare reform).24 In the long run, the rate of net job
creation will equal the rate needed to keep the economy at the natural rate of
unemployment. Beginning in the 1970s and lasting until the 1990s expansion, the
unemployment rate rose to unusually and persistently high levels for reasons that
cannot be explained by the business cycle alone. Changes in demography, social
norms, and policy, as well as the coinciding productivity slowdown, all played a role
in the increase, but there is little consensus among economists on the relative
importance of each factor. Could part of the recent labor market sluggishness be due
to an upward shift in the natural rate, or a return to the natural rate after
unemployment was held below it in the late 1990s? Either is possible, but it is too
soon to tell. But because changes in the natural rate are gradual, an increase in the
natural rate is more likely to be associated with a slower rate of net job creation than
net job loss, all else equal.
Policy Implications
Most economists agree that net job loss is an undesirable phenomenon, and
recommend that public policy be used to offset it. Policymakers can use
expansionary monetary policy (lower short term interest rates by the Federal Reserve)
or expansionary fiscal policy (an increase in the budget deficit) to stimulate aggregate
spending and offset net job loss.25 If used properly and prudently, these policy tools
can theoretically minimize net job loss. Unfortunately because of policy lags in
recognition, implementation, and effectiveness, fiscal and monetary policy will
probably never be conducted effectively enough to eliminate recessionary periods of
net job loss. Direct job creation programs have been used by the government in past
recessions to stem net job loss, but from an economic perspective, these policies have
a similar effect to any expansionary fiscal policy, and they also are prone to
implementation lags.26
Policies that impede gross job loss (e.g., regulatory restrictions on dismissal or
layoffs) may seem to be a desirable way to limit net job loss at first blush. However,
such policies could have the unintended effect of making firms reluctant to take on
new workers, because a firm would not be able to subsequently reduce its workforce
easily if the need for the new workers proved to be only temporary. As a result, gross
job gains could decline; if gross job gains declined by more than gross job loss
declined, net job creation would decline. This suggests that attempts to limit gross
job loss could be counterproductive. Because gross job flows are, on the whole,
caused by the reallocation of resources to their most efficient use, policies to impede
gross job loss would also likely have adverse consequences for growth and
24 For more information on the NAIRU, see CRS Report RL30931, Unemployment and
Inflation: What Is The Connection?, by Brian Cashell.
25 For more information, see CRS Report RL30354, Monetary Policy: Current Policy and
Conditions, by Marc Labonte and Gail Makinen; and CRS Report RL31235, The Economics
of the Budget Deficit, by Brian Cashell.
26 For a history of job creation programs, see CRS Report RL31138, Countercyclical Job
Creation Programs of the Post World War II Era, by Linda Levine.
CRS-15
efficiency. Helping the “losers” in the labor market make the transition into a new
employment situation is a less costly alternative, and one that is compatible with an
efficient, dynamic labor market.
International comparison confirms this view. The Organization of Economic
Cooperation and Development (OECD) ranked countries on a scale of zero to six
based on restrictions on dismissal from regular employment, restrictions on
temporary employment, and restrictions on mass layoffs. As seen in Table 2,
countries with little protection such as Switzerland, Denmark, New Zealand, and the
United States had their unemployment rate fall to between 1.9% and 5.2% at the peak
of the 1990s expansion. Countries with greater protection had a mixed experience:
some small countries like Portugal kept unemployment low, but the four large
countries with the most protection (Germany, France, Italy, and Spain) had the
highest unemployment rates of any country.27 The unemployment rate in the United
States has been lower at the trough of the recession than the lowest level many of
these countries attained at the peak of their business cycles, and had half the
unemployment rate of these countries at its peak.
27 See CRS Report RL30765, Causes of Unemployment: A Cross-Country Analysis, by Marc
Labonte.
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Table 2. International Comparison of
Employment Protection Policies
Unemployment
Regular
Temporary
Rate - 1990s
Mass Layoffs
Employment
Employment
Business Cycle
Peak
Low Unemployment Countries
Switzerland
1.2
0.9
3.9
1.9%
Netherlands
3.1
1.2
2.8
2.0%
Japan
2.7
2.1
1.5
2.1%
Norway
2.4
2.8
2.8
3.2%
Austria
2.6
1.8
3.3
3.6%
United States
0.2
0.3
2.9
4.0%
Portugal
4.3
3.0
3.6
4.0%
Sweden
2.8
1.6
4.5
4.0%
Denmark
1.6
0.9
3.1
4.9%
United Kingdom
0.8
0.3
2.9
5.1%
New Zealand
1.7
0.4
0.4
5.2%
Moderate Unemployment Countries
Australia
1.0
0.9
2.6
6.3%
Belgium
1.5
2.8
4.1
6.7%
Canada
0.9
0.3
3.4
6.8%
High Unemployment Countries
Germany
2.8
2.3
3.1
7.8%
France
2.3
3.6
2.1
8.5%
Italy
2.8
3.8
4.1
9.0%
Spain
2.6
3.5
3.1
10.5%
Source: OECD, Employment Outlook, 1999.
Note: Measured on a scale of 0 to 6, with 0 equal to the least employment protection.
If policies to forestall gross job loss are deemed to have too high an efficiency
cost, what role can policy play? Two perspectives can be used to answer that
question. One perspective would view the labor reallocation issue as a purely social
problem. That is, allowing gross job loss to occur with no impediment from the
government may be an economically desirable outcome as long as it is cancelled out
by job creation, but the situation creates social problems that government can
legitimately tackle on noneconomic grounds. These social problems include poverty,
psychological problems, crime, alcoholism and substance abuse, the undermining of
families and communities, and so on that reportedly increase when gross job loss
occurs. Economic analysis provides little guidance on the best role for the
government to play in tackling these noneconomic problems.
Alternatively, an economic perspective would ask if any market failure is
associated with gross job loss, and what role the government can play in potentially
rectifying that market failure. Although it can be argued that gross job loss poses no
market failure in and of itself, a persuasive argument can be made that there are
CRS-17
market failures that prevent individuals from efficiently insuring themselves in the
private market against the risks posed by gross job loss.28 To a considerable extent,
the possibility of gross job loss is a risky event beyond a worker’s control, such as
adverse changes in the business cycle, tastes, technology, or trade patterns. One
would expect a worker to be willing to use some of his income to privately purchase
insurance against those risks, just as individuals insure against the risk of death, fire,
health problems, and so on. Yet the limited use of private unemployment insurance
to supplement government-provided insurance suggests that market failures may
significantly hamper the functioning of the private market.
All insurance markets are hampered by two important market failures —
adverse selection and moral hazard. A persuasive argument can be made that
unemployment insurance may be more adversely affected by both types of market
failure than most other types of insurance. Adverse selection is caused by
asymmetric information: buyers of insurance know more about their riskiness than
sellers. As a result, only buyers with higher risks will tend to purchase insurance
because they are more certain that the benefit of the insurance will exceed the cost.
This pushes up the price of insurance and hampers insurers’ efforts to pool risk.
Adverse selection hampers efficiency in the market for unemployment insurance
because some causes of unemployment are beyond the worker’s control, and some
are not. Since insurance firms cannot identify which workers have a greater chance
of losing their jobs because of the factors within their control, they cannot efficiently
pool the risks that workers do not control. Moral hazard occurs when an individual’s
behavior becomes more risky once he is insured. Moral hazard also drives the cost
of insurance above its efficient level. Moral hazard can occur in the unemployment
insurance market in two ways: it can cause insured workers to engage in behavior
that is more likely to lead to job loss, and once job loss has occurred it can make an
insured worker less willing to take a new job (because the worker can subsist on the
income provided by the insurance).
Government provision of unemployment insurance solves the adverse selection
problem by making participation universal. As long as all workers are participating,
insurance can be priced at its efficient level, even though benefit will exceed cost, or
vice versa, for any given worker. Government mitigates, but does not eliminate, the
moral hazard problem by making the insurance temporary (normally 26 weeks in
most states) and imposing eligibility restrictions (e.g., not providing insurance when
the worker has quit or been fired). The government has also tended to extend the
duration of insurance during economic downturns, since events beyond the worker’s
control are a greater source of job loss then. The private sector could use the same
methods as the government to mitigate moral hazard, but it could not prevent adverse
selection.
If one accepts that government provision of unemployment insurance is more
efficient than private provision, then the policy issue is whether or not insurance is
28 For a more in-depth discussion of the following argument, see, for example, Robin
Boadway and David Wildasin, Public Sector Economics (Boston: Little, Brown, and Co.,
1984), pp.477-487.
CRS-18
adequate or excessive at current levels.29 Are workers adequately protected against
the risk of gross job loss at existing benefit levels? Should benefit levels or duration
be increased or coverage be expanded since gross job loss seems to be following an
upward trend? (The unemployment benefit exhaustion rate, which is counter-
cyclical, increased from an expansion low of 31.4% in 1999 to 42.5% in 2002;
average exhaustion rates in the 1990s were higher than in the previous two
decades.)30 Would more generous insurance reduce the social problems associated
with gross job loss? The tradeoff here is between both benefit and cost to the
individual (more generous insurance would require higher premiums) and cost to the
economy because of the moral hazard problem: as the insurance becomes more
generous, disincentives to maintain employment or seek new employment among the
unemployed increase.
Government’s role in insuring workers against the risks associated with gross
job loss can also be viewed through a broader prism than the unemployment
insurance program.31 Disability insurance insures against the risk of job loss due to
physical incapacity. Trade Adjustment Assistance (TAA), which offers extended
unemployment benefits and job training, reduces the risk that workers adversely
affected by trade will be unable to find re-employment. (Some policymakers have
suggested that TAA be extended to workers in the service industry, given the
growing concern with offshore outsourcing.) Government programs such as COBRA
(named after Title X of the Consolidated Omnibus Budget Reconciliation Act
of1985) reduce the loss of health care associated with job loss. Some would argue
that income redistribution, in general, is a form of income insurance, whether it takes
the form of progressive taxation, the Earned Income Tax Credit, the food stamps
program, the Supplemental Security Income program, and so on.
Kletzer and Litan have argued that the government should implement a “wage
insurance” program so that workers who lose their jobs and are forced to take lower
paid employment are directly compensated by the government.32 Along these lines,
the Alternative Trade Adjustment Assistance Program for Older Workers was
introduced in 2002. An eligible worker (over 50 years old, earning less than $50,000,
and meeting other criteria) can receive half the difference between the wages
received from reemployment and the wages received at the displaced job for up to
two years and payments up to $10,000.
At the community level, fiscal transfers (differences between outlays received
and taxes paid) that change with economic conditions and government programs such
29 For current UI reform proposals, see CRS Report 95-742, Unemployment Benefits:
Legislative Issues in the 108th Congress, by Celinda Franco.
30 CRS Report RL32111, Unemployment Compensation (UC)/ Unemployment Insurance
(UI): Trends and Contributing Factors in UC Benefit Exhaustion, by Julie Whittaker.
31 The theoretical underpinnings of this view are laid out in Edgar Browning and Jacquelene
Browning, Public Finance and the Price System (New York: Macmillan Publishing, 1979),
p. 188.
32 Lori Kletzer and Robert Litan, “A Prescription to Relieve Worker Anxiety,” Institute for
International Economics, Policy Brief 01-2, Feb. 2001.
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as the Empowerment Zone/Enterprise Communities Program provide what could be
characterized as “insurance” for the community as a whole against the economic
effects of significant job loss.
Conclusion
Drawing a distinction between net job loss and gross job loss can help to inform
the policy debate. Net job loss is a serious economic problem that fiscal and
monetary policy can be used to mitigate. Although it has social costs, gross job loss
is part of the normal functioning of a market economy, and has the beneficial role of
reallocating resources to their most efficient use when tastes, technology, or
comparative advantage changes. Even in expansions, gross job loss is sizeable,
between 6.5 million and 8.5 million per quarter from 1992 to 2000, but it is more
than offset by gross job gains.
Trade, trade deficits, offshore outsourcing, overseas investment, and economic
restructuring all cause gross job loss. But in normal economic conditions, none
typically causes net job loss, according to theory and evidence. To see why, consider
that they all have the same effect on employment as technological advances. For
example, the advent of the automobile caused gross job loss in the horse buggy
industry, but was more than offset by gross job gains in the rest of the economy.
As the buggy example suggests, policies that impede gross job loss can have
high efficiency costs. The difference in the unemployment experience of countries
with high barriers to job loss, such as the high unemployment countries of Western
Europe, and countries with low barriers, such as the United States, offers some
evidence that barriers to gross job loss can lead to lower gross job gains, making such
barriers ultimately self-defeating. However, public policies to protect workers
against the risks posed by gross job loss can be justified on both social and economic
grounds. If crafted properly, they have been shown not to reduce gross job gains, and
they can arguably raise efficiency by addressing market failures. For example, public
provision of unemployment insurance helps overcome moral hazard and adverse
selection problems in that market. The challenge for policymakers going forward is
to find the right balance between mitigating risk and maintaining market dynamism
in an increasingly fluid labor market
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