Is Turbulence Still Good in this Economy?

January 27, 2009
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jacket imageDubbed “the day of layoffs” by the New York Times, Monday, January 26, 2009 saw companies across a wide range of industries cut more than 65,000 jobs worldwide. From Caterpillar and Home Depot to Sprint/Nextel and Texas Instruments, layoffs Monday came as news that unemployment rose to 7.2 percent last month. Reports the Times, “The United States economy has dropped some 2.59 million jobs since the recession began in December 2007.… Economists worry that the economy could now be losing as many as 600,000 jobs a month, and they said Monday’s layoff announcements served to underline the stricken state of the labor market.”
Most of us (especially those who’ve lost jobs) would conclude that the grim employment picture is bad news. But in October 2006, the Press published a book that argued that job turnover and firm disappearance may actually have positive effects in the aggregate. Economic Turbulence: Is a Volatile Economy Good for America? by Clair Brown, John Haltiwanger, and Julia Lane claims that while shifts in consumer demand, changes in technology, mergers and acquisitions, and increased competition can contribute to economic turbulence, our economy as a whole remains, by and large, stronger for it, because these processes of creation and destruction make it more flexible and adaptable. Immediately after publication, the book engendered both thoughtful commentary and heated controversy (it made a splash in the blogosphere after it was reviewed in the Wall Street Journal). But two plus years on, we thought the current crisis merited another look at the book’s thesis. So we contacted the authors and asked if their findings about positive volatility are still applicable today. Here is what they had to say:

Of course it’s clear that many more jobs are getting destroyed right now than created. But that doesn’t mean that jobs aren’t still being created. The same day that the headlines were full of thousands of jobs being lost, the Washington Post ran a story of one startup business. And, as Vivek Wadhwa has pointed out, in his BusinessWeek column, the firms that are starting now up may end up being the job creators of the next few years. Furthermore, Fortune reports that many top companies are still hiring.
Consistent with these observations, the historical data on job creation and destruction (see, e.g., data from the Business Employment Dynamics from the Bureau of Labor Statistics and the Business Dynamic Statistics from the Census Bureau) show that even in the worst downturns (such as the recessions in 1982 and 1991) there is still substantial job creation and startups. Our analysis of the implications of this churning of businesses and jobs in Economic Turbulence shows that the ongoing creative/destructive process has been vital for U.S. productivity growth. While it is costly, it has historically been critical for U.S. productivity growth that resources have been permitted to shift away from less productive to more productive businesses. Moreover, in periods of normal turbulence, we found U.S. workers extremely resilient—typically, those who lost jobs or quit were able to eventually find a job with better earnings.
Of course, our data haven’t tracked any downturn quite like this before, so it’s hard to know how long the current spike in job destruction will continue and its full impact on workers and productivity. Still it’s important to recognize that intense periods of job destruction in past recessions have occurred with the subsequent reallocation of jobs to businesses that are creating jobs ultimately yielding substantial productivity and earnings gains.

A silver lining, perhaps, for those that have been laid off? Read an excerpt of the book and visit the authors’ website to judge for yourself.

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