March 7, 2022
The increasing quality of job matching
Better job screening is decreasing the rate of worker turnover.
Source: shisuka
Economists have noticed that Americans are changing jobs much less frequently than a couple of decades ago. While there has been variation over the business cycle, the rates of new hires and job separations in 2017 were about 25 percent lower compared to 1999.
The decline has some observers worried about the long-term health of the US economy.
But in a paper in the American Economic Journal: Macroeconomics, authors Michael J. Pries and Richard Rogerson argue that a key aspect of the decline in worker turnover is the drop in short-duration employment spells, which has been pervasive across different types of workers and businesses. They find that a large portion of the decline in worker turnover comes from better job matching in the US labor market.
Previous research has often focused on the impact that startups have on the rate of job churn in the economy. Turnover comes from new companies innovating and growing, while firms that used to be at the cutting edge of productivity shrink, reallocating resources from the previous leaders to the new leaders.
The decline in turnover
The chart below shows the hires rate ht (blue) and the separations rate st (red). Both series indicate that there was a significant downward trend in labor market turnover between 1999 and 2017—two “full employment” years.
“If that whole process has slowed down so that nobody's really pushing the frontier very much anymore, then you're going to have less turnover,” Rogerson told the AEA in an interview. “That would certainly be a bad thing. It would signal that there's just not as much technological innovation.”
Rogerson says that while decreased dynamism could still be important, many other factors could also be pushing worker turnover down. The starting point for the authors’ work was their observation that much of the decline in worker turnover in the US labor market is accounted for by a decrease in employment spells of very short duration—just three to six months.
By building a search-and-matching model, the researchers were able to isolate underlying changes in job search frictions that may play a crucial role.
In the authors’ theory, when a worker and firm meet to interview, they observe a noisy signal about how good of a fit they are for each other. If it’s a bad match they go their separate ways, but if the fit looks promising they give it a try, and the true quality of the match is revealed over time.
“For the labor market to work well, you want to get the right people in the right positions. But doing that requires generating a lot of information and trying things out—there's a process of trial and error,” Rogerson said. “In some ways, you can say our model is a model of that trial-and-error process where workers and firms meet.”
Using the Quarterly Workforce Indicators database, the authors estimated how much this matching process has changed the level of short-term employment spells. They found that the lion’s share of the decrease has come from better screening during the hiring process.
For the labor market to work well, you want to get the right people in the right positions. But doing that requires generating a lot of information and trying things out—there's a process of trial and error. In some ways, you can say our model is a model of that trial-and-error process where workers and firms meet.
Richard Rogerson
Many companies over the years have adopted new business practices that screen candidates based on a battery of questions about their technical skills, personality, cognitive skills, and fit for the job. As a result, these tools have allowed companies to weed out less profitable matches during the hiring process. For instance, a related study found that national retail chains that increased their use of electronic applications incorporating personality tests saw an increase in average job tenures.
Overall, the authors found that better screening methods accounted for roughly a third of the decrease in the level of worker turnover over the last two decades. The gains from better matching likely led to benefits for workers, employers, and the economy as a whole.
“You need to get the right people in the right spots. That's an important part of what the labor market needs to do. But facilitating that can be a messy process in terms of learning who's going to be good in which job,” Rogerson said. “Would a worker get along with the manager? How would they get along with their coworkers? Every firm has a different atmosphere to it, so finding the right match is not just something you see from the resume.”
♦
“Declining Worker Turnover: The Role of Short-Duration Employment Spells” appears in the January 2022 issue of the American Economic Journal: Macroeconomics.