December 8, 2017
Back to work
The U.S. labor market is not as flexible as once thought.
Over 40 percent of the unemployed return to their previous employer.
Finding a new job is hard. Returning to an old job is easier, but most people consider these “recalls” uncommon — a relic of the 1970s manufacturing industry that few encounter today.
However, over 40 percent of the unemployed return to their previous employer after a jobless spell. In a new paper in the December issue of the American Economic Review authors Shigeru Fujita and Giuseppe Moscarini study these recalls and what they mean for the U.S. economy. They find that recalls are largely responsible for getting people out of unemployment, but for those who are not recalled, finding work is even harder.
As it turns out, recalls happen all the time. They are more pervasive than temporary layoffs, in which employers expect to re-hire workers (often by a specific date). This means that many recalls are not intentional; employers may not initially believe that they will re-hire workers, and recalled workers do not expect to go back. Even within the group of permanently separated workers, or those who lose their job and start looking for a new one, 20 percent end up back in their old jobs.
This phenomenon is not industry-specific. In addition to manufacturing, the construction industry, seasonal retail, and small town jobs have high recall rates. “If you’re an electrician and you work in a small town, there are probably a couple of companies who can hire you,” explains Giuseppe Moscarini. “So the likelihood you end up back at the old company is very high.”
Recalls may be common, but they do not happen for everyone. Recalled workers were employed at their last job for an average of six years, whereas new hires were employed at their last job for only three. The accumulated knowledge about how the company works makes people who had a longer tenure more valuable than new workers — even if they were just laid off. Moreover, recalled workers switch occupations less often when re-employed and stay with their employer for a longer time after returning. They also are unemployed for at least a month less than people who are not recalled, which inflates the job finding rate.
Fujita and Moscarini find that recalls happen quickly, or else the opportunity disappears. After one or two months, the likelihood of being recalled significantly drops. So, not only do recalls bump up the job finding rate but they also distort the odds of finding a job. With recalls, the odds of finding employment decline with every month you spend unemployed. Without recalls, the odds of finding a new job are equally dismal no matter how long you have been unemployed. In other words, you have the biggest chance of finding a job within the first couple of months when you might be recalled.
This is true when the economy is booming, but recalls happen in economic downtimes as well. Just like the probability of finding a new job, the probability of being recalled drops during recessions. However, the probability of being recalled does not drop quite as much as the probability of finding a new job, and so the share of recalls increases. Although the chances of finding a new job and being recalled are both cyclical — higher when the business cycle is at its peak and lower during downturns — the high share of recalls means that finding a new job is even more cyclical than once thought. When excluding the possibility of recall, it is even harder to find a new job in a recession.
In general, the likelihood of finding a new job (and not being recalled) is much lower, does not depend on how long you have been unemployed, and is more cyclical than economists typically think. Fortunately, recalls are common in the U.S. labor market. Of course, this is no comfort to people who do not have a recall option, such as those whose companies have shut down. Redirecting more unemployment insurance toward people with no chance of recall may help to address this reality.
The traditional view of the U.S. labor market is that jobs are not secure, but if you lose your job, you can easily find a new one. Now, this seems less accurate. “The view of the U.S. as the most flexible labor market in the world changes,” Moscarini says. “It’s very fluid if you’re recalled, but it’s much less promising if you’re not.”
"Recall and Unemployment" appears in the December issue of the American Economic Review.