Tuesday, 10 March 2009

Recovery and labour market flexibility

I met someone last week who is starting a new business related to outplacement - which, in case you haven't met that piece of jargon, is "the process of helping to find new employment for redundant workers, especially executives".

It led me to wonder whether the labour market is more efficient nowadays - at least among professionals and younger people. In theory, information technology and the Internet should make it easier to find suitable jobs and also quicker to fill them with suitable candidates. If this is true, a recovery from recession should be faster. Here's why:

All realistic models of the labour market will include some unfilled positions in new or evolving businesses. Any business as it changes to meet newly identified demand will create new positions (of course, other positions will be eliminated too - so there are always unemployed people as well as unfilled posts. The state of the economy will determine whether there are more of one or the other).

Mark Easton today has an interesting piece about the regional variations in these discrepancies - and mobility is an important factor in closing the gap. But even without extra mobility, there are reasons why the labour market might be more flexible now and this may accelerate recovery.

If the vacant posts are filled, new demand is created as salaries are paid to the new employees. This in turn leads to increased employment by existing businesses and to the foundation of new firms (which, under the lower-demand condition, were just above the margin for new company formation). This in turn leads to more unfilled positions, which result in a further demand increase when an appointment is made.

The length of time required to fill the positions and pay the new employees is inversely proportional to the speed of new company formation and the increase in effective demand. Thus, if positions are filled more quickly, recovery should be faster.

Naturally there are other factors that also influence aggregate demand and supply. But to whatever extent both are constrained by unfilled vacancies, a greater ability to fill them quickly will boost growth.

Even in a recession there are still vacancies left unfilled. Official figures in the UK currently show vacancies of about 500,000 (around 30% of total unemployment). If half of these can be filled, additional wage income of around £5 billion would be created (which in turn would generate added value of anywhere from £7 to £14 billion depending on the type of jobs). Taking the midpoint figure, £10 billion of demand (0.7% of total GDP) would in turn create a requirement for around 250,000 of additional jobs (with a lag time which depends on the birth rate and adaption rate of businesses). This replenishes the 'stock' of unfilled vacancies and the cycle can begin again.

So in every cycle of the labour market, GDP recovers by 0.7%. If these cycles can occur in six months instead of twelve, twice as much of the output gap (between potential and actual output) can be closed each year, even with no other source of demand. It's hard to know just how long the cycles are - I am sure there are detailed labour market models out there, but I'm not familiar with the research.

But we can clearly see some factors which can influence the speed of the cycle:
  • Access (for candidates) to a wider range of jobs
  • Ability for candidates to apply for more jobs
  • Ability for employers to efficiently filter applicants
  • Entrepreneurial culture/business birth rate
  • Access to credit to spend in advance of being paid
  • Access to capital for creating new businesses
  • Low barriers to employment
  • Shorter pay periods
Of these, the first four (blue) items have structurally improved since the last recession. The next two (purple) are structurally improved but cyclically hampered by low credit availability. The next one (red) has probably got a little worse in the last fifteen years due to additional labour regulation, though personally I believe this is a minor factor. The final item (grey) is probably unchanged.

So on balance it's likely that the labour market is now more flexible, the cycle of filling vacancies and creating new demand is shorter, and thus recovery (other things being equal) should be faster in this recession than in previous ones.

If the right kind of changes to decision making take place, and the attitudes of both employees and employers evolve accordingly, it's possible that the market will get ever more flexible and the economy should be able to bounce back more and more quickly from problems. I'm starting to see a picture of how public policy might assist in this process, but that's a topic for a later article (or several).

2 comments:

Anonymous said...

Some serious flaws in your logic. If it were that simple, would things not be moving as you suggest?

Anonymous said...

Your definition of Outplacement is flawed I'm afraid. It is 'the process of better preparing, enabling and facilitating....'. Your definition implies a somewhat niaive thought that someone else can do the work on your behalf. You cannot take your 'Outplacement Mum' to interviews!