A publication of the Indiana Business Research Center at IU's Kelley School of Business
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The Great Recession's Impact on Frictional Unemployment and the Labor Market

Timothy E. Zimmer

Frictional unemployment is the time period between jobs when a worker is moving from one job to another. Within the labor market pool, a small segment of employees each quarter switch jobs as an avenue to better their employment situation (higher wages, more growth potential, etc.). This subset of frictional unemployment, as characterized by employees successfully moving quickly between employers, is defined in this article as the transitional unemployment market and provides significant insight into the strength of the labor market.

Rather than a negative, this type of transitional unemployment and cycling of employees can be a signal of a vibrant labor market. This article attempts to separate this segment of the labor market to use it as a barometer for the overall strength of the market. Data from 2002 to 2010 were examined to determine what impact the Great Recession had on the labor market and the transitionally unemployed.

The Long-Term Employed

Examining wage records pulled from the Indiana Workforce Intelligence System (IWIS), groups of the employed were pooled into two groups. The first group examined was the long-term employed. The long-term group consisted of workers that were employed every quarter of the study by the same company. This group consisted of 567,900 employees and their average yearly annual wages are shown in Table 1.

Table 1: Wages for Long-Term Employees, 2002 to 2010

Year Average Wage
2002 $42,991
2003 $44,901
2004 $47,962
2005 $50,013
2006 $52,645
2007 $54,830
2008 $56,647
2009 $55,764
2010 $58,083
Average Wage of All Years $51,537

Source: Indiana Department of Workforce Development, using Indiana Workforce Intelligence System data

Figure 1 shows the average yearly wage growth (in percentage terms). This is likely the result of promotions within the same company or yearly raises (cost-of-living adjustments and performance-based increases). Wage increases of the long-term employed began to slide in 2007. In 2009, in the midst of the Great Recession, salaries of the long-term employed actually decreased 1.6 percent. However, by 2010, the salaries of the long-term employed rebounded and experienced growth in excess of inflation measures.

Figure 1: Percent Change in Wages for Long-Term Employees, 2002 to 2010

Figure 1: Percent Change in Wages for Long-Term Employees, 2002 to 2010

Source: Indiana Department of Workforce Development, using Indiana Workforce Intelligence System data

Transitional Employees

The long-term employed were compared to the transitionally unemployed. One indication of a healthy labor market (from the employee perspective) is the ability to take one’s skills and find better employment. In a vibrant market with low unemployment, employees will voluntarily separate from a company if they have better opportunities or prospects elsewhere. On a quarterly basis, this group is called the transitional group. The transitional group have employment and, either at the behest of the company or voluntarily, separate only to find employment again in a rapid fashion due to their skills or experience. This group does not include the long-term unemployed or the structurally unemployed. The increase in long-term unemployed or structural unemployment is clearly a sign of a weak labor market. This study is limited to the short-term transitionally unemployed in an effort to see the wage impact of this group.

The transitional group consists of the employed in the marketplace that changed employers in the specified quarter. Attempts were taken to remove those records of individuals obtaining second jobs or other anomalies that might negatively influence the results (employees bouncing between the same employers repeatedly). The total number of transitional group by quarter and yearly totals are provided.

Figure 2 illustrates that the fourth quarter of 2007 marked the beginning of a decrease in the volume of transition employees. The incentive for switching employers decreased and employees valued longer-term employment during the recession years (see Figure 3). The reduction of incentive for movement between employers for the short-term unemployed should also be evident in relative wages.

Figure 2: Number of Transitional Employees by Quarter, 2002 to 2010

Figure 2: Number of Transitional Employees by Quarter, 2002 to  2010

Source: Indiana Department of Workforce Development, using Indiana Workforce Intelligence System data

Figure 3: Annual Number of Transitional Employees, 2002 to 2010

Figure 3: Annual Number of Transitional Employees, 2002 to 2010

Source: Indiana Department of Workforce Development, using Indiana Workforce Intelligence System data

In a healthy labor market, the expectation is that employees make short-term movements between employers if it is in their best financial interest. Given that no information was available about the specific date within the quarter of transition between employers, the wages of the transition quarter were not included. For specific transitional employees, the four quarters of wages prior to the transition quarter were summed and used as the annual salary of the employee prior to the new job. Likewise, the four quarters of wages after the transition quarter were summed and used as the annual salary of the employee in the new position.

As indicated by Figure 4, transitional employees witnessed wage gains in excess of 6 percent in 2002 through most of 2005. The incentive for the short-term unemployed to seek employment with another firm was an average 6 percent gain in wages. However, the benefits of moving between employers began to soften in late 2005 and a significant drop was seen during the third quarter of 2006 (see Figure 5). In some quarters between 2008 and 2009, the benefits of switching became negative. Since the second quarter of 2009, the labor market for the transitional employees has recovered somewhat, but the post-recession labor market remains well below pre-recession levels.

Figure 4: Annual Change in Wages for Transitional Employees, 2002 to 2010

Figure 4: Annual Change in Wages for Transitional Employees, 2002 to 2010

Source: Indiana Department of Workforce Development, using Indiana Workforce Intelligence System data

Figure 5: Quarterly Change in Wages for Transitional Employees, 2002 to 2010

Figure 5: Quarterly Change in Wages for Transitional Employees, 2002 to 2010

Source: Indiana Department of Workforce Development, using Indiana Workforce Intelligence System data

Figure 6 illustrates the wage changes of the long-term employed and transitional employees side by side. In the pre-recession years of 2002 to 2005, the best avenue for individuals to achieve higher wage growth was through leveraging the employee’s skills in the labor market to command a better salary. However, this dynamic changed in 2006 when the transitional unemployment markets weakened. An overall sign of labor market weakness could have been observed as early as the later quarters of 2005, but the third quarter of 2006 showed significant problems in the labor market. From 2006 through 2008, the labor market was weak, and those employees that were able to hold onto positions with employers achieved higher wage growth. With the start of the recovery in 2009, the results of the labor market have varied.

Figure 6: Wage Change Comparison, 2002 to 2010

Figure 6: Wage Change Comparison, 2002 to 2010

Source: Indiana Department of Workforce Development, using Indiana Workforce Intelligence System data

The signals of the transitional labor market significantly preceded other labor market indicators such as the unemployment rate. The transitional labor market indicated potential problems as early as 2005, while the unemployment rate did not begin significant climbs until 2008 (see Figure 7).

Figure 7: Transitional Employee Wage Change Compared to Total Unemployment Rate, 2002 to 2010

Figure 7: Transitional Employee Wage Change Compared to Total Unemployment Rate, 2002 to 2010

Source: Indiana Department of Workforce Development, using Indiana Workforce Intelligence System data
Note: Data are quarterly averages.

Conclusion

The transitional unemployment market provides significant insight into the strength of the labor market. Weakness in the transitional market in the latter half of 2005 signaled problems in the labor market. A clear negative signal in the third quarter of 2006 indicated a lack of vibrancy in the labor market and might have foreshadowed larger potential problems in the broader economy. These negative signals preceded other indicators traditionally used from the labor market.

However, while very effective in determining changes in the labor market, the ability to use the transitional unemployment market as a leading indicator or forecasting tool is severely limited. Current methods require several quarters of post-transition wage data collection. Additionally, each quarter of wage data is lagged in collection and processing by at least six months, and there are currently no methods to gather real-time access to these data.