Job Loss: Causes and Policy Implications

Publication Date: January 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Labor

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Abstract:

Total non-farm private employment fell from 111.6 million in February 2001 to a trough of 108.4 million in July 2003. Job loss -- declines in employment -- is one of the most important macroeconomic problems facing policymakers, both in terms of its economic and social cost. But what is often missing from the policy debate is a distinction between net job loss and gross job loss. Gross job loss is the total number of jobs eliminated in a given period, while net job loss is the result of greater gross job loss than gross job gains in a given period. Economists view net job loss as a detrimental phenomenon, and most recommend that fiscal and monetary policy be used to mitigate it. However, they view gross job loss, as long as it is offset by gross job gains, as a healthy and normal part of a functioning market economy, although it may have social costs and will not affect all regions or industries equally.

The U.S. Bureau of Labor Statistics provides data that help to put the distinction between gross and net job loss into perspective. Gross job loss and job gains are each, on average, twenty times higher than net job loss (or gains) in any given quarter. This is true in both expansions and recessions. Gross job gains increased steadily from the beginning of the data series in 1992 until the end of 1999; at the same time, job losses increased steadily from 1992 to 2001. Clearly, gross job loss is not incompatible with a healthy labor market: during an expansion in which the unemployment rate was lower than it had been in three decades, gross job losses steadily increased as the expansion progressed. Even during the recent recession and "jobless recovery," gross job gains continued to average about 8 million per quarter; but these gross job gains were more than offset by gross job losses. In addition, earlier data for manufacturers show that small businesses have higher gross job gains and losses, and are no better than large firms at net job creation.

Many causes of job loss have been offered, including imports, trade deficits, offshore outsourcing, direct investment abroad, and restructuring. But economic theory suggests that all of these cause gross job loss, not net job loss. Historical experience is supportive: neither imports, the trade deficit, nor the implementation of trade liberalization agreements are correlated with net job loss. Theory suggests, and empirical evidence confirms, that only recessions cause net job loss.

Policies that impede gross job loss may seem to be a desirable way to limit net job loss at first blush. But such policies could make firms reluctant to hire new workers, since a firm would not be able to subsequently reduce its workforce easily if the need for the newly hired workers proved to be only temporary. As a result, gross job gains could decline; if gross job gains declined by more than gross job loss declined, net job creation would decline. International comparison confirms this view: Germany, France, Italy, and Spain all have high barriers to job loss and unemployment rates that are typically twice as high as low barrier countries like the United States. While attempts to impede gross job loss may reduce economic efficiency, policy can (and does) assist some of those affected by gross job loss through unemployment insurance and other parts of the social safety net. Whether the existing social safety net is adequate as gross job loss increases is the subject of policy debate. This report will not be updated.