Effort Itself
The signs of higher effort are everywhere you look
In prior posts, I've said that you don't have to buy into the higher effort hypothesis as the force behind the simultaneous rise in job search costs and fall in the labor participation rate. Some other factor - mystery factor X, could be causing both of them, or perhaps there are two mysterious factors, X and Y, responsible for each of them. But in this post, I'm going to try and persuade you that effort is indeed the culprit and can explain many other things besides the rise in the duration of unemployment.
Before that, let's delve deeper into how effort requirements are set for workers by their employers and what higher effort levels entail for employees.
The firm’s problem
How do employers set effort levels for their employees? Do employers even realize that they are imposing higher effort levels? In a normal economy, i.e. before 2000, firms are constantly adjusting their effort levels. From time to time, firms find that their costs are too high and therefore cut headcount and raise effort levels on the remaining workers. After a time though, firms find that employees burn out and quit, quality deteriorates and customers switch to competitors. This requires them to hire more employees and lower effort levels and so on, and so forth.
Post-2000, this process has continued, but now there are more firms in the increased effort level bucket than normal. Above, I asked the question: "Do employers even realize that they are imposing higher effort levels?" Answer: yes and no. Yes, employers will know that effort levels have recently either increased or decreased; yes, employers will have a good idea whether effort levels at their firm are higher or lower than their competitors (by looking at headcount relative to sales, for instance). What they won't know is that effort levels have increased relative to 2000 levels - that's something that can only be inferred from a macroeconomic perspective.
Stakhanovitism
Effort levels have risen by perhaps 2-3%. That's doesn't sound much, does it? Can it really impact the labor market as much as I'm claiming? Wouldn't people get used to working a bit harder? If all higher effort levels meant was the production line moves a bit faster, or workers have to type 2% faster, then perhaps workers could get used to it. However, higher effort levels will not generally take the form of a continuous increase in work rate - like those old black and white films, where everything is sped up - but rather less downtime for employees.
An interesting thing happens when understaffed. For most of the time workload can be normal, but every now and again things blow up. The more understaffed, the higher the frequency of things going to hell.
I recently came across a Twitter thread that illustrates this concept very nicely.
Granted, in his example, the understaffing was 50%, not 2% percent, but in practice, headcount reduction won't be equally applied across the firm. Rather, at any given time one can expect certain departments to see much bigger reductions - say 10 or 20 percent. As waiting times build, customers become irate; interactions more fraught and unpleasant.
The same logic applies to others workplace situations, not just customer-facing ones.
If working conditions are more stressful, then workers do not want to move up to roles with even more responsibilities. They stay put in their current positions or at least stay longer in them than customary. This leads to obvious problems for those trying to get on the first rung of the employment ladder.
Labor Participation, Again.
Higher effort levels are indirectly responsible for the fall in the employment-population ratio via higher job search costs. But it is also directly responsible for the fall in the epop.
Say what? In 2019, the U.S epop 3-4% less than its peers compared to being 1-2% ahead of its peers in 2000. This represents a drop of around 4-5%. But job search costs can only account for a portion of this. Here are the numbers: in 2019, the duration of unemployment was at 20* weeks. This is the same level as in 2003 when unemployment was 6% (or an increase of over 2% above the unemployment rate in 2000) This implies that job search costs in 2019 were equivalent to that of a recessionary labor market in which unemployment has risen by 2%, or employment has fallen by 2%. But that still leaves another 2-3% unaccounted for.
How does effort itself directly push down the labor participation rate or epop ratio? Consider the point of view of someone who is employed but could very easily withdraw from the labor force. This could be someone with a higher-earning spouse for instance. In response to higher effort demands, they can either try and drop down to a lower-skilled job or refuse to move up to a higher-skilled position. The latter is only possible if someone is on a career track; for many people that won't apply. Dropping down requires them to leave their present position and try to find a new lower skilled job. But this requires undertaking a job search process. Even if job search costs are at normal levels, a job seeker can expect to receive a number of rejections before obtaining one job offer. For those who are the most marginally attached to the labor force, running the job interview gauntlet isn't worth it.
You can think of higher effort levels are being the primary force behind the drop in labor participation, and higher job search costs as a derivative factor.
Jolts!
With higher job search costs, one might expect workers to be more reluctant to quit their job. However, quits in the private sector in 2019 were at similar levels to that of 2000.
Some other force must be responsible for keeping the quits elevated. That force is effort itself.
As a general proposition, why do workers why their jobs? For higher pay, certainly. For family reasons and other situations, ditto. The third reason is that people want a change in their careers. This could be because they have tired of their current job or perhaps they were never in the right career in the first place. What higher effort levels do is magnify all the unpleasant and painful features of the present job while adding allure to potential new job positions. Thus higher effort becomes the spur to greater labor market churn.
You can also see the fingerprints of higher effort levels in the divergence between the quits rate and layoffs. These two should rise and fall together. When the forces of creative destruction are strong, there will be many firms forced to lay off workers, while at the same there will be many fast-growing firms that will be ramping up hiring and inducing workers to quit their old firms for them. Post-2000, productivity growth has been weak, implying less creative destruction, but though lays offs have fallen, the quits rate has not.
Layoffs and discharges have fallen by about 20% from 2000 to 2019.
The chart above is layoffs and firings together. I can't find the data for each separately. I would expect there to be a fall in the number of workers fired. Not directly because of higher effort levels, but as a consequence of higher job search costs. Though the decision to fire a worker lies with the employer, employees can avoid behavior that can get them fired, such as turning up to work late and being hungover for instance.
No Boss of Me
There's one further way of evading higher effort demands and that is to start your own business.
Not everyone can do that and those best placed to start a business are people with both financial capital and human capital. What one should expect to see is strong growth of business income at the top echelons of the income scale. Most of these new businesses would be in the realm of professional and business services - think designers, architects, consultants, PR, and advertising, etc, where people are doing what they did before but now under their own roof.
This figure is from a recent paper noting the growth of business income at the top of the income scale. Note that the big jump in 86 is a result of tax changes that favored switching from taking a wage to a pass-through structure.
One can't be certain that effort is behind this increase in business formation. It could be that the internet has made it easier to thrive as a small business. One would need data on other countries to be sure.
Quantifying Effort
How much has effort increased? There are two ways of calculating that. One can look at productivity differentials between the U.S and the rest since 2000. Or one can look at how much effort increased in recessions as a rough guide to the secular increase in effort from 2000 to 2019.
Productivity differentials suggest effort levels rose by a few percent as U.S productivity since 2000 has been the strongest of the G7 group of economies. This is slightly unexpected because prior to 2000, U.S productivity growth was also higher than other economies. One can attribute that to earlier adoption of the internet - but this would imply that other economies should see catch-up productivity growth post-2000. Because productivity growth varies so much between economies it would be a mistake to use the productivity differential between the U.S and other economies as equal to the increase in effort.
Better to consider how much effort increases during recessions. This is after all the only other time and place where effort levels increase. As described in my second post, The higher effort hypothesis, effort levels increase whenever there is a divergence between the level of wealth and the level of technology. In a recession, this divergence happens because wealth drops - stocks and houses prices crash, but technology doesn't regress. For the secular increase in effort between 2000 and 2019, there has been a modest rise in wealth but a larger increase in the technological frontier (labor productivity can be used as a proxy for this). If these two divergences in wealth and technology are similar in magnitude, then we can use the cyclical increase in effort to calculate the secular increase in effort between 2000 and 2019.
The 2008-2009 recession saw effort levels rise by 1.5 percent for the non-farm business sector. This includes sole proprietors, whose productivity might well have fallen since they would have seen revenue falling more sharply than hours. Effort levels in the corporate sector itself could have risen by close to 2%.
Still, it is remarkable that an increase of just 2% can be behind all this labor market turmoil.
A preview of coming attractions: why do we only see signs of higher effort in the U.S? What is it that sets the U.S apart? And finally, what can be done to fix this whole situation?