You'll Be Surprised by How Lower Unemployment Rates Could Cost You

The American job landscape has changed dramatically over the last decades. 

According to recent paper from the National Bureau of Economic Research, job reallocation, which is the balance of job creation and destruction in the economy, has fallen more than 25% since 1990, and the rate of hires and separations fell nearly 30% between 1999 and 2010.

In short, there are fewer jobs being developed or phased out, and there's less movement of workers between jobs. 

You might be thinking that's not such a bad thing -- doesn't this mean that things are more stable? 

On one hand it does. For example, the long term rise in stability has led to a significant drop in the overall unemployment rate. 

That's great, except that the forces behind this change also come with some big costs.

How can it ever be bad to have fewer unemployed people?
To understand this question it first helps to understand the context of the trends. What's driving the rise in stability? 

One is an aging workforce. Fewer people competing for jobs means fewer people becoming unemployed. We've also seen some big shifts in the way certain industries function. For example, in the retail sector a few major companies have come to dominate the scene (think Walmart, as opposed to mom 'n pops). Because big companies are more stable, they don't create and destroy jobs as rapidly as small companies do.

So, fewer people competing plus less creation and destruction of jobs means that people are sticking around in their jobs for longer periods of time. 

It sounds like a good thing, except that it can also make things worse for the people who do fall into unemployment. They tend to stay out of work longer, and the consequences are pretty sizable, ranging from a drop in wages to poorer physical health and emotional wellbeing. We really do suffer when we're out of work.

Fewer new jobs also means slower wage growth
The other cost is that with less opportunity to get a new job, people are missing out on a massive source of wage growth. Changing jobs is a great way to get a boost in salary and advance your career. 

How important is it? According to the ADP Workforce Vitality Index, in the last quarter compensation growth rates looked like this:

Staying in a job means a bit of wage growth; changing jobs means a lot of wage growth. So less opportunity to switch jobs could hurt your ability to make more money over the long haul.

It's not all doom and gloom: The ADP Research Institute estimates that, overall, conditions have improved by about 10% for the average salaryman/woman in the past three years. But a long-term structural shift in the number of new jobs being created can end up having a significant effect on long-term wage growth.

Could there be other costs to less hiring by small firms?
Finally, the rise of big firms has come with a fall in employment by small or young firms. Historically, new firms provide some of the critical lifeblood of economic growth: they tap new markets, help develop new skills, and provide some of the creation and destruction that goes along with economic growth. 

How much have things changed? In 2011, young companies (in business less than five years) employed 10.7% of the labor force. Back in 1982 that number was 19.2%.

Fewer small firms hiring means fewer new jobs, means less wage growth for you and me. But you have to wonder if it also means fewer new rising stars -- or at least less "sharing" of the glory in those rising stars across the economy. 

In other words, there's no such thing as a free lunch
In the case of unemployment, even some seemingly promising long-term trends can come with costs. 

Even something as seemingly unambiguously fabulous as lower overall unemployment can have costs over the long run.

Makes you appreciate those new job opportunities all the more.