What Happens to Worker Quality During Economic Recessions and Booms?

Citation: Housman, M. What Happens to Worker Quality During Economic Recessions and Booms? San Francisco, CA: Evolv, Inc., 2014.

Abstract: Prior research has established that employees are less likely to quit their jobs during economic recessions and more likely to do so as labor markets tighten and economic conditions improve. What has received far less attention, however, is whether the quality of employees who change jobs differs across economic cycles.

To address this gap, we examined how the performance of job changers varies as macroeconomic conditions shift. We compiled longitudinal data on tenure and performance for U.S.-based frontline service employees from 2011 to 2014, resulting in a sample of more than 40,000 employees and over 6.5 million performance observations.

Applying a range of econometric techniques, we found that changes in the unemployment rate are associated with systematic shifts in the composition of workers who change jobs. Specifically, a one–percentage point increase in the unemployment rate is associated with a 1.8% increase in worker productivity. In other words, employees who switch jobs during economic downturns tend to be higher performers than those who move when economic conditions are strong.

These findings suggest that labor market tightness materially affects the quality of job movers. During economic expansions, when quitting behavior increases broadly, firms may face a greater risk of hiring lower-performing job changers. As a result, organizations may benefit from being more selective in their hiring practices during economic booms to avoid making suboptimal hiring decisions.