Organizations and Markets

Lazear and Spletzer on Creative Destruction

12 March 2012 at 11:25 am Peter G. Klein Leave a comment

| Peter Klein |

What labor economists call “churn” is an important part of creative destruction, the combining and recombining of productive resources as business entities appear and disappear. New paper:

Hiring, Churn and the Business Cycle
Edward P. Lazear, James R. Spletzer
NBER Working Paper No. 17910
Issued in March 2012

Churn, defined as replacing departing workers with new ones as workers move to more productive uses, is an important feature of labor dynamics. The majority of hiring and separation reflects churn rather than hiring for expansion or separation for contraction. Using the JOLTS data, we show that churn decreased significantly during the most recent recession with almost four-fifths of the decline in hiring reflecting decreases in churn. Reductions in churn have costs because they reflect a reduction in labor movement to higher valued uses. We estimate the cost of reduced churn to be $208 billion. On an annual basis, this amounts to about .4% of GDP for a period of 3 1/2 years.

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