Since the beginning of 2008, employment has fallen again and the unemployment rate has risen. Job loss—declines in employment—is one of the most important macroeconomic problems facing policymakers, both in terms of its economic cost and the social toll it takes on our society. 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 by all contracting firms in a given period, whereas 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 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. As can be seen in Figure 1 , gross job loss and job gains are each, on average, around 20 times higher than net job loss (or gains) in any given quarter. This is true in both expansions and recessions. 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. And even during the 2001 recession and subsequent "jobless recovery," gross job gains continued to average about 8 million per quarter; but gross job gains in this period were more than offset by gross job losses. In the current expansion, job gains and losses have been modestly lower than in the second half of the 1990s. What Causes Gross Job Loss and Net Job Loss? These gross job gains may not occur instantaneously—so there could be transitional net job loss—but when they do occur, they will offset the gross job loss caused by higher imports so that the trade deficit causes no net job loss. Policies that impede gross job loss (e.g., regulatory restrictions on dismissal or layoffs) may seem to be a desirable way to limit net job loss at first blush. However, such policies could have the unintended effect of making firms reluctant to take on new workers, because a firm would not be able to subsequently reduce its workforce easily if the need for the new 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. Net job loss is a serious economic problem that fiscal and monetary policy can be used to mitigate. Trade, trade deficits, offshore outsourcing, overseas investment, and economic restructuring all cause gross job loss. As the buggy example suggests, policies that impede gross job loss can have high efficiency costs. The difference in the unemployment experience of countries with high barriers to job loss, such as the high unemployment countries of Western Europe, and countries with low barriers, such as the United States, offers some evidence that barriers to gross job loss can lead to lower gross job gains, making such barriers ultimately self-defeating.
Total nonfarm private employment has fallen since the beginning of 2008. Job loss 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 by all contracting firms in a given period, whereas 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.
Data reveal that gross job loss and job gains are each, on average, 20 times higher than net job loss (or gains) in any given quarter. This is true in both expansions and recessions. Clearly, gross job loss is not incompatible with a healthy labor market: during the 1990s 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 2001 recession and subsequent "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 the subsequent expansion, gross job gains stayed relatively constant, but gross job losses fell. Small businesses have both higher gross job gains and losses than large firms, and have tended to contribute modestly more 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 has confirmed, 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. However, such policies could make firms reluctant to hire new workers, because a firm would not be able to subsequently reduce its workforce easily if the need for the new 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 had high barriers to job loss and unemployment rates that were typically twice as high in the 1990s as low barrier countries like the United States. Although 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 be updated as events warrant.