Why the Economy Needs Churn

Healthy economies exhibit plenty of churn or labor market turnover. Employees leave companies in large numbers and (hopefully) join or start other companies in even larger numbers.

Prior to 2006, an average of 5.3 million Americans were hired every month and 5.1 million left their job or were fired. Net employment grew by 172,000 per month.

But a new report by TD Economics finds one of the lingering impacts of the Great Recession is a low level of churn. While 3 million people quit their jobs every month prior to the recession, that number is now less than 2.1 million.

Why is this bad? Economists Beata Caranci and James Marple point out that churn results in workers leaving jobs for ones that better fit their skills or that pay more. As younger workers are traditionally the most mobile, the result of this lower turnover in the workforce could be lower lifetime earnings for today's workforce entrants.

Small businesses are the engines of churn, Caranci and Marple point out. "Businesses with fewer than 250 employees simultaneously create and destroy three times the number of jobs as their larger peers," they write.

But new firms are not starting up at the same rate as they did prior to the recession. The number of jobs created by startups fell in 2010 and available data indicate there is yet to be any significant improvement in the situation.

What is holding back small business creation and growth? Credit and poor sales have been problems but both are showing improvement, Caranci and Marple point out. They expect real estate prices to bottom out this year. Less certain, they note, is clarity about legislative and regulatory burdens on small businesses.

Despite nearly three years of economic recovery, they note, "hiring rates cannot return to normal until conditions for small businesses do. Unfortunately, this is likely to be a slow grind upward."