Worker Reallocation over the Business Cycle: the Importance of Employer-to-employer Transitions

In this paper, I show that employer-to-employer transitions are not only pervasive in the U.S. labor market, making up 49% of all separations from employers over the past decade, but also are a critical component in understanding worker turnover over the business cycle. In fact, the shift in the composition of separations from employer-toemployer transitions to employment-to-unemployment transitions explains all of the rise in the incidence of unemployment during the 2001 recession. In addition, the contribution of the change in the employer-to-employer transition probability to unemployment volatility was almost as large as that of the change in the job-finding probability. A parsimonious model of worker turnover with on-the-job search and stochastic unemployment risk can explain the cyclical features of employer-to-employer transitions in response to the observed variation in the job-finding probability. The model also can account for all of the rise in unemployment incidence without any change in the separation hazard faced by different jobs, although it cannot fully explain the speed of the rise.