Cyclical worker flows: Cleansing vs. sullying

Abstract

Do recessions speed up or impede productivity-enhancing reallocation? To investigate this question, we use U.S. linked employer-employee data to examine how worker flows contribute to productivity growth over the business cycle. We find that in expansions high-productivity firms grow faster primarily by hiring workers away from low-productivity firms. Productivity growth slows during recessions when this job ladder collapses. In contrast, layoffs at low-productivity firms disproportionately increase in recessions, which leads to an increase in productivity growth. We thus find evidence of both sullying and cleansing effects of recessions, but the timing of these effects differs. The cleansing effects are concentrated in downturns while the sullying effects linger well into the economic recovery. Our results imply that slow labor market recoveries will be more damaging to productivity growth than V-shaped recoveries due to lingering sullying effects.