When workers change jobs, pause their careers, reenter the workforce, start their own businesses, move into new fields, or retire, the resulting labor-market churn tends to follow a predictable pattern, according to a large body of research. People generally move from lower-productivity companies (which shrink and eventually go out of business) to higher-productivity businesses (which tend to grow faster over time), leading to a more productive economy.
This broad-brush theory, however, obscures a significant amount of opposite moves from high-productivity to low-productivity companies, according to the Central Bank of Chile’s Elías Albagli, Mario Canales, Matías Tapia, and Juan Wlasiuk and Chicago Booth’s Chad Syverson. In an analysis of the labor market in Chile, they find that up-the-ladder transitions only marginally outnumbered lower-productivity moves.
“It’s true on average that these job changes are productivity enhancing, but it turns out it’s just barely on that side of the scale,” Syverson says. “This net productivity enhancement actually hides a lot of changes in both directions. Workers are going not just from less- to more-productive companies, but also quite often from more- to less-productive companies too.”
It’s an important issue because productivity gains are an economy’s most important source of overall growth, according to Syverson. “If the economy increases its productivity faster, that raises average incomes faster,” he says.
The researchers analyzed data from a matched employer-employee Chilean census from 2005 to 2016. They find that 49 percent of job changes involved workers moving from higher- to lower-productivity companies. Though the researchers expected to see some productivity-diminishing moves, they were surprised by the nearly even split, Syverson says. The findings suggest that job-change decisions are complex and that workers switch employers for reasons other than earning higher pay, including shorter commute times or proximity to their children’s school, he says.
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The researchers also find demographic differences between workers moving to more- or less-productive companies. Most of the productivity-enhancing job changes were among workers going directly from one job to another, and moving among high-productivity companies, rather than among those who had been unemployed or working off the books. Younger workers, high-skilled workers, female workers, and workers with longer job tenures were more likely to move to higher-productivity employers.
The findings offer insights into the productivity mechanics of job reallocation and suggest that reducing labor-market friction even slightly could lead to large productivity gains, Syverson says. Countries might encourage this by improving job-search platforms, reducing traffic congestion, decreasing commuting costs, or offering greater remote-work flexibility, for example.
“It doesn’t take much net increase in productivity from worker reallocations to get aggregate productivity growth that’s pretty big, simply because so many people are changing jobs all the time,” he says. “If you get a small fraction of those to become productivity enhancing, you get a lot of extra productivity growth out of it.”
Elías Albagli, Mario Canales, Chad Syverson, Matías Tapia, and Juan Wlasiuk, “Productivity Growth and Workers’ Job Transitions: Evidence from Censal Microdata,” Working paper, April 2021.
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