*2.3. Why Does Risk in Labor Markets Affect Workers?*

We identify risk through both employment-based and income-based measures. Employment-based risk (wage and salary employment risk, WSE-Risk) represents the

volatility in the growth of employment opportunities in a local county. Firms often freeze hiring or lay off workers in response to economic downturns. WSE-Risk is likely to have a profound impact in a recession. Even after the recession, recovery in local employment lags behind recovery observed in other economic indicators. Consequently, the negative impact, economic and social, is more painful and lasts longer for the unemployed.

On the other hand, income-based risk (wage and salary income risk, WSI-Risk) represents the volatility in growth in income from wages and salaries. Wage income makes up for a significant proportion of the total income of the bottom 20 percentile of households [32]. Volatility in wage income thus has a substantial impact on the living standards of the majority of households. Empirical research highlights the divergence between growth in wages and growth in productivity. From 1973 to 2017, net productivity increased by 77%, while real wages increased by only 12.4% [33,34]. A closer look at the wage growth across different segments of labor force shows that the hourly wage of the middle-wage worker grew only 6% during 1979–2013. Wages were more or less stagnant during the 1980s, 1990s, and 2000s, except for a short period during late 1990s when wages grew due to a tight labor market [32]. The rise in unemployment, observed during recessions, also leads to the suppression of wages.

The overall trend indicates stagnation in wages, which translates into higher income risk for an average worker. The divergence between wage and productivity growth, and near stagnant wage growth, have been identified as major contributors to increases in income inequality in the U.S. With a higher cost of living and divergence in household income, the impact of WSI-Risk is likely to manifest more strongly in urban areas than in rural areas.

A common feature of recession is increased turmoil in the local labor market. This turmoil is apparent through the increased number of mass layoffs, significant and rapid increases in unemployment, a decline in new jobs, increased furloughs, reduced work hours, stagnation, or falls in wage and salary income for the employed.

The Bureau of Labor Statistics (BLS) in the March 2013 survey on Jobs Openings and Labor Turnover highlighted that the number of job openings in the private sector fell sharply, from 3.8 million in December 2007 to a low of 1.9 million in July 2009. During the same period, the number of quits (voluntary separation initiated by the employee) also declined from 2.7 million in December 2007 to 1.5 million in September 2009. Since the end of the recession, the numbers of both job openings and quits increased by 81% and 34%, respectively, in March 2013.

The increased volatility in the local labor market, demonstrated through a sharp decline in job openings and new hiring, is likely to discourage rational employees from taking the risk of quitting their current employment. Besides the risk of loss of income from quitting, an experienced employee also faces the risk of loss of skills and becoming less competitive in the job market. Ref. [35] found that such workers face a higher risk of skill loss, and thus accept a lower wage in exchange for job security. This decision results in lower employee turnover and a higher retention rate for existing business establishments. As evident in Figure 1, corresponding to an increase in layoffs and discharges, voluntary quits by employees declined significantly during both recessions.

**Figure 1.** Quits, and layoffs and discharges, 2000–2014 (Seasonally Adjusted, 2000s). Source: Bureau of Labor Statistics, Jobs Openings and Labor Turnover Survey dataset.
