The Timing of Labor Market Expansions: New Facts and a New Hypothesis

We document three new facts about aggregate dynamics in US labor markets over the last two decades, drawing in part from newly available data sets. We find a strong comovement between the employer‐to‐employer worker transition rate, various measures of wages, and the share of employment at large firms. All three remain below trend several years into the expansion. Then, simultaneously, large firms take over employment, workers start quitting more from job to job, and wages accelerate. Somewhat surprisingly, employment growth of larger firms is more cyclically sensitive. Building on these facts, we formulate a new hypothesis of how business cycles evolve and mature. Following a positive aggregate shock to labor demand, wages respond little on impact and start rising only when firms run out of cheap unemployed hires and start competing to poach and to retain employed workers. Workers quit mostly from small, low‐paying, less productive firms to large, high‐paying, productive firms. Wages rise both within firms and as workers upgrade by quitting to higher‐paying employers. The growth in the employment of large firms is fueled by the stock of employment at small firms, which takes some time to replenish after a recession. We investigate whether this view is consistent with the transitional dynamics of the Burdett and Mortensen (1998) equilibrium search model, which we analyze in detail in a companion paper. A calibrated example shows that the model qualitatively captures the essence of the three facts.