MainStreet Macro: Job Switching

May 10, 2021 | read time icon 8 min

Nela Richardson, Ph.D.
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Typically, when the economic growth starts to accelerate like it is now, workers dust off their resumes and look for better options. The economy grew a vigorous 6.4% annualized in the first three months of the year, and is poised to grow by double digits in the current quarter.  Yet recent data shows that even as the economy has improved, employees are reluctant to seek out new opportunities. 

The ADP Research Institute Workforce Vitality Report found that the rate of people changing jobs was down 2% in the first three months of 2021 from a year earlier.   

Workers change jobs for all kinds of reasons but one important–and obvious–driver of job-switching is more money. 

Using ADP data, we measured the change in nominal hourly wages between new jobs and old jobs. Wage offers to job candidates are more sensitive to labor market conditions than wages of job holders. And wage growth for job switchers can indicate that employers are competing for talent in a tight labor market. 

We analyzed data on 18 million workers across 250,000 employers (representing about 15% of US private sector employees) to measure the financial returns to job switching.  We compared yearly wage growth for job switchers and workers holding the same position for a year or more. While we looked specifically at the first quarter of 2021, these relationships are incredibly stable over time, in both good and bad labor markets. 

What we found was surprising.  

Job switching pays off more when you’re mid-career

Workers younger than 25 and older than 55 tend to see lower wage growth when they switch jobs. The barbell result points to the fact that job skills grow more valuable over time, but companies reach a limit to what they’re willing to pay for those skills. 

Not every industry is ripe for job switchers. 

Over the course of a year, workers in education, trade and some other industries actually lost ground by switching jobs.  

In leisure and hospitality, a sector with a high concentration of low-paying jobs, workers who switch actually saw their wages decline after a year.  

Job switching paid off for workers in finance, information, and business services, where incomes tend to be higher. 

The more you make, the more you’re likely to benefit by switching jobs. 

High-income earners are more likely to see a payoff from job switching than their low-income peers. This trend is related to our second finding that high-paying industries tend to reward job-hopping. 

Where you work matters. 

Switching tends to be more financially rewarding in the Northeast, where there are lots of high-paying finance jobs, than in other parts of the country. 

There are benefits, too, for job-hoppers in the South and West where tech companies are congregated.  

Sadly for this Indiana native, the Midwest is the one region were job-switching is more likely to lead to lower wage growth over time. 

My Take 

A growing number of industries are reporting labor shortages and difficulty finding qualified workers. Their struggles are hard to square with the fact that there still are nearly 8 million more people looking for work now than there were before the pandemic.  

Our data shows why some workers who held onto jobs during the pandemic might be reluctant to make a change. Sectors best positioned to see a surge in hiring also have been hit the hardest by the pandemic, like leisure and hospitality, and retail trade. These are also sectors where wages tend to be low and the returns from switching jobs might not be worthwhile.  

The fact that many workers are staying put for now tells us that, despite a growing economy, the labor market recovery still has work to do.