Leaving your job? Losing your job? Where you end up might reveal a lot about the state of the economy

There are two ways to leave a job: Voluntarily (quit) or involuntarily (be laid off). Those who quit but don’t immediately start a new job are often assumed by economists to want out of the labor force. Those who were laid off, on the other hand, are assumed to join the ranks of the unemployed, the group of people actively looking for work.

A new data series from Institute senior economist Amanda Michaud and co-author Kathrin Ellieroth shows that this conventional wisdom is flawed. Using data from the Current Population Survey (CPS) from 1978 to 2024, the economists look at everyone who moved from employment to nonemployment each month. Nonemployment encompasses all individuals who do not have a job, including unemployed individuals (available for work and actively searching) and nonparticipants who have exited the labor force (not available or not actively searching). Then the economists identify both the reason the person left employment (did they quit or were they laid off?) and where the person ended up (did they look for a new job or did they leave the labor force?).

Michaud and Ellieroth’s analysis, described in a new Institute working paper, shows that worker flows are more complex than conventional wisdom assumes. It is not the case that laid-off workers always start searching for a new job, joining the ranks of the unemployed. In fact, a substantial share of them, 40 percent, choose to exit the labor force. Likewise, some workers who quit their jobs end up unemployed rather than out of the labor force. “Flows from employment to unemployment understate the true extent of job loss in the economy because job loss can lead workers to exit the labor force entirely,” the economists write.

This new observation underlines why a more nuanced understanding of labor market flows between employment, unemployment, and nonparticipation can help policymakers better monitor the state of the economy as well as guide policy to support full employment.

Quits and layoffs over the business cycle

The share of workers who leave employment every month is fairly constant over the business cycle. However, the composition of these separations—the fraction that are quits and the fraction that are layoffs—changes quite a lot (Figure 1).

In an average month, about 3.1 percent of employed workers transition to nonemployment, and there are more quits than layoffs. Figure 1 shows how that these worker flows move in opposite directions during recessions: The quit rate falls while the layoff rate rises.

Where these formerly employed workers end up is also revealing. Figure 2 shows that while the majority of laid-off workers do start looking for a new job, a substantial minority chose to exit the labor force.

What is hard to discern precisely from the charts alone is how much these flows of workers change during recessions. So Michaud and Ellieroth look at how these flows move with the unemployment rate, which rises in recessions and falls during economic expansions.

They find that quits to unemployment and to nonparticipation both decline when unemployment is rising. The quit rate is one way to measure people’s confidence in the economy. When the labor market is strong, workers are more willing to quit because they are optimistic they can land a new job or that their household financial situation is secure. When unemployment is rising, that confidence erodes as people worry it will be hard to get a new job or that a family member may lose theirs.

Layoffs, on the other hand, increase as unemployment rises. This is a standard story: Recessions tend to put economic stress on firms, leading to layoffs if firms don’t need as many workers to meet the declining demand for their goods and services.

However, the fact that fewer workers are quitting suggests there could be another dynamic at play as well, Michaud points out. For idiosyncratic reasons, at any moment there will be some firms that need to shrink their workforce. During economic expansions, the number of workers who quit might be enough for firms to shrink through such “natural attrition,” avoiding layoffs. In a recession, however, with fewer workers quitting, more firms will need to lay off workers. In other words, layoffs increase during a recession due to both a decline in labor demand and an increase in labor supply.

Economy cools, labor supply … rises?

The economists also reflect on what the patterns of quits and layoffs mean for the supply of labor in the economy—that is, the share of people who are working or looking for work. The evidence points to an increase in the labor supply during recessions, the result of two factors: Fewer workers quit their jobs, and fewer laid-off workers exit the labor force. Both behaviors increase the labor supply.

This empirical finding is at odds with conventional models of the labor market, which usually assume that labor supply falls during a recession. In particular, it is puzzling why workers who are laid off would choose to enter unemployment rather than leave the labor force. It’s always hard to be unemployed, but it’s arguably even more miserable during a recession, when there are fewer job openings and the speed of finding a job goes down. Meanwhile, being unemployed is costly in that it takes time to search and apply for jobs, time that you can’t spend doing something else.

That laid off workers are choosing unemployment could be a sign of significant economic stress for workers and households, Michaud said, something that policymakers may care about. It could also reflect a reduction in the cost of unemployment if, for instance, Congress increases unemployment benefits during a recession, as it did in the recessions of 1982, 1991, 2002, 2008, and 2020.

Which workers drive the fluctuations in labor flows?

The rich demographic data in the CPS gives the economists another way to understand worker flows over the business cycle, answering not only how many but who? Because their analysis focuses on changes to the flows of workers who exit the labor force, Michaud and Ellieroth choose to look at two groups of workers who move frequently between employment and nonparticipation: married women and Black workers. These groups make up about 35 percent of the labor force.

How do married women and Black workers differ from the population as a whole? They have a higher quit rate, for starters, and they are more likely than White men to exit the labor force after quitting rather than enter unemployment.

But these patterns are sensitive to the state of the economy. The economists find that the quit rate for married women and Black workers declines significantly during a recession. The data show it is entirely the quit-to-nonparticipation flows that dry up; the few who quit to unemployment continue to do so at similar rates.

The behavior of married women and Black workers following a layoff also looks different than the population as a whole. Only 14 percent of White men leave the labor force after they are laid off, compared with 28 percent of Black workers and 53 percent of married women.

However, when the economy enters a recession, married women again change their behavior: They become much less likely to exit the labor force after being laid off. In a separate paper, Ellieroth and Michaud explore reasons why this might be, finding that the earnings of married women may act as insurance against the possibility that their spouse loses their job. Future research will help tease out the different factors acting on different groups of workers and how they might vary during economic booms and busts.

The Great Resignation: Fact or fiction?

One noteworthy feature of the new dataset that Michaud and Ellieroth assembled is its time span, from January 1978 through October 2024 (and the economists continue to update it every month). The primary source for data on labor flows has been the Job Openings and Labor Turnover Survey, or JOLTS, which begins in 2000. By using data that goes back to 1978, Michaud and Ellieroth double the number of recessions in their analysis, from three to six.

Interestingly, their analysis shows that the empirical patterns described here are strikingly similar across recessions—including the 2020 recession following the outbreak of the COVID-19 pandemic. The economists then examine whether the much-ballyhooed “Great Resignation” of 2021–2022 actually happened. Their data show that quits fell sharply at the pandemic’s onset, then bounced back quickly to pre-recession levels. Notably, the quit rate in their data does not appear particularly high in 2021 and 2022. In contrast, the JOLTS data does show a high level of quits in the recovery period.

The comparison may not be entirely apples-to-apples, as the JOLTS data include all quits (quitting to take another job and quitting to nonemployment), while Michaud and Ellieroth’s dataset includes only quits to nonemployment. But the new data does at minimum suggest a more nuanced take on the Great Resignation: If it happened at all, it wasn’t people choosing to step away from work, it was people switching to new employers.

This finding illustrates how the new data can provide useful information to policymakers about what workers are doing and what that might say about the economy at large.