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Economic Insights

Many commentators worry that a skills mismatch is weighing on the U.S. labor market. But the elevated unemployment rate stems from a variety of other factors

The answer to the title question is: No, probably not. It is, of course, very popular to explain the nation's stubbornly high unemployment in terms of a mismatch between the skills the economy needs and those that exist in the workforce. People of all political stripes—in Washington, in business, academia, think tanks, even organized labor—have done so and have proposed solutions, usually, and not coincidentally, furthering their partisan agendas. To be sure, this consensus is broadly correct. The modern developed economy will need ever better educated, better trained workers. But though an important longer-term issue, today's stubbornly high rate of unemployment seems to result from more cyclical and immediate policy considerations, such as extreme caution in corporate America, skewed wage expectations, and the extension of unemployment benefits. The skills mismatch may in time create chronically higher unemployment, but that is not what is happening now.

A Popular Argument Indeed
The popularity of the skills mismatch argument is evident. President Obama noted the issue in the last three State of the Union addresses, and in his latest budget asked for $8 billion in new monies for training to address it. His opponent in the 2012 election, Mitt Romney, while disagreeing on almost every other point with the president, asserted that a skills mismatch "lies at the heart of our job crisis." The president of the Minneapolis Federal Reserve has pointed to the skills gap as the root of the nation's unemployment problem,1 as has the U.S. Chamber of Commerce. The International Labor Organization, in its publication Global Employment Trend 2013, features the mismatch as the cause of "long-term unemployment,"2 while the prestigious Organization for Economic Cooperation and Development (OECD) has produced book-length studies documenting the mismatch in the United States and across its global membership. And those are only some of the most prominent sources of such commentary.

It is easy enough to understand why so many people and interests seek an explanation. The nation's labor market has behaved in an atypical way. Usually, unemployment rises when there is a shortage of jobs on offer and falls when business and government put more jobs on the market. But since this recovery began in 2009, the United States, and many other developed countries as well, have suffered abnormally high rates of unemployment even as the number of available job openings has increased. It is unusual and disturbing that people go wanting for jobs at the same time as jobs go begging people to fill them. Yet as millions have failed to find work, so much so, in fact, that millions have even given up trying: the number of unfilled positions offered by business and industry has risen by almost 1.5 million, from about 1.4% of the total to about 2.4%, some 600,000 of these positions in manufacturing.3 This strange twist in the Beveridge curve (what economists call the graphic presentation of this relationship) naturally makes all concerned look to explanations outside the normal business cycle, and the existence of a skills mismatch naturally attracts.

Reason to Look Elsewhere
Aside from such atypical statistical relationships, the main support for the skills mismatch explanation comes from research that found rapid wage increases in some skills and stagnation in others. Those conducting the research allow that the situation could reflect a particular need rather than the general skills mismatch of which most commentary speak. But it does point in that direction.

Other than this, however, most other investigations raise a measure of skepticism about the skills mismatch explanation, and point to other causes. Studies that examine specific jobs and the men and women who hold them find no evidence of a skills mismatch at all, except perhaps for high school dropouts. The Chicago Federal Reserve Bank, in its review of work done elsewhere as well as its own original research, offers more reason to doubt the skills mismatch. The bank points to the considerable evidence that firms have approached recruiting less aggressively than they have in the past. It reviews other research questioning the skills mismatch explanation by pointing out how little variation there is from one industry to another. All show employment below past peaks, high- and low-skill industries and positions alike. The Chicago Fed's own work raises a similar point. If the problem were a general skills shortfall, one would think the mismatch would occur in particular sectors, levels of skill, and industries.

Some of the most interesting work on this question comes out of Northeastern University. There, Professor William Dickens compared job openings statistics to unemployment data disaggregated according to the duration of unemployment.4 In this way, he composed a series of what could be described as specialized Beveridge curves for each subgroup. Dickens discovered no relationship at all between short-term unemployment (five weeks or less) and job vacancies. The implication is that such unemployment, as in the past, simply reflects the normal hiatus people face when they change jobs, even when the move is planned, what economists call frictional unemployment. When he did a similar analysis for those unemployed for five to 14 weeks and 15–26 weeks, he discovered that in the conventional relationship between jobs on offer and unemployment, the more jobs there are available, the less unemployment there is. Only for the very long-term unemployed (27 weeks or more) did he observe the strange result in which the number of jobs on offer and unemployment rose in tandem. It seems, then, that the entire departure from past cycles is concentrated in this group of long-term unemployed.

Drawing the Pieces Together
It is possible, of course, that a skills mismatch creates the long-term unemployment. No doubt, there is something to this. But in light of all this research, it would seem that other causes lie at the root of this stubbornly high long-term unemployment. Extreme caution among managements is entirely plausible given the severity of the past recession and the uncertainties imposed by the Affordable Care Act and other massive pieces of legislation. In addition, the 2008–09 recession created layoffs in areas where pay was high relative to skill levels, finance, construction, real estate sales, and media, in particular. As these people have sought alternative employment, they have no doubt balked at the lower salaries they have been offered and, quite naturally, have held back in the hopes of finding jobs in which they could recover a greater share of their former wage or salary. At the same time, such behavior has received encouragement from a third factor, the government's decision to greatly elongate the period over which people could collect unemployment.5

If this analysis is correct, and it seems likely, this strong relationship will break down in time, quite aside from any efforts to erase a skills mismatch. Time, of course, will clarify the uncertainties still surrounding the ambitious legislation of the past few years. It also will heal the wounds left on management by the last severe downturn in 2008–09. Time also will convince many that their former wages and salaries cannot in fact be reproduced, forcing the unemployed to accept less than they commanded during the artificial environment of the last boom. The recent decision to remove the prop of exceptionally long-term unemployment benefits should accelerate this process. It will impose hardship, to be sure, and no one wants to see that. But it also will spur these long-term unemployed to accept positions, disappointing as the wages are, even if only as an interim solution, and, accordingly, reduce the number of the long-term unemployed.

Over the longer term, perhaps, a skills mismatch, and an education mismatch, which is different, could cause a chronically elevated unemployment rate. Indeed, such a prospect would be likely, if the nation fails to give greater attention to training, education, and also immigration reform. But it would be premature to look for such a result until—or if—the economy fails to step up to the needs of the more demanding future economy. For now, the data cannot support the skills mismatch argument as a cause of stubbornly high unemployment, no matter how popular it is.


1 Federal Reserve.
2 International Labor Organization, February 4, 2013, and Barbara Kiviat, "The Big Jobs Myth," The Atlantic, July 2012.
3 All data from the Department of Labor.
4 Jason Faberman and Bhashkar Mazumder, "Is There a Skills Mismatch in the Labor Market?" Chicago Fed Letter, July 2012.
5 For more detail, see Rand Ghayad and William Dickens, "It's Not a Skill Mismatch," VOX Policy Analysis, January 5, 2013.

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CRITICAL RELEASES IN THE WEEK AHEAD

Milton Ezrati examines the key economic and financial releases scheduled for the coming week. 

KEY MOVER:

Retail Sales for January*
Thu., February 13, at 8:30 a.m. ET
Previous: +0.2% • Prospect: +0.3%

The weakness in December was really just an adjustment in auto sales after a torrid few months. The figure expected for January puts retail sales back toward their slow underlying trend.
*Source: Department of Commerce.

OTHERS TO WATCH:

Janet Yellen Speaks*
Tue., February 11, at 10:00 a.m. ET

It would be a huge surprise if Yellen said anything other than echo the balanced approach of her predecessor as chairman, Ben Bernanke, when he spoke of policy in general and the taper in particular. After all, she worked hard hand in glove with him to create it. Still, the media and market commentators will parse every word and nuance to detect a departure from past policy. Little will have any substance, and less will be applicable to investment strategy.
*Source: Federal Reserve.

Industrial Production for January*
Fri., February 14, at 9:15 a.m. ET
Previous: 0.3% • Prospect: 0.4%

Previously close to its underlying trend, nothing suggests a deviation in the pattern except a little extra activity in fuels production because of the inordinately cold weather.
*Source: Federal Reserve.

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