Saturday, 9 June 2012

Is there high mismatch in US unemployment numbers?

Whether US unemployment is because of structural (mismatch between skills and availability of jobs) or because of cyclical issues (low demand) is a hot debate. The policy implications are according to the stance one takes. Those in former camp believe mon pol cannot do much in case of high mismatch. Latter camp believes it does. Chicago Fed chief has stressed in couple of speeches that high unemployment a cyclical problem. And this can be resolved by easy mon policy. He came with innovative thinking like Price Level targeting/unemployment targeting to keep policy rates at current levels till price level/unemployment levels rise..

Here is a short paper on the mismatch from Chicago Fed econs. They nicely show much of the rise in unemployment is not because of mismatch. They point that during the crisis, mismatch had increased but lately has declined:
Concerns about a greater degree of mismatch in the U.S. labor market in recent years have arisen partly because of a shift in the Beveridge curve. The Beveridge curve describes the relationship between the vacancy rate and the unemployment rate. Figure 1 shows that, after the end of the latest recession, the vacancy rate had been rising while the unemployment rate had barely budged. In fact, it has only been recently that there has been movement along the Beveridge curve that is consistent with cyclical movements along the curve rather than an outward shift in the entire curve. Search theory implies that outward shifts in the Beveridge curve are the result of a decline in matching efficiency and, consequently, a rise in mismatch.

Some recent research by AyŞegül Şahin, Joseph Song, Giorgio Topa, and Gianluca Violante uses search theory to generate an index of the degree of mismatch in the labor market.5 Figure 2 illustrates their index based the dispersion of industry unemployment and vacancy rates. It shows that mismatch rose sharply during the recession, but it has since abated. Other research shows similarly mixed evidence on mismatch. The results of recent research by Steven Davis, R. Jason Faberman, and John Haltiwanger are shown in figure 3.6 They find that employers were able to fill jobs relatively easily during the recession, but that their measure of recruiting intensity per vacancy, which captures a variety of efforts employers put into recruiting, remained low well after the end of the recession.

Their own research shows little support for mismatch:
Finally, we perform our own analysis of mismatch by examining the supply and demand of workers across occupations of varying skill requirements. First, we consider the supply of workers of various skill levels using data from the U.S. Bureau of Labor Statistics.7 For our sample, employment in 2011 was about 6.2% below its 2007 level. On the one hand, if workers are scarce in particular occupations where skills are highly valued, we would expect that employment would have roughly returned to its 2007 level for those workers. On the other hand, if workers of all skill levels are all well below their peak employment levels prior to the recession, then this would provide little support for the skill mismatch hypothesis.

Using this approach, we find limited evidence of skills mismatch. For example, the employment levels for workers in occupations that are sometimes claimed to be in scarce supply, such as those classified as “installation, maintenance, and repair workers,” were 8% lower in 2011 than in 2007, suggesting that supply was not a constraint. However, it is possible to find pockets where supply may be a constraint. For example, employment among engineers was actually 2% higher in 2011 than in 2007, so it is plausible that engineers are currently scarce. In figure 4, panel A, we aggregate occupations by skill level and show the broad pattern of employment since 2007 for various skill groups. We find that workers in the middle range of skills are precisely the ones for whom employment remains well below the pre-recession level. Employment for low-skilled workers remains below its 2007 level but has not fallen as much; and employment for highly skilled workers is close to its pre-recession level.

Hmmm…Raghuram Rajan and many others think there is wide mismatch..

Debate expected to continue for a long time on this..

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